According to the Financial Times, European governments could be set to follow in Hungary’s footsteps in introducing a range of windfall taxes or banking levies. This comes as a reaction to the huge profits financial institutions are currently generating mainly through sky-high interest rates.
Earlier this year the legitimacy and necessity of the Hungarian government’s decision to introduce windfall taxes in banking and business was called into question, with the issue even escalating into an open spat between the top brass of the Irish airliner Ryanair and Hungarian government officials. Soon after in July, however, the government in Madrid had announced a similar measure taxing bank operating in Spain on their extra profits. Even though this has set Spain on a collision course with the European Central Bank (ECB) that opposes such measures, the windfall taxes are set to stay.
Similarly the United Kingdom’s old-new Chancellor Jeremy Hunt is expected to introduce various tax levies on banks, a measure that is supported by opposition MP’s unhappy about news of massive quarterly profits at financial institutions in a period of unprecedented interest-rate hikes for consumers.
On the back of enormous interest rate hikes, and that of private consumers and small businesses, banks across the EU and UK have generated eye-watering profits not seen in the past fifteen years. From Deutsche Bank, to Barclays, Santander, UniCredit, HSBC and UBS have all exceeded previous profit estimates. The profits were mostly generated by the difference between the very low interests they pay on customers’ deposits (Bank of England rates are currently at 2.25%), and the high interests they charge on loans they approve.
As reported in the FT, banks themselves put their success down to “the outcome of good commercial dynamics, a favorable interest rate environment, continued cost discipline, a low cost of risk, and most importantly the commitment and work of our employees”. Furthermore, the Hungarian Banking Association (AFCA) warned that the “new windfall tax, will ‘endanger’ the banking sector’s ability to be agents for economic development and act as intermediaries for capital, as well as giving foreign companies offering cross-border financial services “an unfair advantage”.
Yet the unprecedented financial and economic crisis in Europe means that governments have little choice but to put extra burdens on sectors that have proved crisis-proof in the past months. As the British example shows, it would not be without political costs to governments if they were to be seen as shielding banks generating record incomes while the rest of society generally struggles with the cost of living and inflation.
The public will find it hard to stomach banks raking in large profits whilst their mortgage bills spiral out of control,
said British Liberal Democrat Treasury spokesperson Sarah Olney.
According to the FT, Barclays reported a pre-tax profit of £1.97bn for the three months to the end of September, Deutsche Bank’s pre-tax profit more than doubled to €1.6bn in the third quarter, while Santander, reported an 11 per cent year-on-year increase in net income to €2.42bn in the third quarter.
As Reuters reported though, on Thursday, the European Central Bank, rather counter-intuitively, „is set to raise the cost of borrowing further, offering an additional lift to banks”. This could put further burden on ordinary borrowers not only struggling with record high interest rates, but also ones that are entirely unpredictable, expected to rise significantly through the borrowing cycle.
Featured Photo: European Central Bank, Pixabay