Payback time for the financial sector that was bailed out by taxpayers, the new government thinks.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
It’s payback time for Spain’s financial sector. At least that’s what the country’s new center-left coalition government appears to believe. After receiving the biggest financial bailout in the country’s history — over €60 billion in direct state aid, and as much as €371 if you include all the recapitalisations, the mass buyouts of impaired assets, the deferred tax credits and government guarantees — it’s time for the banks, which have been racking up profits of late to return the favor.
But the banks are not in a generous mood. The deputy governor of the Bank of Spain, Javier Alonso, warned that hiking taxes on bank profits could result in shrinking credit, higher fees and less interest on deposits, which is already about as low as it can get. If banks don’t pass on the additional costs to the consumer, it would mean “less profitability” for the sector, in an environment of ZIRP-induced wafer-thin margins, he said.
So far, the banks have been able to get around this problem of tight margins with a combination of ruthless cost cutting, closing over 40% of branches, and laying off roughly a third of their workforce over the last 10 years, and relentless fee gouging.
In a fit of brazen hubris, the CEO of Bankia, Ignaci Goirigolzarri, argued this week that there’s no moral case for raising taxes on banks. “It makes sense when there are negative externalities in a sector, but that does not happen in banking,” he said. Given the untold trillions of dollars of damage caused by the last global financial crisis, it’s an outlandish claim for anyone to make. But this is coming from the leader of a bank whose collapse shortly after its IPO seven years ago cost taxpayers over €22 billion and set the stage for Spain’s worst recession in decades!
Goirigolzarri isn’t the only senior banker opposed to paying a bit more in taxes. According to Carlos Torres, the CEO of Spain’s second biggest lender, BBVA, retail banks such as his own have zero responsibility for the last crisis; the culprits were Spain’s woefully (and at times criminally) mismanaged cajas (savings banks) that collapsed in unison the moment Spain’s real estate bubble began deflating. It’s an argument that’s often used to absolve Spain’s commercial banks of any blame for the country’s crisis.
Like all good myths, it has an element of truth to it. Most commercial banks in Spain, with the notable exception of the now-defunct Banco Popular, were less reckless in their mortgage lending than the savings banks. That said, the commercial banks did play a part in fueling Spain’s madcap real estate bubble, just as they’re trying to stoke a new one right now by offering high-risk loan instruments such as the 100% mortgage.
More to the point, if the country’s taxpayers hadn’t intervened when they did, essentially underwriting the cajas’ losses, the contagion would have probably spread to Spain’s commercial banking sector, by which point banks like BBVA would also have begun teetering. Instead, the bailout, together with Draghi’s pledge to do whatever it takes, stemmed the immediate panic and the cajas’ assets — good and bad — were transferred, at great public cost, onto the balance sheets of Spain’s biggest commercial banks, thus massively increasing their market share.
In other words, without the help of taxpayers Spain’s five biggest banks may well have collapsed. They certainly wouldn’t be as big as they are today. Now, much to their unconcealed displeasure, the government wants the banks to repay the favor, by contributing more to the state’s coffers.
It won’t be the first time a European government has raised taxes on lenders’ profits since the crisis began ten years. The UK’s notoriously bank-friendly government hiked taxes on banks in 2015, with minimal fallout. The Macron government also levied a one-off tax on large French corporations, including the banks, last year, which was also met with howls of outrage. The hardest hit lenders were France’s three largest mutual banks, Crédit Agricole, Banque Populaire-Caisse d’Epargne and Crédit Mutuel.
In Spain the new tax could cost the sector between $800 million and $1 billion, shaving 7-8% off its consolidated profits, according to Swiss bank UBS. The worst affected banks are likely to be those most dependent on the domestic market, since the tax will only be imposed on profits earned in Spain. The three smallest of Spain’s five largest banks, Caixabank, majority state-owned Bankia, and the perpetually troubled Banco Sabadell, could suffer a 10% hit to their profits, while the impact on the country’s two biggest and most international banks, Santander and BBVA, will be around 2-3%.
This is happening at a time when Spain’s banks are going to have to start learning to live without the so-called deferred tax asset (DTA), which allows banks (and other companies) to carry forward their bountiful losses from crisis-ridden years to offset their tax liabilities in the future. Spanish banks are home to a staggering €50 billion worth of DTAs, The “assets,” though they have limited, if any, liquidity value, have been declared “high quality” for years, and thus were included in regulatory bank capital, enabling banks to significantly increase their “capital buffers,” at least from a cosmetic viewpoint.
Now we’re in the so-called “good times” the banks have been cashing in their chips, with some even receiving net fiscal income from Spain’s tax office last year. But the game is almost over. The new government is already threatening to put an end to it, and if it doesn’t, the new regulation brought into effect by Basil III almost certainly will. This development is likely to have a massive impact on their balance sheet health. According to Moodys, if the DTAs disappeared, Spanish banks would have the weakest core capital in the Eurozone. Perhaps it’s no wonder the banks are protesting so much about all this talk of taxation. By Don Quijones.
