Financial Activities Taxes, Bank Levies and Systemic Risk

The question of additional taxes on banking institutions has recently been debated. At the same time, financial regulation in the banking sector is undergoing many changes aimed at strengthening financial stability. This paper on the base of a micro-simulation model of the banking system, estimates the contributions to systemic risk of individual banks under various future regulatory scenarios and compares them to their potential tax liabilities under alternative designs of Financial Activity Taxes and Bank Levies. Results show that when contagion is not avoided, all taxes perform about the same way. However, when contagion is avoided, bank levies outperform FATs