ECB expresses concern over Spain’s proposed tax on bank profits

The European Central Bank has criticized Spain’s proposed windfall tax on its banks, warning that it could hurt creditors’ capital, disrupt monetary policy and prove difficult to enforce.

The Spanish government should conduct an assessment of the impact on the bank tax and clarify several unclear points, the ECB said in a statement. non-binding legal opinion this raised the same objections as claims of comparable moves elsewhere in the EU.

Socialist-led coalition government of Pedro Sanchez wants to use temporary measure raise a total of 3 billion euros from lenders to be used to mitigate the impact of the spike in energy prices caused by Russia’s invasion of Ukraine.

Several other EU countries have also announced additional taxes on creditors this year to help cover the costs of Europe’s energy crisis. Hungary plans to impose a surcharge of 10 percent on banks’ domestic revenues this year and 8 percent next year, while the Czech Republic plans to impose a 60 percent tax on any banks’ “excess profits” defined as more than one-fifth. above the average for the past four years.

But the ECB warned that Spain’s planned tax of 4.8%, levied on banks’ income in the form of interest and fees for two years, could be charged to the institution even if it was unprofitable because it does not take into account provisions for bad loans or operating expenses. .

“If the ability of lenders to achieve adequate capital positions is undermined, this could jeopardize the smooth transfer of monetary policy measures by banks to the wider economy,” the ECB said in a November opinion signed by its President Christine Lagarde. 2.

The central bank recommended that Madrid conduct a “thorough analysis of the potential negative impacts on the banking sector” to detail its impact on profitability, financial stability, competition and soundness of banks, as well as on the supply of credit.

The Spanish government, whose taxation will affect about 10 creditors, including the country’s two largest banks, Santander and BBVA, claims that rising interest rates are generating ‘extraordinary’ profits. sector.

Parliament is likely to introduce a tax to cover income received in 2023 and 2024, despite the concerns of the ECB.

One Spanish government official emphasized that the ECB’s opinion was not binding, while noting that the central bank had not strongly opposed the proposal.

The official said that issues on which the ECB required clarification or further analysis were taken into account by the government when developing the proposal for a contingency tax, which was announced in July.

Santander, BBVA and CaixaBank, Spain’s biggest lenders, declined to comment, as did the country’s main banking trade association.

Commercial lenders have said the fact that the government wants to prevent them from passing the cost of the tax on to customers is inconsistent with EU rules and potentially destabilizing.

The ECB said that this aspect of the proposal “may cause uncertainty and associated operational and reputational risks for these institutions.” He added: “The ECB generally expects lenders, in line with international best practice, to consider and reflect in the loan assessment all relevant costs, including tax considerations where appropriate.”

It also raised doubts as to whether it could even be enforced, stating: “Given all the various circumstances that could cause prices to rise in the current context of higher interest rates, inflation, or worsening risk premiums, it seems difficult to distinguish between a temporary fee in fact will be transferred to customers or not.

Calling on Madrid to clarify the “inconsistency” in the bill on exactly how much of the bank’s income would be taxed, the ECB raised concerns about whether its reference to Banco de Espana’s duty to comply would “tantamount to giving any new task” to the national central bank .

The ECB’s non-binding opinions were previously ignored by the Spanish government. This year, Madrid pushed for a ceiling of €1,000 on cash payments that can be made with businesses, a measure to curb black market activity, despite the ECB saying in March it was “disproportionate”.