Working Paper Series no. 428: Fiscal Sustainability in the Presence of Systemic Banks: the Case of EU Countries - Forthcoming in: " International Tax and Public Finance "

Abstract

We provide a first attempt to include off-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps a la Blanchard (1990) and Blanchard et al. (1990). We then introduce two alternative measures of implicit off-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies on microeconomic data at the bank level. The second one is based on econometric estimations of the probability and the cost of a systemic banking crisis. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk.

Agnès Bénassy-quéré and Guillaume Roussellet
March 2013

Classification JEL : H21, H23, J41

Keywords : Fiscal sustainability, tax gap, systemic banking risk, off-balance sheet liabilities