Dirt rise, bank levy ‘may breach’ State aid rules

The Government’s decision to introduce a bank levy and increase the Dirt tax in the budget could potentially breach EU State AID rules and seriously undermines the sector’s attempts to return to profitability, said the president of the Irish Banking Federation, John Reynolds.

At the time of the budget in October, the Minister for Finance, Michael Noonan, cited the banks’ “significant role” in causing the financial crisis as the rationale for imposing a bank levy that aims to generate €150m each year from all retail banks operating in the Republic.

Speaking at the IBF annual conference, Mr Reynolds acknowledged the banks’ culpability in the financial meltdown, which he attributed to poor lending decisions fuelled by an excessive use of wholesale funding.

When the wholesale markets seized up in the wake of the collapse of Lehman Brothers, the banks were left badly exposed.

“There is therefore more than a note of irony in the fact that both of the minister’s budget proposals could represent a serious undermining of banks’ efforts to rebuild their retail deposit base as a main source of funding again.

“The proposals also run counter to banks’ efforts to rebuild their capital structures in accordance with the new CRD IV requirements under which retail deposits are assigned the lowest risk and thus are the most valuable for banks,” said Mr Reynolds.

“From a competition perspective the proposals undermine the capacity of banks to win and retain customer deposits and greatly distort the operation of the market.

“Why is it that the same level of Dirt is not consistently applied across the deposit product range provided by An Post and the credit unions? And why is it, as deposit takers, that those same institutions are not covered by the proposed levy?” he said.

“We believe that such questions raise issues of possible state aid under EU legislation and we are closely examining these.”

Mr Reynolds also unveiled the IBF’s Protocol on Multi-Banked SME Debt which has been devised in conjunction with all banks engaged in SME lending.

The aim of the protocol is to enable an SME which is carrying unsustainable debt levels, with a number of different banks, to “communicate with the banks on a collective basis and to allow those banks to collectively discuss and consider the case”.

The IBF president noted the recent exodus of foreign-owned banks from the Irish market.

However, much lower levels of business activity cannot support the same number of banks that existed during the Celtic Tiger, he said.