Cantillon: Justifying a bank levy never that difficult

The penny stock nature of Irish bank shares meant that news of a fresh bank levy had little impact on prices , with Bank of Ireland down 1.28 per cent and AIB up a surprising 2.13 per cent yesterday.

The new breed of bank investors appear to have taken it all in their stride. Analysts, however, were far less sanguine about the prospect of something in the region of €150 million to €200 million being extracted from the sector. The details will become clear today but several questions remain to be answered: will it be a once-off and how will it be levied?

The former is unknown, but the latter would appear to be on the basis of market share – in effect turnover – which would see AIB, Bank of Ireland and Ulster Bank hit hardest. AIB and Bank of Ireland could pay between €50 and €65 million each.

The levy will ostensibly be linked to one of the job creation measures to be
announced today and a phasing out of the lower rate of VAT for the hospitality sector would be as good a fig leaf as any other.

In reality, it looks like an effort to claw back some of the revenue lost to the Government by the ending of the scheme under which it guaranteed the banks’ debts for a hefty fee. As Goodbody pointed out yesterday, this amounted to more than €1 billion a year at its peak, but will fall back to €430 million this year.

The sweetener for the banks may be a relaxation in the limits on how much of the bank’s future profits can be sheltered behind the horrendous losses of the past five years. Although the arrival of that happy day will now be delayed by the levy.

Justifying a hit on the banks rarely presents a political challenge and in the current climate it is, in truth, an open goal for the Minister. The banks have done themselves no favours by talking of a return to profitability being in sight
while appearing to drag their heels on
implementing solutions for over-indebted borrowers and mortgage holders.

But, at the same time, it is a dangerous enough game for a Government that is a reluctant owner of two banks and a major shareholder in a third to play. It is
reasonable under the circumstances for the Government to effectively tax
recovering banks rather than wait for their return to profit, but it must be proportionate or investors will respond.