Spain: And Slows Down Credit in the Economy

The ECB Replies To The Treasury: The Tax On Banks Is Discriminatory an Harms Solvency

Bank of Spain.
Bank of Spain.

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 on the cost of the tax to cus­to­mers.

The government recalls that this is a non-binding opinion, but it comes at a time when there is still a deadline to present partial amendments to the bill to create this tax, for which they have until next Thursday.

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, it 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 lamented on numerous occasions this particularity of the tax and now the ECB is launching a similar warning.

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

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