ECB warns of potential impact on economy from Spanish banking tax

2:46 pm Thursday, November 03rd, 2022

By Jesús Aguado

MADRID (Reuters) – The European Central Bank warned on Thursday in a non-binding opinion that Spain’s banking tax proposal could damage lenders’ capital, lead to higher credit costs for clients and even have an impact on the wider domestic economy.

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

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

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

Banks have however warned about the negative impact on credit at a time when recession looms and lenders could be forced to set aside 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 adverse impact on Spanish banks’ solvency and of a higher cost of credit.

Governments are not obliged to act on the ECB’s opinions, but most amend proposals in the case of warnings likely to be seen as a negative assessment.

A government source said the administration would analyse the ECB’s opinion in detail, but that it had taken into account all technical aspects highlighted by the ECB before proposing the tax and the banks’ increasing profits supported the idea that the sector was is in a very solid position in terms of solvency.

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

The supervisor said this was particularly relevant in the current economic environment, which “features high uncertainty, and higher loan loss provisions due to a foreseen marked slowdown in real economic activity”, and therefore banks were not necessarily due to benefit from current market conditions.

In that context, lenders could become “less able to absorb the potential downside risks of an economic downturn.”

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

On this issue, the ECB said that the application of the levy only to certain Spanish lenders could distort market competition and impair a level playing field.

Though the Spanish legislation bill aims to avoid passing on the costs to clients, the ECB said it “generally expects lenders to reflect in loan pricing all relevant costs, including tax considerations”.

(Reporting by Jesús Aguado; additional reporting by Emma Pinedo; editing by Andrei Khalip and Chizu Nomiyama)