MILAN – La European Central Bank fills the draft with criticism tax on extra profits banking linked to the rise in interest rates. The opinion, which is the responsibility of the institution for the stability of the institutions and supervision, is six pages long, signed by the president Christine Lagarde and sent yesterday to the Treasury, which on 11 August had sent the version of the measure, to collect in 2024 the 40% rate on the increase of more than 10% in the interest margin of Italian banks in 2023 compared to 2022. The Eurotower , as it had already done for similar laws adopted by the governments of Spain and Lithuania, raised formal and substantial concerns, inviting us to better calibrate all the repercussions that the tax could have on credit in Italy and on the ability of institutions to absorb the economic cycle problems (already upon us).
The supervisory authority therefore 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 illustrates in particular the specific impact of the extraordinary tax on longer-term profitability and on the capital, on access to finance and on the granting of new loans and on the conditions of competition on the market, and its potential impact on liquidity”. The Treasury, which has been working for weeks on a review of the tax base, also to exempt banks’ investments in government bonds, will read all of Frankfurt’s findings and recommendations with the utmost attention; although the final version of the law, under discussion in parliament, could reduce its impact from the 2.5 billion euros initially estimated to less than half.
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The risk of not considering the waning phase of the cycle
The first observation concerns the fact that the one-off rule does not measure the effects of the rate increase on the entire economic cycle: “It has been demonstrated that net interest income usually tends to expand as the reference rates increase (…). However, as the restrictive cycle continues, this positive effect 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 the potential deterioration in the quality of the credit portfolio”. Therefore, “the net effect of tighter monetary policy on bank profitability measured over the entire policy-making cycle may therefore be less positive, if not negative, over an extended time horizon.”
Second, “because the determination of recipients of the extraordinary tax is also based on net interest income in 2023, such credit institutions may experience lower profits or losses when the tax is actually collected.” And 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 “caution must be exercised to ensure that the extraordinary tax does not impact the ability of individual credit institutions to build solid capital bases and to make adequate provisions for greater devaluations and a deterioration in credit quality”, avoiding “putting I jeopardize a regular transmission of monetary policy measures, based on the banking system, to the economy in general.”
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The financial stability risks of banks
As it did with the Spanish and Lithuanian taxes on banks, the ECB had remarked that “imposing an extraordinary tax on the sector could make it more complicated for credit institutions to accumulate additional capital reserves as their retained earnings would be reduced, which would reduce their resilience in the face of economic shocks”, limiting the ability of institutions to provide credit. Another criticism concerns the one-off nature of the tax: while “the ECB has previously recommended that a clear separation is needed between the extraordinary nature of the proceeds and a government’s general budgetary resources to avoid their use for general recovery purposes budget”.
Among the risks to the stability of institutions there is also that, “in a long-term perspective, higher interest rates can negatively impact the financial situation of borrowers, thus increasing credit risk. These effects are not taken into consideration when designing the extraordinary tax, as the latter is calculated on the net interest margin and not on net profits. These different factors should be duly assessed to ensure that credit institutions remain in a favorable position 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 equity capital and wholesale financing, as domestic and foreign investors may have less interest in investing.”
The findings regarding prudential supervision
In the final part of the opinion, concerns are raised about the prudential supervision that the ECB carries out on the major European institutions. The main one concerns the “risks of fragmentation of the European financial system due to the heterogeneous nature of these taxes”; and the fact that groups operating through foreign branches are subjected to “double taxation”. Among other things, the letter asks for clarification on the “treatment of credit institutions in which mergers and acquisitions have taken place during the estimation period for the calculation of the tax and the related impact, in terms of different perimeters at the different reference dates”, which the decree law “does not consider or clarify”.
A related risk is that “the extraordinary tax will particularly impact the less significant institutions, which tend to focus more on the provision of credit”, and less on savings management commissions; especially since the Italian government’s tax base “does not take into consideration 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 extraordinary tax may not be commensurate with the longer-term profitability of a credit institution and its ability to generate capital”.
A final clarification concerns the specification of the maximum tax ceiling, set at 0.1% of total assets relating to the 2022 financial year. “It is not entirely clear whether the notion of total assets refers to the same perimeter used for the calculation of the tax or whether it refers to total activities at a consolidated level”: therefore entities such as Intesa Sanpaolo and Unicredit that have significant foreign or insurance activities still do not understand what their taxable amount is.
2023-09-13 22:29:06
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