Additional profits and ECB rejection: “Caution on bank taxes creates uncertain financial framework”

Milan – No European Central Bank He fills the draft with cash Tax on additional profits banking associated with rising interest rates. The opinion entrusted to the institution in the stability and supervision of institutions, consisting of six pages, signed by the president Christine Lagarde Yesterday it was sent to the Treasury, which sent the copy of the measure on August 11, to charge a rate of 40% in 2024 on an increase of more than 10% in the interest margin of Italian banks in 2023 compared to 2022, as it has already done with similar laws adopted by the governments of Spain and Lithuania. , raised formal and fundamental concerns, and called on us to better calibrate all the repercussions that the tax on credit in Italy could have and on the ability of institutions to absorb the problems of the economic cycle (already on us).

Therefore, the supervisory authority recommended to the government “that the decree law be accompanied by an in-depth analysis of the potential negative consequences for the banking sector, which in particular demonstrates the specific impact of the exceptional tax on long-term profitability and long-term profitability.” “Capital, access to financing and granting new loans, conditions of market competition and their potential impact on liquidity.” The Treasury, which has been working for weeks to review the tax base, and also to exempt banks’ investments in government bonds, will read all its findings and recommendations. Frankfurt is keenly interested, although the final version of the law, under discussion in Parliament, could reduce its impact from the €2.5 billion initially estimated to less than half.

The danger of not considering the catagen phase of the cycle

The first observation concerns the fact that the one-time rule does not measure the effects of a rate increase on the entire economic cycle: “It has been shown that net interest income usually tends to expand as reference rates increase (…). However, as the restrictive cycle continues, this effect The positive impact on income may be offset by lower loan volumes, higher financing costs, losses recorded in the securities portfolio and an increase in provisions resulting from a potential deterioration in the quality of the credit portfolio. Therefore, the “net impact of tight monetary policy on banks’ profitability, measured over the entire policy-making cycle “It may be less positive, if not negative, over an extended time horizon.”

Second, “because the determination of beneficiaries of the exceptional tax is also based on net interest income in 2023, these trusts may experience lower profits or losses when the tax is actually collected.” This applies even “if credit institutions subject to this tax record losses on components of their profits arising from income other than net interest income.” For this reason, Lagarde adds that “care must be taken to ensure that the extraordinary tax does not affect the ability of individual credit institutions to build solid capital bases and make sufficient provisions for further currency devaluation and deterioration of credit quality,” and to avoid “which jeopardizes the orderly transfer of existing monetary policy measures.” On the banking system, on the economy in general.”

Financial stability risks of banks

As it did with the Spanish and Lithuanian taxes on banks, the ECB noted that “an extraordinary tax on the sector could make it more complicated for credit institutions to accumulate additional capital buffers as their retained earnings decline, which would reduce their ability to save.” . resilience to economic shocks”, which limits the ability of institutions to provide credit. Another criticism relates to the one-time nature of the tax: while “the European Central Bank has previously recommended that the extraordinary nature of revenues should be clearly separated from the government’s general budget resources to avoid them being used for The general recovery budget.

Among the risks that threaten the stability of institutions is that “in the long term, high interest rates can negatively affect the financial situation of borrowers, thus increasing credit risks. These effects are not taken into account when designing the exceptional tax, as the latter is calculated on the net interest margin.” Not on net profits. These various factors should be properly evaluated to ensure that credit institutions remain adequately positioned to absorb potential future losses. Then a passage on higher financing costs: “The extraordinary tax may make it more expensive for banks to attract new capital and wholesale financing, Where local and foreign investors may have less interest in investing.”

Results related to precautionary oversight

In the final part of the opinion, concerns were raised about the ECB’s prudential supervision of major European institutions. The main reason relates to “the risks of fragmentation of the European financial system due to the heterogeneous nature of these taxes.” The fact that groups operating through foreign subsidiaries are subject to “double taxation.” Among other things, the letter requests clarification on “the treatment of credit institutions in which mergers and acquisitions took place during the assessment period for tax calculation and the associated impact, in terms of different perimeters on different reference dates” which “the Decree-Law does not address or clarify.”

A related risk is that “the exceptional tax will particularly affect less significant institutions, which tend to focus more on the provision of credit,” and to a lesser extent on savings management commissions; Especially since the Italian government’s tax base “does not take into account the entire economic cycle and does not include, among other things, operating expenses and the cost of credit risk.” For this reason, “the amount of the exceptional tax may be disproportionate to the long-term profitability of the credit institution and its ability to generate capital.”

The final clarification concerns the definition of the maximum tax, set at 0.1% of the total assets relating to the fiscal year 2022. “It is not entirely clear whether the concept of total assets refers to the same perimeter used to calculate the tax or whether it refers to the total activities at the unified level.” : Therefore entities such as Intesa Sanpaolo and Unicredit that have significant foreign or insurance activities still do not understand what the taxable amount is.