The proposed additional taxation of bank profits could lead to more expensive or more difficult-to-access credit, limit private investment and increase the cost of state financing, warned the Governor of the Bulgarian National Bank (BNB) Dimitar Radev.
“Raising taxes has a price“, Radev said in a statement published on the BNB website, quoted by BTA. According to him, when the tax affects financial intermediation, part of the burden can be shifted outside the formal taxpayer.
The BNB does not take sides in the political debate on budget priorities, but presents a professional assessment of the possible consequences for the financial system and the economy, he specified. The proposal has a clear budgetary logic and the expected revenue can be calculated relatively easily, but “the macroeconomic account is different“.
Banks' profits are not only a tax base, but also a major internal source of capital formation, the BNB Governor pointed out. Their ability to take risks, provide loans and cover losses in the event of adverse economic development depends on capital.
As an example, he recalled the measures to strengthen the capital and liquidity of the banking system in 2020 and the private moratorium on loan payments introduced by banks. As of September of the same year, deferred liabilities exceeded 9 billion leva. The accumulated reserves allowed banks to absorb the temporary pressure, and enterprises and households - to gain time to overcome the shock.
Therefore, the current bank profit is not only income that can be distributed, but a resource that supports lending and the resilience of the system in future shocks, the BNB governor pointed out.
According to him, the use of the period 2020-2025 as a basis for determining "excess profit" should also be carefully analyzed. This period includes the pandemic, unusually low interest rates, the inflation and energy shock and the subsequent sharp change in the interest rate environment. The beginning of 2020 was a crisis year with a sharply reduced bank profit, which is why part of the subsequent recovery can be presented as an exceptionally high profitability.
During the same years, bank balance sheets, loan portfolios and capital grew. Therefore, the higher nominal profit may include economic rent, but it may also reflect a normal return on larger capital and additional risk taken, Radev explained.
Formally, the additional tax will be paid by the banks, but its economic burden will not necessarily remain with them. Banks can react through lower dividends, but also through changes in interest rates on loans and deposits, tightening lending conditions or restructuring their assets.
For households, this may mean more expensive or more difficult to access credit, and for enterprises - a higher cost of capital. It depends on which investment projects will be implemented. The extent to which the burden will be passed on to customers “must be measured, not assumed,” the BNB governor stressed.
Radev also pointed to the possible impact on government financing. Bulgarian banks are among the main institutional investors in government securities. If the higher cost of capital directs them towards low-risk government debt at the expense of private lending, businesses and households will receive less financing. If banks limit their investments in government securities, the consequence could be a higher cost of financing the budget.
This effect is particularly important in the event of a significant need for new government debt, Radev noted. The revenue from the extraordinary tax could be a one-time one, while the higher interest on long-term government bonds is paid over their entire term.
The additional taxation could also have the opposite effect on other budget revenues. If more expensive or more limited credit slows down investment and consumption, lower economic activity will shrink the base for collecting VAT, corporate taxes, income taxes and social security contributions. Therefore, the gross revenue from the measure is not equal to its net fiscal result, Radev pointed out.
After joining the eurozone, Bulgaria should focus its efforts on accelerating investment, productivity and real convergence with more developed European economies, said the BNB governor. This requires a predictable tax environment, a disciplined budget policy and a financial sector capable of channeling funds to productive private investment.
Radev also highlighted a possible contradiction between macroprudential and fiscal policy. The BNB requires banks to accumulate capital buffers with strong lending and high profitability, while the additional tax would take away part of the resource from which these buffers are formed. If fiscal and bank reserves weaken at the same time, the state will have fewer opportunities to react in a crisis, and banks - more limited capacity to maintain lending.
The banking system is “well capitalized, liquid and profitable“ and there is no reason to present the issue as an immediate risk to financial stability, Radev stressed. The main question, according to him, is whether the proposed measure will improve the overall economic outcome.
Before the final decision, the budget assessment must be supplemented with an analysis of the impact on bank capital, lending, interest rates, investments, growth, other tax revenues and the cost of government financing. According to Radev, the analysis must include a base and adverse scenario and take into account the interaction with monetary policy and financial sustainability measures.
This is not an argument in defense of bank profits or against the government's right to propose tax changes, the BNB governor clarified. It is about the difference between the “accounting account“ and the assessment of the overall consequences for the economy and public finances.