BBVA, Spain’s second biggest bank, is the biggest loser in the collapse of the Turkish lira. Read… As Turkish Lira Collapses, Foreign Banks in Turkey Rue the Day
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“…it’s no wonder the banks are protesting so much about all this talk of taxation.”
It appears that no one has yet told the new Spanish president that taxes are only for the little people.
Hi DQ, really interesting article. If the DTAs disappeared what would be roughly the core capital of the average Spanish Bank? Regards Steve.
“It makes sense when there are negative externalities in a sector, but that does not happen in banking,”
God’s work by definition has no negative externalities. Since human beings are created by God, by definition and logic, he is absolutely right.
Also bankers alone did not create the crisis. “You can lead a horse to water …”. Bankers do the thankless job of putting muppets in their place i.e. down there.
I am not kidding. Muppets have serious delusions, and they always expect others to fullfil them.
Good laugh, thanks! What a sick farce these banks are. Wafer thin margins? LMFAO I could borrow at 1% above prime pre-2008 now they want no less than 4% above prime. But yet those same bankers salaries and stock margins have doubled in the same time frame. No thanks to their bigly generous offers. They can suck it.
Spain: The party is over guys.
Banks: NOOOO!
Spain: Look I do this or Grandpa Euro does.
Banks: NOOO!
“But the game is almost over.”
That is tad too optimistic. With Central Banksters, Banksters and Politicians in charge it will not happen anytime soon. These ra^% will find a way to pull wool over people eyes, pull band-aid solutions and change track when required (e.g. interest rate hikes are years away, postpone implementing BASEL III, change accounting rules, migrant deal reached, subtly increase yields if a government does what is right for the people, MORE THAN WHATEVER IT TAKES, do a Goebbels -propaganda-screw people and then tell them that you would have been screwed more otherwise etc.).
How about making people pay for the wars they support?
Anyone representative who voted for any war, and any voter who voted for an elected official who voted for a war or at any time in any voiced support for any war in any way or any representative who supported war in any way, should be levied a 5000% income tax surcharge payable each and every year that war continues. Each vote and each voice of support of war, should be counted as an new tax levy until infinity.
For instance, each time an official votes to fund 5 wars, that representative shall pay a 5 x 5000% income tax surcharges. That surcharge double each year the war continues. And every citizen who voted or that representative shall also pay equal 5 X 5000% tax surcharge. For each additional year that representative votes to support or fund a war, an additional 5000% income tax surcharge shall be levied each year in addition to all prior surcharges until the representative votes to defund the and voices opposition to that war. However, the taxes on citizens and representatives who voted and supported wars will not end, unless the wars end, regardless of their changes in votes or support. The end the surcharge, the war must actually end.
As usual, banks plead poverty and how unfair it all is, whilst businesses and people lose their livelyhoods and properties as they foreclose! But hey, yes very unfair for banks to suffer; scumbags.
The government is simply carrying on with ripping off the populace. First, bailout and now, adding expenses for banks that will simply transfer costs to their customers. When Hungary did the same, they even passed a law that made having a bank account mandatory for government workers (around 1997).
Give a hearty handshake to your brain surgeon: your lobotomy was a success!
They should go and tax the bank regulators who, with their risk-weighted capital requirements, have so dangerously distorted the allocation of credit to the economy, and caused the crisis.
http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html
Profits are private while losses are public. Easy-peasy.
I think the most sensible venture under the current circumstance would be to tax money. Why bother with all the NIRP and bailouts and every other shenanigan that can be invented, when you can simply just empty people’s pockets, corporate accounts, anywhere that money is found in fact, and place it all under national supervision ?
People would have no reason to complain, as exactly the same will have been done to everybody else. On top of that it will all be destined to help the poor of the country, them.
What’s to not like about that.
I can even think up a name for such a policy, Meurxism .
Catchy eh ?
Hold up: the criminal banks gained so much clout during the rise of neoliberalism that they captured the regulators and made themselves seem systemically indispensable, such that the government looted the community chest and kept them solvent at the cost of everyday people’s lives and prosperity, but now that the government wants a cut to pay for public services it’s suddenly “cultural marxism”? You seem confused as to which end of society has all the power and which is getting looted.
This is democracy. The people elect a party to bring about a change the entire country would applaud and the banks tell that government “If you tax us, we will tax the people”. Who then runs the country, and to what end? Is it only the banks who can benefit from improvements in a countries fortunes? Are those fortunes not completely in the hands of the banks? Who can invest? What future can one invest in if one is not a bank? With no, or low pay rises the country must decline.