This implicit guarantee creates incentives for banks to become systemically important . The government might be inclined to bail out bank creditors, as winding up a systemically important bank generates the risk of destabilizing the entire financial system. In addition, systemically important banks benefit from implicit government guarantees. Moreover, additional levies can also offset tax distortions, as financial services are exempt from value-added tax (VAT) and used for fiscal optimization. Others claim that bank levies allow taxing potential economic rents enjoyed by the financial sector owing to implicit and explicit state guarantees . It has been argued that the aim of bank levies is to modify the incentives of banks’ management and owners to persuade them to consider their bank’s contribution to systemic risk . The bank’s contribution to the systemic risk depends, first and foremost, on its leverage, size and degree of interconnectedness with financial system. Just like a Pigouvian tax, bank levies put a price on the bank’s contribution to systemic risk and thus, aim at internalizing negative externalities. They argue that, designed as a Pigouvian tax, Footnote 1 taxing short-term funding, with the exception of stable funding, such as equity and deposits will discourage banks from undertaking risky activities. The proponents of this reform suggest three types of taxes:įinancial stability contribution (bank levy) levied on specific components of balance sheets of financial institutions.įinancial activities tax (FAT) levied on the total profits of financial institutions.įinancial transaction tax (FTT) levied on a specific type of financial transaction for a particular purpose. Therefore, taxation can be considered as a measure to counteract the negative externalities generated by the financial sector, especially during economic crises, but also before and after them. Taxing the financial sector could serve as a lever in regulating it without direct intervention . One of the proposals, which are heavily debated these days, is the introduction of taxes in the financial sector (International Monetary Fund, 2010). Many proposals have been advanced regarding ways to protect the banking sector from future turbulences and discouraging banks from taking unnecessary risk. Hence, policymakers proposed several means to increase revenues from the financial sector through levies on financial institutions and additional tax instruments. When G20 leaders met at Pittsburgh in 2009 to discuss the ongoing financial crisis, they requested the International Monetary Fund (IMF) to investigate how the financial sector can make substantial contributions toward relieving any burden associated with government interventions to repair the banking system ). Therefore, GFC highlighted the pivotal role of a properly functioning money market for both monetary policy and financial stability. These events are even more serious because the financial sector as a proportion of the overall economy in many countries has grown in addition to becoming globalized. The bankruptcy of Lehman Brothers in 2008, along with the “freezing” of the interbank market, has led to the bankruptcy of numerous banks that were unable to acquire funding in the market. Moreover, the GFC has provided overwhelming evidence confirming the importance of the effective functioning of the banking sector. Furthermore, recessions triggered by debt crises are particularly severe and long-lasting. The global financial crisis (GFC) of 2007–2008 has shown that banks’ risky operations might have dramatic consequences for economies for the following reasons: First, banks can incur great losses and spend a considerable amount of public resources on bailing them out, and second, bank bankruptcies have major social and economic consequences throughout the world.
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