‘Higher bank taxes could damage the resilience of the banking sector’

The recent proposal by the House of Representatives to increase the bank tax may have negative consequences for the banking sector in the Netherlands. This is what the European Central Bank writes in an opinion on the bill published on Tuesday. The regulator states that before introducing the additional banking tax, a “thorough analysis of possible negative consequences” must first be carried out. According to the ECB, the levy could “damage the resilience of the banking sector” and “cause market disruption.”

The increase in the bank tax was proposed after Budget Day by GroenLinks-PvdA, ChristenUnie and D66. The bank tax, introduced in 2012 to tax implicit state support to banks, now generates 470 million euros annually. After the increase, this should be 150 million euros more. With the increase, the House wants to tax the ‘excess profits’ of banks. The proceeds should cover part of the costs of increasing the social minimum.

In its advice as banking supervisor and monetary policymaker, the ECB is critical of the design of the tax. Although the reason for the plan was to tackle ‘excess profits’, the amount is calculated on the basis of the banks’ balance sheets, not on profitability.

According to the ECB, this may mean that weaker banks – which are not at all profitable or make losses – are less able to absorb a possible economic downturn. The bank tax does not take into account any higher financial contributions a bank may have to absorb losses on loans. “Consequently, the tax may be disproportionate to the longer-term profitability of a credit institution and its ability to generate capital,” the ECB said in its letter.

In its criticism, the ECB agrees with earlier statements from the banking umbrella organization NVB and with statements by President of De Nederlandsche Bank, Klaas Knot, who is also on the board of the ECB. Knot previously warned that the tax could make it harder for banks to replenish their buffers.

‘Remarkable increase in profits’

The ECB wrote in another publication on Tuesday that bank profitability has shown a “remarkable increase” in 2023. The average return of banks reached an average of above 10 percent in the second quarter of the year for the first time since the start of the banking union in 2014 – when supervision became European – the ECB writes in its annual banking supervision evaluation SREP.

However, the higher profitability due to higher interest rates is again under pressure, the ECB warns at the same time. The same higher interest rates that resulted in higher profit margins last year are now causing various “challenges”, according to the regulator.

The ECB sees, among other things, that higher interest rates mean higher capital costs for banks: it is more expensive for them to attract money on the financial markets and the bank has to pay more savings interest to retain customers. At the same time, the ECB itself is phasing out TLTRO loans, a source of bank financing. The ECB has provided these loans since the euro crisis to increase inflation, which was very low at the time. This support program will be phased out since 2022, to zero in December next year.

The ECB also sees a danger to the profitability of banks that there is a chance that banks’ loan quality will decline if geopolitical tensions increase or if consumers and companies are less able to pay their interest costs due to high inflation and increased interest rates. .

The ECB expects that there will be more competition on the savings market in the near future due to this tension in bank financing. The regulator sees that a division is already emerging: weaker banks in the euro zone pay off their TLTRO loans from the ECB later than stronger competitors. The same weaker banks offer higher interest rates on savings deposits in order to attract more savings.

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