The Government is very keen for voters to know that in the upcoming budget, it will extend the so-called bank levy for several more years. The levy is a tax applied to the state’s four largest banks on the deposits held by them, and generates the fairly insignificant sum of €200m per year.
€200million is not, of course, an insignificant sum to you or I – but in the context of Ireland’s national budget, it amounts to pocket change, generating about 0.1% of the country’s annual tax take. Sinn Fein, for their part, would like to see the levy doubled to about €400million per year. “Double the tax on the banks” is populist politics 101, but it’s not as if the banks are quaking in their boots. Nor should they be: In 2022, for example, AIB paid only €37m to the exchequer as its share of the bank levy, as against total pre-tax profits of over €880million.
Even were the levy to rise, it’s unlikely that the bank’s shareholders would take much of a hit. Taxing banks is popular precisely because such taxes are presented as taxes on banks, as opposed to taxes on bank customers. When you’re taxing the four largest banks in the state equally, and when those banks face little by way of competition, then the banks are incentivised to find all sorts of ways of simply passing the tax on to their customers either by way of lower interest rates on deposits, higher interest rates on loans, or higher banking charges. The Government can levy all the taxes it likes – what it cannot do is force the banks to pay those taxes without raising costs on consumers.
At the same time, as Peter Ryan wrote on these pages yesterday, there’s a more fundamental issue with the Irish banking sector: It is barely lending any money:
Ireland’s (deposit to credit) ratio is 32 percent lower than the global average, and is, in fact, one of the lowest recorded in the world. Angola followed by Zambia sat lower than Ireland followed by Ghana then Sudan which sat higher.
The bottom-line here is that Irish banks are not lending as much as they should be. They are well below the healthy level of lending let alone a level that would cause concern. When banks lend more it allows businesses to invest in order to innovate and expand their operations stimulating economic growth and job creation. On the consumer side, increased credit provides needed financing and expands demand for goods and services from the business sector.
So, what can the Government do, and what policy options are available that might get the banks to loosen the purse strings? Traditionally, the way to stimulate lending in an economy is to lower interest rates, but that choice is off the table because the public voted to transfer that power to the European Central Bank.
Another option would be to reform the caps on lending imposed after the financial crash. At the moment, for example, Irish banks are forced to restrict mortgage lending to a 90% loan-to-value ratio, meaning that people are banned from borrowing the full costs of their home and are told that they must have a 10% deposit minimum for a home that will be their primary residence. This could have the side-effect of further driving up home prices and indebting more Irish consumers, however, since it would amount to more money chasing the same number of homes.
A third option might be to reform the bank levy by increasing it substantially, but applying it only to net deposits: That is to say, the closer a bank got to lending out every single euro that it has on deposit, the less tax it would pay. This would financially incentivise banks to loosen their lending policies and release more cash into the economy, potentially at lower and more competitive interest rates.
One of the problems with having a banking sector dominated by just four players in the market is that they are not particularly incentivised to compete in terms of their offers. Good policy would encourage them to do so: By penalizing those banks that did not lend at the same rate as those who did with a higher and more punitive tax on un-lent monies, banks could be pushed in the direction of reducing their interest rates to attract more customers.
As it is, the bank levy does basically nothing to incentivise the banks to do anything. It is a passive tax that they can simply pass on to the consumer, while the Government basks in the fact that it is taxing the banks rather than the public, and relies on the public hearing “two hundred million” and thinking “gee that’s a big number” when it’s really not.
Tweaking the levy and how it is applied to force the banks to become more competitive is something the Government should look at, but don’t hold your breath.