Ad hoc bank taxation and credit supply

Abstract

This paper studies the introduction of new temporary taxation on banks and its effects on banks' lending decisions. Focusing on a unique policy experiment in Slovenia in 2011, where the government imposed a 0.1% tax on banks' total assets, I find that the introduction of the tax resulted in a lower credit supply of loans to corporates. In particular, for each percentage point increase in the share of tax in the capital, banks charge, on average, 8 basis points higher lending rates and decrease their lending amount by 0.5%. The findings of this research carry strong policy implications for countries contemplating or having already implemented windfall or other temporary taxes on banks. The introduction of the tax might lead to a reduction in lending beyond what would be warranted from the standpoint of monetary or other policies.