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Bank levy and household risk-aversion

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  • Papageorgiou, Stylianos

Abstract

We study a bank levy that funds government guarantees in a general equilibrium setting where banks intermediate between risk-averse households and state-contingent investments. We offer an analytical characterization of the optimal bank levy as a function of household risk-aversion and guarantees. We show that household risk-taking is increasing in guarantees, while it is decreasing as the bank levy and household risk-aversion increase. This allows us to establish a non-trivial relationship between the optimal bank levy and household risk-aversion: Higher risk-aversion optimally induces a higher levy when guarantees exceed a threshold; otherwise, a higher levy shall be observed in economies with less risk-averse households.

Suggested Citation

  • Papageorgiou, Stylianos, 2022. "Bank levy and household risk-aversion," Journal of Banking & Finance, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426622000462
    DOI: 10.1016/j.jbankfin.2022.106446
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    More about this item

    Keywords

    Bank levy; Risk-aversion; Government guarantees; General equilibrium;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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