Spanish banking tax ballooning

No wonder they feel anxious as the deadline approaches. According to Basel III rules, entering into force at the beginning of next year, only items fully covering losses will embody core capital. For DTA to become eligible, they should be able to match any potential liability even in a bankruptcy scenario. Currently, DTA become fiscal credits should an expected flow of benefits reasonably compensate them in the near future. This prudent line of action fails to provide sufficient comfort under the new banking scheme.

Credit rating agencies are warning against this artificial bolstering of own resources. They argue that such moves could undermine banking credibility by raising false expectations on inner solvency. Only fat profits can ensure covering liabilities on a sound basis.

The real flaw lies in banking regulation. Treating on the same footing a lame duck bank full of fiscal credits and well performing one seems tantamount to nonsense. Yet that’s the approach Basel III envisages for determining capital needs. You can hardly blame the Spanish banks for trying to reduce their bill.

Other countries like France or Ireland have already performed that accounting trick. Italy tries to secure extra capital by increasing its central bank value, thus bringing a windfall benefit to shareholding entities, such as UniCredit and Sanpaolo. The Spanish government is likely to follow suit if only to provide similar protection to their home banking industry.

It will not prove in an easy task. Brussels has already warned against any selective measure that may fall under competition rules. Overcoming this hurdle would entail any DTA preferential treatment being applied to all sectors on a horizontal basis. It’s hard to imagine that public authorities should turn out as systematic debtors in all bankruptcy proceedings. A hard price to pay for securing a capital upgrade of non-performing banks.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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