The temptation for governments to go after the eye-watering profits that banks are generating from rising central bank rates has been too much for some.
Last month Italy’s right-wing administration announced a surprise 40 per cent windfall tax on “surplus profits” generated by lenders on the back of rising interest rates. The European Central Bank’s deposit rate has gone from minus 0.5 per cent last to July to 4 per cent, while its main lending rate has risen at the same pace, to 4.5 per cent.
Spain expects to raise €3 billion by 2024 from the windfall tax on banks. The likes of the Czech Republic and Lithuania have introduced similar charges to skim off outsized profits.
With AIB having seen its net profit soar 79 per cent to €854 million in the first half of this year, while Bank of Ireland’s earnings surged 200 per cent to €853 million — mainly from interest on the €60 billion of idle surplus deposits stored with the Central Bank — increasing the haul from the existing bank levy may seem a vote winner.
Minister for Finance Michael McGrath is considering the future of the levy, introduced in 2014. It raised €87 million last year.
While an Italian-style windfall tax has been ruled out, McGrath signalled recently the levy will be extended. “We can change the nature of the levy. We can change the rate of the levy if we so choose,” he said last month.
However, Central Bank governor Gabriel Makhlouf warned at an Oireachtas finance committee meeting on Wednesday against going too crazy, highlighting that while Irish banks are enjoying high earnings, their net interest margins and profit returns had long been below the European average before the recent spike.
He also suggested that margins are bound to tighten as savers move from low-yielding on-demand and current accounts to fixed-term accounts, which are offering rates of as much as 3 per cent.
But the main argument against a very big increase would be the impact on banks’ capital and their capacity to lend. “At the end of the day, tax policy is a question for the Government and not for us,” he said. He’s made his point before Budget 2024 is unveiled.