Bank taxation : implications for financial intermediation, liquidity creation, and the real economy

Abstract

This thesis investigates the implications of bank taxation for financial intermediation, bank liquidity creation, and the real economy. Our empirical analysis is underpinned by an identification strategy which relies on an exogenous variation in the taxation of banks. We exploit a unique quasi-natural experiment which occurred in the early 2000s when a group of Japanese commercial banks unexpectedly became liable to pay a gross-profit tax based on their respective presence in Tokyo prefecture. In Chapter 3, we investigate the impact of the Tokyo bank tax on loan supply, pricing of loans and deposits, and the monitoring efforts of banks. Using a difference-in-differences approach, we find that affected banks increase net interest and fee margins. Depositors are most affected by adjustments to interest and fee rates. The imposition of the tax also reduces the credit supply of affected banks. Moreover, affected banks appear to reduce the effort devoted to the monitoring of borrowers. In Chapter 4, we investigate the impact of the Tokyo bank tax on bank liquidity creation. Using a difference-in-differences approach, we find that affected banks reduce liquidity creation. This is driven primarily by the negative impact of the tax on the asset side of the balance sheet of affected banks. Specifically, the imposition of the tax leads affected banks to hold significantly less illiquid assets. In Chapter 5, we investigate whether the Tokyo bank tax matters for the investments of corporates that borrow from banks affected by the tax. Using a sample of banks matched with corporates, we find that banks with a greater exposure to the tax reduce lending more. Following the reduction in credit supply, corporate borrowers reduce levels of investment. Other funding sources available to corporates do not alleviate fully the impact of the tax on the overall level of corporate funding and subsequent investment.