Business

Bank ‘super profits’ spurred Minister to consider bank levy increase

Minister for Finance wanted charge to raise ‘considerably’ more than €150m of previous years

Michael McGrath on budget day last year when he revised the bank levy. Photograph: Gareth Chaney/ Collins

Ken Foxe
Wed Jan 3 2024 - 06:00

Minister for Finance Michael McGrath was determined to increase the amount of money taken in from the bank levy as he said every indication was that the banks were going to enjoy “very significant profits” as interest rates rose.

In pre-budget discussions, Mr McGrath said he wanted to aim for a take “considerably higher” than €150 million from the banks as they were doing very well and much of their profit was “sheltered from tax” due to massive losses incurred during the financial crisis.

During the deliberations, the Minister was also warned that any extension of the bank levy outside of the main banks was likely to face legal challenges in the courts. In a series of submissions for the Minister, officials said there were questions to be asked over why the levy should apply to financial institutions that had not been bailed out following the collapse of the Celtic Tiger economy.

The submission said that the levy had been introduced in 2014, repeatedly extended, and had begun to move away from “its original time frame and effect”. It said several other institutions were becoming liable for the charge due to how it was calculated based on Dirt payments [Deposit Interest Retention Tax].

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The submission noted: “Given that such institutions have not benefited from taxpayer-funded assistance during the financial crisis, and indeed may not even have been present in this country at that time, it is felt that they may have grounds on which to challenge their being required to pay the levy. Entities might also challenge the rationale for the levy if other providers of similar services are not in scope.”

Department officials also flagged one concern with how the existing levy was calculated where it acted potentially as a “disincentive” for banks to offer better interest rates for savers.

“The lower the amount of interest paid, the lower amount of bank levy which will be paid,” said their submission to the Minister.

Officials from the banking division of the Department of Finance also flagged the risk of how a very significant hike in the bank levy would simply be passed on to customers.

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It said anything that resulted in a much “larger liability” for banks could lead to an unwanted consumer outcome.

Their submission to the discussions said: “It is likely that the liability will be passed on by the banks to their customers through lower deposit rates and higher loan costs.”

The banking division also raised concerns that a higher levy could create a new “barrier to entry” for any bank that wanted to do business in Ireland, especially with long-standing concerns over how few options are available to Irish customers.

In discussions over other possible approaches to a bank levy, officials warned in particular about one based on what was called “systemic importance”.

They said this approach would mean several unnamed international banks making a significant contribution with the risk they might even move operations out of Ireland if it “impacts their profitability”.

In the final submission, Mr McGrath said he wanted to go ahead with a levy for AIB (including EBS), Bank of Ireland, and Permanent TSB based on their customer deposits and to bring in €175 million.

In a note, he wrote: “I may decide to increase the levy further in the days ahead as we finalise the overall tax package, but the structure won’t change so the drafting work can be advanced now.”

Asked about the records, a department spokesperson said they had nothing further to add to their contents.

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