Bank solidarity tax may be introduced if banks do not contribute more to Latvian economy - Kazaks

RIGA - A solidarity tax could be charged on banks if they do not contribute more to the Latvian economy, the Bank of Latvia Governor Martins Kazaks says in an interview with LETA.

"A tax on excess profits is not the best solution. Unfortunately, such a levy may be introduced if the banking sector does not increase its involvement in the Latvian economy," Kazaks points out.

Lending could make a greater and lasting contribution as it would help the Latvian economy develop much faster and over a long period of time, says Kazaks.

Everyone would benefit from an increase in lending, but if that does not happen, if deposit interest rates remain low, loan interest rates are high and commissions hinder competition, a solidarity tax on banks is one of the possible solutions, explains Kazaks.

Banks must first of all be profitable, because if a bank is not profitable, its very existence is in jeopardy, says Kazaks. "Take Credit Suisse for instance. The main reason why the bank experienced such major problems is that it was not a profitable business and for a long time it was unable to achieve adequate profits. Banks have to make money. The question is only about profit amounts and contribution to the economy."

The Bank of Latvia governor also says that a solidarity tax on banks could be effective for a year or two, not longer. A better solution should be sought to achieve a greater contribution from the banking sector to the Latvian economy, including through lending, more accessible services, lower commissions, increased bank customer mobility.

"There is room in the market for higher deposit interest rates, improved competition, faster lending growth and a broader range of customers who take out loans. Latvia's economy is no longer the same as it was in 2008, a number of risks simply no longer exist here. Following the pandemic and the crisis caused by the war in Ukraine, we have not observed a significant rise in unemployment nor in bad loans. The economy has been flat or in slight recession in the second half of last year and early this year, and under normal circumstances bank portfolios would also deteriorate. We have not seen any of that. The banking sector has benefited greatly from the fact that the state has been helping bank customers - both private individuals and businesses - with various support programs during these two crises. Therefore, banks should structure their business according to the current risks, not risks that were relevant in 2008 or 2018. If this does not happen, a solidarity tax is a viable alternative," says Kazaks.