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Bank levy and bank risk‐taking

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  • Michael Diemer
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.

Suggested Citation

  • Michael Diemer, 2017. "Bank levy and bank risk‐taking," Review of Financial Economics, John Wiley & Sons, vol. 34(1), pages 10-32, September.
    • Handle: RePEc:wly:revfec:v:34:y:2017:i:1:p:10-32
    DOI: 10.1016/j.rfe.2017.06.001
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