Bank Taxes, Bailouts and Financial Crises

Following the Great Financial Crisis, more than a dozen countries adopted innovative bank taxes as part of their response. This paper characterizes, calibrates and discusses Pigovian taxes on bank borrowing to address externalities associated with either the collapse of systemic financial institutions or, to prevent that, public guarantees to bail out their creditors. It also characterizes optimal bailout policy, differentiating between circumstances in which the government can and cannot commit. Building on the analysis for a representative bank, it considers the implications for corrective taxation of various aspects of bank heterogeneity, connectedness, and asymmetries of information.