Bank levy and bank risk‐taking. Issue 1 (17th June 2017)

• Record Type: Journal Article
• Authors: Diemer, Michael
• Is Part Of: Review of financial economics. Volume 34:Issue 1(2017)
• Page Start: 10
• Page End: 32
• Publication Date: 2017-06-17
• Subjects: Bank levy -- Competition -- Moral hazard -- Transparency; D82 -- G21 -- G28; Business -- Periodicals; Economics -- Periodicals; Business; Economics; Electronic journals; Periodicals; 332.05
• DOI: 10.1016/j.rfe.2017.06.001
• Languages: English
• ISSNs: 1058-3300

Abstract

Abstract: In the aftermath of the recent financial crisis, several countries implemented a bank levy. This paper studies the impact of different types of bank levies on the risk‐taking behaviour of banks competing in the market for secured or unsecured debt à la Hotelling. We differentiate between three types of bank levies: a levy on secured liabilities, a levy on unsecured liabilities and a levy on risk‐weighted assets. Banks collect funds and invest in either a prudent or a gambling asset. We find that a levy on secured and unsecured liabilities can prevent banks from investing in the gambling asset. A levy on risk‐weighted assets also induces banks to behave more prudently. Such a levy is even more effective than a levy on liabilities if banks are well‐capitalized. Finally, a guarantee on debt makes a bank levy more effective. Highlights: We study the impact of different types of bank levies on the risk‐taking behaviour of banks in a setup à la Hotelling (1929). A levy on secured debt can prevent banks from excessive risk‐taking only if this charge is performance‐unrelated. A levy on risk‐weighted assets may be even more effective than a levy on secured debt if banks are well‐capitalized. A levy on unsecured debt does not affect risk‐taking of transparent banks, but it decreases the risk‐taking of opaque banks.