Liability taxes, risk, and the cost of banking crises

This study investigates the effects on risk and financial stability of the taxes on bank liabilities introduced across European countries after the global financial crisis. Using a difference -in-differences setup, we show that banks responded to the implementation of liability taxes by reducing their interbank exposure, and by increasing both equity, at least in the short term, and the risk weight of their assets. When we consider these adjustments in a microsimulation model for bank portfolio losses, we find that liability taxes reduce risk in the banking sector and could therefore decrease the cost of crises.

Automated summary

This study examines the impact of bank liability taxes on risk and financial stability in European countries after the global financial crisis. Through a difference-in-differences analysis, it is found that banks responded to these taxes by reducing interbank exposure and increasing both equity and the risk weight of their assets in the short term. The microsimulation model shows that these adjustments reduce risk in the banking sector, potentially decreasing the cost of crises.