ECB and Spain set for potential clash over bank windfall tax
Central bank to review whether levy on lenders contravenes EU banking regulations
Spain has put itself on a potential collision course with the European Central Bank by proposing a tax on banks that executives say clashes with European rules and threatens to weaken the sector.
The ECB is preparing to issue an opinion on the tax within weeks, according to its vice-president Luis de Guindos, a critical moment for Spanish prime minister Pedro Sánchez, who is championing the levy along with his Socialist-led coalition government.
Private lenders said the fact the government wants to stop them passing the cost of the tax on to clients is incompatible with EU regulation and potentially destabilising.
Sánchez wants to use the temporary measure to raise a total of €3bn from lenders that would be spent on cushioning the impact of the surge in energy prices triggered by Russia’s invasion of Ukraine.
In July, Spain became the first western European country to propose a windfall tax on banks. Hungary has already introduced one. The UK’s new chancellor, Jeremy Hunt, is also preparing to include a bank levy in a set of tax rises designed to undo the disastrous impact of a shortlived tax-cutting budget unveiled by his predecessor.
If approved by parliament, the Spanish levy would come into force at the start of 2023 and last for two years.
The Spanish government — whose tax will hit roughly 10 lenders, including the country’s two largest banks, Santander and BBVA — has argued that rising interest rates are yielding “extraordinary” profits for the sector.
The ECB has raised its deposit rate by 125 basis points so far this year, and is set to increase it by another 75 basis points to 1.5 per cent on Thursday next week. Higher central bank rates boost banks’ profit margins by enabling them to collect more interest on loans.
But lenders dispute the government’s assertion and warn that the proposed levy is unworkable and even dangerous.
Gonzalo Gortázar, chief executive of CaixaBank, one of Spain’s biggest lenders, rejected the premise of the tax, telling the Financial Times “banks are not likely to have extraordinary profits” but were instead still recovering from “a long period of very low returns”.
He added that the tax was “counterproductive because in an economic slowdown we need a strong banking sector”.
Highlighting the clash over rules, he said the Spanish plan “is against EU regulations”. European Banking Authority guidelines, which are enforced by the ECB, require banks to reflect in loan pricing “all relevant costs . . . including tax considerations”.
Gortázar said: “The proposal requires us to do the opposite.”
The legislative text for the 4.8 per cent tax, charged on banks’ income from interest and commissions, states that the cost of the levy “cannot be passed on to customers and non-compliance with the prohibition constitutes a serious infringement”.
The EBA said: “Banks need to make an adequate return on capital to be viable over the long run. In that context a healthy competitive environment and an adequate reflection of costs on pricing of products is needed, and strong banks in the long run are a safeguard for financial stability.”
The ECB is preparing to issue the opinion after receiving a request from Spain’s parliament, which is required to seek the view of the central bank.
The ECB has been critical of other governments’ plans to impose extra taxes on banks, especially when the proceeds are used for general budgetary purposes and not held in reserve to cover the cost of potential bank crises.
Pablo Hernández de Cos, the governor of the Bank of Spain and a member of the ECB’s policymaking governing council, said this week that deliberations over the opinion were focused on how the tax would affect the transmission of monetary policy and “the solvency of the banking sector”.
A spokesperson for the Spanish government said it “has designed the temporary levy so as to avoid any material impact on solvency ratios, which is the objective of the EBA guidelines. There can be no doubt about this when comparing the low rate [of 4.8 per cent] with the extraordinary profits already announced by the main banks.”
The ECB’s opinion is non-binding and its recommendations have been ignored by the Spanish government before. This year Madrid pressed ahead with imposing a €1,000 ceiling on cash payments that can be made involving businesses, a measure to curb black market activity, despite the ECB saying in March it was “disproportionate”.
Lithuania also ignored the ECB by introducing an extra tax on lenders despite the central bank’s warning in 2019 that it would have “a material adverse effect” on the country’s financial system.
Sánchez this week defended the bank tax, which he is pushing alongside new taxes on energy companies and the wealthiest Spaniards, saying: “We need to have more tax justice to have more social justice.”
Opposition leader Alberto Núñez Feijóo of the People’s party has attacked the proposal and accused the prime minister of pursuing “fiscal populism”.
Lorenzo Bernaldo de Quirós, president of Freemarket, a Madrid-based consultancy, forecast the government would go ahead with the tax even if the ECB criticised it. “They don’t care. It’s political,” he said. “They want to show voters they are taxing the powerful and favouring vulnerable groups.”