Minister examining appropriate bank levy in wake of surging profits

Departure of KBC and Ulster has seen the amount collected through the levy drop from €150m to €87m

Michael McGrath: 'Other countries have gone down the road of a windfall tax but they may not have had a levy in place. We have a levy in place. That’s the vehicle we will use.'

The minister for finance said Ireland's existing banking levy will be extended in the budget and is the appropriate mechanism for banks to make a contribution to the exchequer given the surge in profits recorded this year.

Following a series of interest rate hikes by the European Central Bank (ECB) over the past year, banks across Europe have seen a surge in interest income due to the money they hold on deposit with central banks.

However, they have come under strong criticism for now passing on the benefit of increased rates to savers. Many countries have imposed windfall taxes on the banks' profits. 

Speaking to the Irish Examiner, Michael McGrath said the current bank levy, in place since 2014 and due to come to an end this year, will be extended.

"I am looking at the scope of the levy, the rate, the yield we expect from it, and how long the levy will be in place for," he said.

"Over the next six to seven weeks, these are decisions that will be made but a levy will be extended in 2024 and that is appropriate given the scale of the profitability of our banking system at this point in time."

Ireland's three main pics have grown their customer base and loan books significantly in recent months as Ulster and KBC banks depart the Irish market. However, their departures have seen the amount collected by the levy drop significantly.

"For many years we were collecting €150m each year," Mr McGrath said. "Because of the departure of Ulster and KBC this year and last year, the amount was €87m.

I have to make a decision as to what is an appropriate contribution from the financial sector to the exchequer for next year.

"Those are serious matters for consideration."

He dismissed suggestions of a windfall tax on bank profits like in Italy and Spain.

"The levy is the appropriate mechanism for what is the appropriate contribution by the financial sector," he said.

"Other countries have gone down the road of a windfall tax but they may not have had a levy in place. We have a levy in place. That’s the vehicle we will use."

"We have to be cognizant of a range of factors including bank profitability but also the importance of having competition. We have gone from about a dozen banks 15 years ago in Ireland to now around three public-facing banks but I do believe a contribution is required and we will be deciding in the weeks ahead what is the appropriate amount.

Windfall tax

Separately, the ECB is to send a letter of complaint to the Italian government about a 40% windfall tax on extra profits announced in a surprise move last week, a move that may intensify frictions between Rome and Frankfurt. 

While the ECB doesn’t have the power to interfere in domestic fiscal decisions, such a letter is likely to be met with protests from the Rome government, which has repeatedly attacked the central bank over its interest-rate hikes.

Still, Italy would not be the only country to get such a rebuke. When Spain and Lithuania announced similar windfall levies on banks, the ECB also criticised the measures. 

Additional reporting Bloomberg