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Bank Taxes and Loan Monitoring: A Cautionary Tale
Author(s) -
Dia Enzo,
VanHoose David
Publication year - 2018
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12172
Subject(s) - loan , margin (machine learning) , economics , incentive , monetary economics , distortion (music) , finance , microeconomics , amplifier , cmos , machine learning , electronic engineering , computer science , engineering
This paper analyzes a model in which there is excessive bank lending and in which regulators attempt to correct the problem with a tax. A tax on lending can correct the over‐lending problem by reducing the returns from lending. Imposition of the tax has a perverse effect on the composition of lending, however, because it falls more heavily on banks that incur expenses to reduce loan losses. Hence, along the external margin, the share of banks that voluntarily monitor loans decreases. In contrast, monetary policy tightening can produce the optimal level of lending without generating any distortion of monitoring incentives.