Bank Account Debit (BAD) Taxes, Bank Lending and Industrial Growth: Evidence from Latin America

I examine the bank credit supply and industry growth effects stemming from the introduction of bank account debit (BAD) taxes using a sample of Latin American countries between 1986 and 2005. I exploit a key channel through which BAD taxes affect the supply of credit: their introduction creates a strong incentive to shift away from holding bank deposits and into using cash and other quasi-currencies. I find that this higher preference for cash results in a lower availability of deposits as a source of funding for banks, and that this in turn is directly related to a lower provision of bank credit to the private sector. Furthermore, using a differences-in-differences empirical strategy, I find that the implementation of BAD taxes ultimately affects economic growth at the industry level, mainly by reducing the growth prospects of industries that are more dependent on external finance or that have less tangible assets.