The Lithuanian government’s proposed temporary bank solidarity contribution could have negative effects by making credit institutions less resilient to economic shocks, the European Central Bank has said.
The ECB has presented its opinion on the proposed levy at the request of Lithuania’s Finance Ministry. The report states that higher costs and reduced credit supply can adversely affect real economic growth.
The ECB recommends complementing the bill with a thorough analysis of potential negative consequences for the banking sector, detailing, in particular, the impact of the temporary solidarity contribution on the longer-term profitability and capital base of banks.
The temporary solidarity contribution could create disincentives to attract new deposit funding and provide lending to the real economy. At the same time, domestic and foreign investors could have less appetite to invest in credit institutions as the temporary solidarity contribution decreases their profitability outlook.
In addition, the draft law could make it more difficult for credit institutions to build up extra capital buffers and increase resilience to withstand future economic shocks, the ECB report reads.
“Therefore, the potential negative effects of the temporary solidarity contribution on the banking sector and its impact on financial stability should be closely monitored, particularly within the current context of higher uncertainty and increased volatility in financial markets,” the ECB said.
As Lithuanian commercial banks are expected to make a profit of around 1 billion euros this year, the Finance Ministry and the Bank of Lithuania are proposing introducing a temporary solidarity tax on them.
The levy of 60 percent would be charged on net interest income more than 50 percent above the average of the past four years. It is expected to raise around 410 million euros over two years, which would go towards the increased needs of national defence, according to the Finance Ministry.
The Bank of Lithuania told BNS the ECB’s opinion published on April 4 has to do with the first version of the temporary solidarity contribution bill, adding that the updated bill presented on April 5 by the Finance Ministry already takes the ECB’s comments into account.
The updated draft law includes a clause separating new crediting activities from the temporary solidarity contribution, thereby eliminating any doubts that the tax may influence the normal activities of credit institutions and the business decisions they make.
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