Effect of bank levy introduction on bank risk-taking

Abstract

Risk-taking by financial institutions is widely regarded as the one of the causes of the global financial crisis. To reduce the probability of crises and internalize the costs of financial institution distress, policymakers have introduced bank levies (BLs). In this study, we evaluate the effects of the Hungarian and German BLs on the risk-taking behavior of financial institutions. We compare two totally different BL designs. The results unambiguously demonstrate that a BL on assets has a negative impact on the financial sector’s stability. The results of analyzing the influence that introducing BLs has had on the German financial sector demonstrate that BLs on liabilities decrease credit risk. An improved understanding of the determinants of the risk of EU financial institutions is very important for regulators and supervisors interested in benchmarking and validation issues related to the new EU banking regulation.