ECB warns of potential economic impact of Spanish banking tax

  • ECB says banks less likely to absorb risk in downturn
  • Warns of impact on banks’ capital and profitability
  • A tax on only certain banks could distort competition
  • Warns of higher costs for customers resulting from taxation

MADRID, Nov 3 (Reuters) – The European Central Bank warned in a non-binding opinion on Thursday that Spain’s bank tax proposal could hurt lenders’ capital, lead to higher borrowing costs for customers and even impact the national economy at large.

In July, Spain’s ruling left-wing coalition introduced a bill that is still being debated in parliament to create a temporary tax on banks aimed at raising 3 billion euros by 2024.

“If the ability of lenders to reach adequate capital positions is compromised, this could jeopardize the smooth transmission of monetary policy measures to the wider economy,” the ECB said.

The government’s rationale for imposing the tax was to help offset the rising cost of living for vulnerable households at a time when lenders were already benefiting from higher interest rates.

Banks, however, warned of the negative impact on credit at a time when recession looms and lenders may be forced to build more provisions to weather the crisis.

Two sources with direct knowledge of the matter told Reuters last month that the ECB was set to warn of the negative impact on the solvency of Spanish banks and a higher cost of credit.

Governments are not obliged to act on the ECB’s advice, but most modify the proposals in the event of warnings that could be perceived as a negative assessment.

A government source said that the administration would analyze the ECB’s advice in detail, but had taken into account all the technicalities highlighted by the ECB before proposing the tax and that the growing profits of banks supported the idea that the sector was in a very solid situation. position in terms of solvency.

On Thursday, the ECB also mentioned the potential specific impact of the tax on the profitability of banks, and said that Spain should “ensure that its application does not pose risks for financial stability, the resilience of the sector banking and the granting of credit”.

The supervisor said this was particularly relevant in the current economic environment, which “presents high uncertainty and higher loan loss provisions due to an expected sharp slowdown in real economic activity”, and that banks should therefore not necessarily benefit from the current market conditions.

Against this backdrop, lenders could become “less able to absorb potential downside risks from an economic downturn.”

The banking tax includes a charge of 4.8% on net interest income and net commissions of banks above a threshold of 800 million euros, excluding small Spanish lenders and units of foreign banks in Spain.

In this regard, the ECB said that applying the levy only to certain Spanish lenders could distort competition in the market and harm a level playing field.

Although the Spanish bill aims to avoid passing costs on to customers, the ECB said it “generally expects lenders to reflect in the pricing of loans all relevant costs, including tax considerations”. .

Reporting by Jesús Aguado; additional reporting by Emma Pinedo; edited by Andrei Khalip and Chizu Nomiyama

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