No deferred tax change plan for banks

The Government is not planning to reclassify banks’ deferred tax assets as tax credits in an effort to boost their capital positions.

The Spanish government announced on Thursday that it was looking into legislative changes that would enable Spanish banks to covert some of the estimated €50bn in deferred tax assets (DTA) into tax credits.

DTA enable a bank to write off losses against future tax bills when the bank returns to profitability. Bank of Ireland has €1.5bn in DTA and AIB holds €3.5bn.

Under existing Spanish regulations, DTA have very little absorption capacity in the event of a bank liquidation. Consequently, they are deducted from a bank’s core tier one capital.

However, tax credits are guaranteed by the government in the event of a liquidation, which means that they can be included in core tier one equity capital.

A spokesman for the Department of Finance said there is a different approach in this country.

“Basel III treats DTAs differently depending on how much they can be relied upon when needed to help a bank to absorb losses. Where their value is less certain to be realised, they must be deducted from capital. However, Basel has subsequently clarified that DTAs that are transformed on a mandatory and automatic basis into a claim on the State when an institution makes a loss would be one of the forms of DTAs for which deduction would not be warranted.”

The Irish banks are set to undergo an asset quality review in October followed by European Banking Authority stress tests in March or April of next year.

These tests will determine whether the banks will need more capital to comply with existing regulations on core tier one equity capital.

Finance Minister Michael Noonan has said that the banks will not need more capital following the stress tests.

The troika had originally wanted the Irish Central Bank to complete the bank stress tests before the country exits the EU/IMF bailout programme in November on the basis that Ireland’s prospects of making a sustainable return to the markets over the medium term hinged on the state of the banks.

The Government’s €1.8bn preference shares in Bank of Ireland are set to be redeemed on Mar 31. If Bank of Ireland cannot refinance the preference shares, then the Government’s stake in the bank increases by €450m.

There had speculation that the uncertainty caused by the delay in the stress tests would weigh on Bank of Ireland’s attempts to attract private capital before the March deadline.

Bank of Ireland declined to comment. During a meeting with analysts earlier this year, Bank of Ireland chief executive, Richie Boucher, said that the stress tests would not be a factor in its ability to secure private sector funding.


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