The ECB replies to the Treasury: the tax on banks is discriminatory, harms solvency and slows down credit

Spanish banksSpanish banks

The opinion of the European Central Bank (ECB) on the new bank tax, which is currently before Congress, is already public. The banking supervisor has issued a tough and detailed opinion in which it warns of the negative effects that the tax, as it is designed, could have on the banking sector, such as damage to profitability, competition, solvency and the granting of credit, while warning of the risks of not passing the cost of the tax onto customers.

The government recalls that this is a non-binding opinion, but it comes at a time when there is a deadline ending on Thursday to present partial amendments to the bill which will put this tax into effect.

The authority chaired by Christine Lagarde considers that interest rate rises, although they will increase banks’ net interest income, may also have a negative effect on their profitability.

In fact, the tightening of financing conditions could reduce the demand for loans by households in a context in which banks would also have to take on greater provisions to protect themselves against future defaults due to the economic slowdown. Two elements that would reduce the profitability of the banking sector.

“The net effect of monetary policy normalisation on banks’ profitability could therefore possibly be less positive, or even negative, over an extended horizon,” the ECB notes. It adds that “treating an affected bank as liable to pay the temporary levy for as long as it incurs net losses would significantly distort and further impair the resilience of a loss-making bank”.

Indeed, the ECB says that, ‘given that the determination of the recipients of the temporary levy is based on total interest and fee income for 2019, it is possible that these institutions will be making low profits or losses by the time the levy is actually collected’.

The profitability and solvency of the financial sector are key to the flow of credit to households and businesses, as the ECB considers. While there are no doubts about the latter, with regard to the former, banks and the market consider that the sector is still far from its optimum level.

In the ECB’s view, “an adequate capital position helps banks to avoid abrupt adjustments in their lending to the real economy” and “if banks’ ability to achieve adequate capital positions is impaired, this could jeopardise a smooth transmission of monetary policy measures through banks to the broader economy”. That is, the flow of credit to customers.

Another of the negative effects highlighted by the ECB in its non-binding opinion is that this tax would distort competition among banks, given that it would not affect all banks, but only those that in 2019 exceeded 800 million euros in interest and commission income.

This requirement leaves out the Spanish branches of many foreign banks, small banks and entities such as ING. That is why the big banks have expressed disagreement, on numerous occasions, with this particularity of the tax and now the ECB is givng a similar warning.

Moreover, in drafting the new tax, the government wanted to prevent banks from passing its cost onto customers. It sought to force banks to assume the tax from their own profits, something difficult given the extensive regulations banks are subject to. And the ECB recalls this in its opinion, stating that European banking regulations oblige banks to include “all relevant costs, including tax considerations, where appropriate” in the price of credit.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.