An irrevocable rejection the one inflicted this morning by the European Central Bank on extra profit tax of banks imposed by decree by the Meloni Government. On the eve of the board which will announce the new monetary policy measures, revealing whether in September there will be a pause in the increases or whether the tightening will continue, the Eurotower sent a document, signed by President Christine Lagarde, to the Ministry of Economy which some a week ago he asked him for an opinion on the 40% tax on the increase in bank interest margins. And in the six pages that arrived in Rome from Brussels there is no shortage of criticism. There are three main findings raised by the ECB, concerning respectively the consequences for credit, investor confidence and the possible repercussions on smaller banks, especially given the problems that institutions are called upon to face in the current economic cycle.
ECB: the tax on extra profits must not be used to balance the budget
The tax on banks' extra profits is a one-off tax. “In this regard 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 its use for general fiscal consolidation purposes“: writes the ECB in the legal opinion on the extraordinary tax.
The effects of the tax on banks
In the document the ECB makes a reflection: it is true that a monetary policy characterized by a rapid increase in rates leads to an increase in the interest margins of institutions. But it is also true that this only happens in a first phase. Then there is a second, long-term one, characterized by higher collection costs, losses on the securities portfolio and a growth in provisions in view of possible insolvencies. The tax on banks' extra profits only takes into account the first phase, totally ignoring the second that could turn out to be “less positive, if not negative”, for the banks. For this reason the risk is that compromises the institutions' ability to respond to the second phase where they will face an increase in suffering.
For this reason, Eurotower recommends "that the decree-law be accompanied by ain-depth analysis of potential negative consequences for the banking sector, explaining in particular the specific impact of the extraordinary tax on longer-term profitability and the capital base, on access to finance and on the granting of new loans and on the conditions of competition in the market, and its potential impact on liquidity".
According to the ECB, “caution must be exercised to ensure that the extraordinary tax does not impact the ability of individual credit institutions to establish solid capital bases and to make adequate provisions for increased write-downs and deterioration in credit quality.” “Limiting the ability of credit institutions to maintain adequate capital positions or to prudently build provisions in the context of a possible decline in credit quality could put a regular transmission of monetary policy measures is at risk“, adds the European Central Bank.
ECB: the tax on extra profits can generate distrust in investors
“The extraordinary tax can make it more expensive for banks toattract new capital equity and wholesale financing, as domestic and foreign investors may have less interest in investing in Italian credit institutions that have more uncertain prospects", the ECB writes clearly. Simply put, the investors may be discouraged to invest in Italian banks because the Government could decide again, and once again surprisingly, to impose new taxes, a scenario which would in turn risk increasing the cost of Italian credit. Not only that, “the retroactive nature of the tax on extra profits could fuel the perception of one uncertain legal framework and give rise to large-scale disputes, creating doubts about legal certainty."
ECB: the risks for small banks
In the final part of the opinion, the ECB raises doubts regarding supervision. The main one concerns the “risks of fragmentation of the European financial system due to the heterogeneous nature of such taxes”; and the fact that groups operating through foreign branches are subjected to "double taxation".
Another big risk concerns the smaller banks. The danger is in fact that "the extraordinary tax will particularly affect the less significant institutions, which tend to concentrate more on the provision of credit". Especially since the tax base of the Italian government's tax "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".
