The Impact of Bank Tax on Lending Margin

Abstract

In February 2016, Poland implemented a bank tax paid by monetary financial institutions based on the assets of their balance sheets. Two years later, the same tax was proposed in Lithuania. Critics of the tax claimed that the tax burden in Poland shifted to customers by increasing the lending margin, and were this tax to be implemented in Lithuania, negative economic consequences would be likely. The aim of this paper is to estimate the potential impact of the bank tax on the lending margin in Lithuania by evaluating the case of Poland. Currently, research studies do not provide a definitive answer about the effects of bank taxation, mainly because various types of bank tax exist. Further research of the bank tax implemented in Poland could provide more information about the consequences of the bank tax applied to the assets of financial institutions. Also, a previous investigation of Poland’s bank tax was limited by a short time series. Currently, a more accurate analysis could be done by using data over a longer period of time. Following previous research, difference-in-differences estimation is used to evaluate the impact of the policy change and uses data from the period 2012 to 2020. The results of the analysis are significant and show that the bank tax had a positive impact on lending margins in Poland by an average value of 0.39%. The descriptive analysis of the Herfindahl index shows that the banking sector of Lithuania is highly concentrated, implying that the tax burden would be shifted to bank customers by increased lending margins. In this way, the banking sector in Poland managed to avoid paying the levy by shifting the burden onto consumers. The same outcome is to be expected in Lithuania. The findings of the paper suggest that Lithuania should consider alternative ways of taxation since increased lending rates could have a negative effect on the overall economy of the country.