infonet-economy

Several European countries have recently introduced levies on bank liabilities to internalise the fiscal costs of banking crises. This paper studies the tax incidence: Building on the Monti-Klein model, we predict that banks shift the burden to borrowers by raising lending rates and that deposit rates may increase as deposits are partly exempt. Bank-level evidence for 23 EU countries in the period 2007-2013 implies a moderate increase in lending and deposit rates and net interest margins. Market characteristics and capital structure influence the magnitude: The lending rate strongly increases in concentrated markets, whereas the pass-through is weak for well-capitalised banks.