Project

Bank Transaction Taxes, Market Power and Credit Allocation: Evidence from Ecuador

Felipe Brugués and Rebecca De Simone

This project has been retired

Small Research Grant

Financial regulation has the ability to increase the stability of banking systems in countries but can also impact access to and availability of credit. However, the effects of regulation may differentially affect borrowers and their bargaining power, leading to credit misallocation. The current literature mainly observes the outcomes of the bargaining process by only looking at contracted loans, which can fail to characterise which frictions lead to credit misallocation and how these characteristics differentially impact borrowers and firms. This project seeks to address these issues and answer how search costs and relative bargaining power between borrowers and lenders mediate the impact of loan taxes on credit allocation.

The project considers the introduction of a bank tax in Ecuador in 2014, which was unanticipated by banks and firms and provides an optimal setting for studying bargaining power. The research team characterise how the introduction of the bank transaction tax affected new loan terms to assess the policy impacts on the tax burden split between banks and borrowers. They then analyse the sources of bargaining power by looking at heterogeneity in firm and market characteristics and creating a model to address the common challenge of borrowers having outside options. In doing so, the project informs the larger question of structural transformation by estimating the impacts of increased costs of bank loans and by characterising which frictions contribute to the misallocation of credit as a result.

Answering the given research questions is important for informing government policy since fiscal policy, credit allocation, and financial frictions all impact growth and development. While the study primarily considers Ecuador, many other low-income countries have employed bank and security transaction taxes, and, thus, any knowledge gained about this policy in this context may be more broadly applicable. Due to the comprehensive dataset, the research can evaluate relevant frictions in more detail and identify in which areas policy intervention will yield the highest returns in various settings.  Finally, the proposed structural model will allow researchers and policymakers to analyse potential policies and their impacts on borrowers, banks, and firms.

Research Team

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