Taxation and bank liquidity creation

Allen N. Berger; Dimitris K. Chronopoulos; Anna L. Sobiech; John O. S. Wilson

doi:10.1111/jmcb.70023

Taxation and bank liquidity creation

Allen N. Berger^*, Dimitris K. Chronopoulos, Anna L. Sobiech, John O. S. Wilson

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract

We investigate the impact of taxes on bank liquidity creation using the Tokyo bank tax as a quasinatural experiment. Drawing on data for Japanese banks, we find that the tax reduces retained earnings and capital, leading to a significant reduction in liquidity creation. The decline in liquidity creation is concentrated on the asset-side of bank balance sheets. Banks reduce the supply of long-term loans and shift toward short-term government securities. The results suggest that tax-induced erosion of capital constraints banks’ ability to provide liquidity through productive lending, and highlight the role of capital as a risk-absorbing buffer.

Original language	English
Pages (from-to)	1-34
Number of pages	34
Journal	Journal of Money, Credit and Banking
Volume	Early View
Early online date	26 Nov 2025
DOIs	https://doi.org/10.1111/jmcb.70023
Publication status	E-pub ahead of print - 26 Nov 2025

Keywords

Bank liquidity creation
Bank capital
Tax
Risk
Japanese banks

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10.1111/jmcb.70023

Berger-et-al-2025-Taxation-and-bank-liquidity-JMCB-AAM-CCBY
Copyright © 2025 the Authors. This work has been made available online in accordance with the University of St Andrews Open Access policy. This accepted manuscript is distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. The final published version of this work is available at https://doi.org/10.1111/jmcb.70023.
Accepted author manuscript, 1.1 MBLicence: CC BY

Cite this

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title = "Taxation and bank liquidity creation",

abstract = "We investigate the impact of taxes on bank liquidity creation using the Tokyo bank tax as a quasinatural experiment. Drawing on data for Japanese banks, we find that the tax reduces retained earnings and capital, leading to a significant reduction in liquidity creation. The decline in liquidity creation is concentrated on the asset-side of bank balance sheets. Banks reduce the supply of long-term loans and shift toward short-term government securities. The results suggest that tax-induced erosion of capital constraints banks{\textquoteright} ability to provide liquidity through productive lending, and highlight the role of capital as a risk-absorbing buffer.",

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AU - Berger, Allen N.

AU - Chronopoulos, Dimitris K.

AU - Sobiech, Anna L.

AU - Wilson, John O. S.

PY - 2025/11/26

Y1 - 2025/11/26

N2 - We investigate the impact of taxes on bank liquidity creation using the Tokyo bank tax as a quasinatural experiment. Drawing on data for Japanese banks, we find that the tax reduces retained earnings and capital, leading to a significant reduction in liquidity creation. The decline in liquidity creation is concentrated on the asset-side of bank balance sheets. Banks reduce the supply of long-term loans and shift toward short-term government securities. The results suggest that tax-induced erosion of capital constraints banks’ ability to provide liquidity through productive lending, and highlight the role of capital as a risk-absorbing buffer.

AB - We investigate the impact of taxes on bank liquidity creation using the Tokyo bank tax as a quasinatural experiment. Drawing on data for Japanese banks, we find that the tax reduces retained earnings and capital, leading to a significant reduction in liquidity creation. The decline in liquidity creation is concentrated on the asset-side of bank balance sheets. Banks reduce the supply of long-term loans and shift toward short-term government securities. The results suggest that tax-induced erosion of capital constraints banks’ ability to provide liquidity through productive lending, and highlight the role of capital as a risk-absorbing buffer.

KW - Bank liquidity creation

KW - Bank capital

KW - Tax

KW - Risk

KW - Japanese banks

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JO - Journal of Money, Credit and Banking

JF - Journal of Money, Credit and Banking

ER -

Taxation and bank liquidity creation

Abstract

Keywords

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