Balancing the Regulation and Taxation of Banking
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Balancing the Regulation and Taxation of Banking

Sajid M. Chaudhry, Andrew W. Mullineux and Natasha Agarwal

This concise book gives a unique overview of bank taxation as an alternative or a compliment to prudential regulation or non-revenue taxation. Existing bank taxation is reviewed with a view to eliminating distortions in the tax system, which have incentivized banks to engage in risky activities in the past. The authors analyse the taxation of financial instruments trading, as well as the taxation of banking products and services to gauge whether this could finance resolution mechanisms and also help to ensure the stability of banks.
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Chapter 7: Conclusion and policy recommendations

Sajid M. Chaudhry, Andrew W. Mullineux and Natasha Agarwal


The optimal combination of regulations and fiscal taxes that would truly circumvent the negative micro-prudential externalities stemming from limited liability and asymmetric information (relating to individual institutions) and macro-prudential externalities relating to systemic risks, remains to be discovered. The impact of these externalities on the growth and development of several countries also remains a source of concern among policy makers, academics, and several national and international bodies. Macro-prudential supervision is an evolving device for reducing asset price inflation, and thus the need to insure against bank failure via capital ratios and deposit insurance and resolution funds, but the proposed macro-prudential policy instruments are untried and untested. We highlight the inconsistencies within the taxation system and also the inconsistencies between taxation and regulation, with particular focus on banks, and provide an overview of the differing tax regimes between countries. Current business tax rules arguably encourage excessive leveraging because of the tax deductibility or ‘expensing’ of interest on debt, in contrast to dividend payments on equity, which are arguably double taxed. Tax expensing should perhaps be removed to give debt equal treatment to equity, at least for banks. However, the increased emphasis on core equity will put the small saving, and particularly mutual, banks at a disadvantage because they cannot issue equity or quasi equity very easily, if at all. There is concern about the continuing viability of universal banks. The UK’s Independent Commission on Banking (ICB, 2011) recommended ‘ring fencing’ retail banking within universal banks.

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