ECB criticises the bank levy hike, too

Parliament is dealing with the change in a fast-track proceeding.

(Source: Sme)

The European Central Bank (ECB) is warning Slovakia of the potential negative impacts of changes made on the special levy that banks pay in Slovakia. In its opinion this measure is likely to jeopardise financial stability in the country, as it might disproportionately lower the profitability of the banking system.

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The Slovak cabinet proposes to double the levy as well as cancel its current time cap. Parliament is dealing with the proposal in a fast-track proceeding.

Finance Minister Ladislav Kamenický sees two recommendations in the letter sent by ECB. The first one is to elaborate an impact study and the second one is to cap the levy.

“I firmly believe that the final solution [approved by parliamentary deputies] will be acceptable for the market, the European Commission as well as the European Central Bank,” said Kamenický as cited by the TASR newswire.

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The rate of the levy for banks in Slovakia, originally planned for 2017-2020, has stood at 0.2 percent of the bank’s liabilities reported in its balance sheet, and the levy was supposed to be scrapped as of 2021. Now the amendment is increasing the levy rate to 0.4 percent of liabilities as of 2021, with banks expected to pay an additional €144 million into state coffers only this year. Moreover, it removes the so-car time cap from the levy.

The ECB opines that the lowered profitability of the banking system would lead to “negative impacts on internal capital generation and lending.”

“Removing the time limit on the levy could have cyclical consequences, as banks may be subject to the levy even in periods of adverse macroeconomic conditions,” reads the assessment signed by ECB President Christina Lagarde, as cited by TASR.

The ECB recommends that the legislative proposal should be accompanied by a robust impact assessment detailing the net benefits of the proposed changes.

“At a minimum, the draft law could maintain a proportionate time limit on applying the levy in line with the impact assessment in order to reduce ambiguity regarding the overall effects of the levy going forward,” reads the text as cited by TASR.

The ECB objects to the method and the purpose for which the government is collecting the levy. The ECB considers it undesirable to use any additional bank taxes for general budgetary purposes, because they impose a disproportionate burden on banks, restrict lending and thus directly influence growth of the real economy. According to the ECB, the revenues from the taxation of financial institutions should therefore be purpose-bound in order to avoid their use for general budgetary consolidation purposes, the SITA newswire wrote.

It was Robert Fico, former PM and leader of the ruling Smer party, who announced the extension of the levy earlier in November. He cited the above-average profitability of the Slovak banking sector compared to other EU countries in his argument.

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