BANK LEVY INCIDENCE AND BANK MARKET POWER

Transcription

1 BANK LEVY INCIDENCE AND BANK MARKET POWER Gunther Capelle-Blancard (CEPII, University of Paris 1) (CEPII, Paris West University Nanterre La Défense)

2 We task the IMF to prepare a report... as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system. G-20 Leaders Statement, The Pittsburg Summit-September 25, 2009.

3 Bank levies across the world vary in design and objective France Hungary Austria Germany Sweden United Kingdom United States Start date Tax base Threshold Rate Minimum own funds required to comply with capital requirements 500 mln EUR of minimal own funds 0.25% of own funds Total assets. Interbank loans and securities of credit institutions are excluded None Balance sheet. Insured deposits and capital are excluded Tax base of EUR 1 billion Liabilities. Non-bank liabilities and equity are excluded Liabilities with some exceptions Liabilities. Insured deposits and Tier 1 capital are excluded None None GBP 20 billion of relevant liabilities % % % 0.036%, but reduced rate for Could depend on risk in the future 0.07%. 50% tax rate for stickier funding (>1 year of maturity) Liabilities. Tier 1 capital and FDICassessed deposits are excluded USD 50 billion of consolidated assets Not set but expected 0.15%

4 Literature Motivation Studies Sample Data Dependant variables Variables of interest Econometric Method Demirgüc-Kunt, & Huizinga (1999) 80 countries ( ) Bankscope (5,841 banks) NIM, Pre-tax profit Implicit Tax Rate Cross-section, weighted least squares Demirgüc-Kunt, & Huizinga (2001) 80 countries ( ) Bankscope (5,391 banks) NIM, Pre-tax profit Average Implicit Tax Rate, Statutory Tax Rate Cross-section, OLS Albertazzi & Gambacorta (2010) Huizinga et al. (2011) 10 OECD countries ( ) 38 countries (199x-08) OECD & IMF (macro data) Bankscope (9,729 banks) NIM, Noninterest income, Provisions, Pretax profit NIM, Pre-tax profit Statutory Tax Rate Statutory Tax Rate, Double Taxation of Dividends and Interests Dynamic panel, GMM Cross-section, OLS Chiorazzo & Milani (2011) EU ( ) Bankscope (8,000 banks approx.) NIM, Pre-tax profit Taxes / Total Assets Dynamic panel, GMM Capelle-Blancard & Havrylchyk (2013) EU ( ) Bankscope (1,411) NIM Implicit Tax rate Dynamic panel, GMM

5 Contribution to the literature First analysis of incidence of the bank levy. Previous studies dealt with taxation of bank profits.

6 Contribution to the literature First analysis of incidence of the bank levy. Previous studies dealt with taxation of bank profits. Theoretical model à la Monti-Klein to show that tax incidence depends on the elasticity of credit demand (i.e. banks market power).

7 Contribution to the literature First analysis of incidence of the bank levy. Previous studies dealt with taxation of bank profits. Theoretical model à la Monti-Klein to show that tax incidence depends on the elasticity of credit demand (i.e. banks market power). Empirical study of the Hungarian bank levy : One of the first countries to have introduced bank levy (Sweden is first). The highest tax rate in the world ; tax burden has tripled after the introduction of the tax. The tax rate is higher for large banks than for small banks, which allows relying on difference-in-difference methodology. The MNB provides confidential data that allows analysis of interest rates separately for firms and households, with different elasticities of demand.

8 Tax revenues from bank levy in % of GDP 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 Average

9 Implicit tax rate in % of assets in Hungary 0,6 0,6 Small banks (%) (%) Large banks 0,5 0,5 0,4 0,3 0,2 0,1 0,0-0, Corporate income tax Bank levy Sept ,4 0,3 0,2 0, Corporate income tax Bank levy Sept. 2012

10 Monti-Klein model with taxation Oligopolistic environment à la Cournot max = ,, The cost function is separable: Cn = γd Dn + γl Ln+ γs Sn, Taxn = τ Ln ; 0< τ < 1 The resolution of the maximization problem: the equilibrium depends on the elasticity of the demand for loans : " # $% # = & ; " # '( # ) )* = 1 1 1, Proposition: The sensitivity of lending rates to the introduction of a tax on loans depends negatively on the elasticity of credit demand.

11 Testable hypothesis Motivation Tax incidence is higher for households than for firms, because their elasticity of credit demand is lower and, hence, bank power is higher. Switching costs are higher for households. Credit registry with positive information does not exist for households. Banks have the right to unilaterally modify contract conditions (e.g. interest rates) on outstanding fixed interest rate loans to households.

12 Identification strategy : difference-in-difference R i,t = α + β 1 Tax i,t + β 2 Time t + β 3 Bank i + β 4 Controls i,t + ɛ i,t, where R i,t - NIFM and interest rates on loans Tax is a dummy variable that is equal to 1 for large banks for the period during which the bank levy applied (since July 2010).

13 Data Motivation Individual bank-level monthly data on balance sheets and income statements ; Confidential data on average interest rates on loans provided by the Hungarian Central Bank : Analyzed period : March 2008 and September Non-financial corporations (NFC) and households (housing, consumption) New and outstanding loans Currency (HUF, FX)

14 Margins of large and small banks before and after the tax introduction A. NIM and fees Small banks Large banks

15 Dependent variables : NIFM and lending rates Sample of commercial banks Dep. Variable NIMF Average interest rate Customers All NFC Households Housing loans Consumption loans Type of loans All loans Small loans New loans Outstanding loans New loans Outstanding loans Currency All HUF FX HUF HUF FX HUF HUF FX TAX 0.07 ** ** 0.57 ** * (0.03) (0.33) (0.61) (0.61) (0.52) (0.25) (1.23) (0.74) (0.29) Size * ** (0.06) (0.92) (1.43) (1.45) (0.60) (0.48) (0.93) (1.26) (0.76) Capital 0.01 ** * (0.00) (0.01) (0.02) (0.04) (0.02) (0.01) (0.03) (0.03) (0.02) Cost (0.11) (1.46) (3.51) (3.48) (3.72) (1.86) (6.60) (4.47) (1.76) LLR NFC (0.00) (0.02) (0.07) LLR HH (0.00) (0.05) (0.05) (0.03) (0.12) (0.11) (0.05) Constant 1.69 ** * * ** 7.47 (0.74) (11.75) (18.68) (19.84) (7.630) (6.15) (11.74) (16.03) (9.79) R² Nb. Obs. 1,409 1, ,010 1,317 1,106 1,160 1,393 1,096 Nb. Banks

16 Results are robust across different specifications and samples Without control variables. With cooperative banks (the effect is smaller). Without the largest banks.

17 and policy recommendations The burden of bank levy is shifted to clients with the lowest demand elasticity, such as households with outstanding loans. The introduction of the tax should be accompanied by measures that increase market competition (borrower mobility).