ECB cautions temporary bank tax potentially damaging
Frankfurt/Ljubljana, 9 November - The European Central Bank has warned the Slovenian government that a temporary tax on bank total assets designed to finance post-flood reconstruction could be potentially damaging for the banking sector and the economy as a whole.
In an opinion issued at the request of the Slovenian Finance Ministry, it says that unlike other member states, Slovenia would not levy the tax on net interest income or a value related to the interest margin, but by taking the entire balance sheet into account.
"Caution must be taken so that such tax base does not incentivise credit institutions to contract their balance sheet by reducing their lending activity beyond that which would be warranted from a monetary policy perspective.
"To this end, the ECB notes that a reduction in lending volumes has already been observed in Slovenia, and the introduction of the additional tax could further inhibit lending activity," the ECB says.
According to the ECB, inhibited crediting could make lending conditions worse for bank clients, whereas higher costs and lower supply of credit could have a negative impact on real GDP growth.
A similar warning was issued in an interview for Thursday's edition of Finance by ECB vice-president Luis de Guindos, who told the business newspaper that the ECB was not in favour of such taxes.
In response, the Slovenian Finance Ministry said the ECB did not oppose the planned tax but advised caution, "which is its role and had been expected".
The ministry said that in drawing up the proposal it had taken into account recommendations that the ECB had issued in similar cases - the dedicated purpose and temporary nature of the tax, surplus buffers and mechanisms to safeguard financial stability.
The ministry also said that the ECB had acknowledged that the draft bill provides preliminary analyses of the overall net impact of the proposed provision on the Slovenian banking sector.
The ECB bas also welcomed that the Bank of Slovenia will review the impact of the tax on the stability of the banking system on an annual basis and understands that the government will take into account the Slovenian central bank's findings and recommendations on the basis of the annual review, the ministry said.
Commenting on the ECB's recommendation that caution should be taken to ensure that the tax does not impose an additional burden on less profitable banks or banks that made a loss during the tax period concerned, the ministry notes that such banks will not pay tax, which it will clarify to the ECB.
It will also provide further clarification on the interaction between this tax and corporate income tax.
As part of the post-flood reconstruction efforts, the government is also planning an increase in corporate income tax from 19% to 21% in 2025 and by an additional percentage point until 2028, a proposal that businesses have been vocally protesting against.
Like the ECB, the Slovenian Bank Association has been warning that a tax on total assets would have a negative impact on crediting as well as the resilience and competitiveness of the bank system.
Stanislava Zadravec Caprirolo, the association's president, told the newspaper Delo today that the tax is significantly higher than in some other countries, and unlike in some other countries, it is not a one-off tax.
According to the Finance Ministry proposal, Slovenia would levy a 0.2% tax on bank total assets for five years, whereby certain ceilings are set benefiting large banks in particular.
She said the Slovenian proposal was significantly worse for investors and shareholders because it would affect the availability and price of capital, and lead to a contraction of credit activity.