Bank solidarity contribution in Lithuania could have negative effects on economy – ECB

VILNIUS – The Lithuanian government's proposed temporary bank solidarity contribution could have negative economic effects by making credit institutions less resilient to economic shocks, the European Central Bank says.

The ECB has presented its opinion on the proposed levy at the request of Lithuania's Finance Ministry and states in its report 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 specific impact of the temporary solidarity contribution on the longer-term profitability and capital base of banks and the provision of new lending and competition conditions in the market, to ensure that its application does not pose risks to financial stability, banking sector resilience and avoids market distortion.

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 the profitability outlook of credit institutions. 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 total profit of around 1 billion euros this year, the Finance Ministry and the central Bank of Lithuania are proposing introducing a temporary solidarity contribution of 60 percent from net interest income that exceeds the average of four regular financial years by more than 50 percent. The levy is expected to raise around 0.5 billion euros over two years.

Under the new model, all banks and credit institutions would have to pay the solidarity contribution, but one of the largest lenders, Revolut Bank, would avoid the levy because 98 percent of its deposits are outside Lithuania.

The central 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.