Solidarity contributions could make bank lending more expensive - Cerps

RIGA - Solidarity contributions could make bank loans more expensive, Uldis Cerps, Chairman of the Board of the Finance Latvia Association, told LETA in an interview.

He pointed out that the association would continue the dialogue and would explain to the government, the Saeima and the public what risks the association sees, especially based on what the legislator has defined as the purpose of the tax.

"If the objective of this tax is to develop lending, we want to draw the legislator's attention to the fact that this type of tax is unlikely to achieve this. On the contrary, the effect is likely to be more expensive loans for both residents and businesses," said Cerps.

At the same time, however, he also noted that banks operate in a free competitive market, so it is not possible to speculate on how each bank will react to rising costs. "In any case, it is possible that banks may price some of the rising costs into their products. Such decisions will be taken by each bank individually, assessing its own market and lending policy," said Cerps.

The association's head pointed out that similar problems in Estonia and Lithuania have been tackled differently, including a two percentage point increase in corporate income tax for all companies in Estonia, while Lithuania has adopted a tax that applies directly to the banking sector but excludes new lending from the tax base.

"New lending is far from trivial. If we look at the first six months of this year, EUR 1.6 billion in new loans have been granted in Latvia. If these are included in the taxable base, this does not create an incentive for lending," said Cerps.

He also said that the fact that such a tax would not have the intended effect had been pointed out to the government by the Finance Latvia Association some time ago. The International Monetary Fund also urged the government to refrain from applying such a tax in its assessment of the Latvian economy in August this year.

"This means that we are not talking about something that is only in the interest of the banks. I think we are talking about things that are in the public interest. In a context where the demand for loans has resumed, where the volume curves are starting to go up, it is not in the public interest to take measures that could make loans more expensive," said Cerps.

He said that what the annotation of the draft law and the Bank of Latvia are saying is that this tax can stimulate lending, but this is exactly what the banks are not seeing, despite the rebate system that is built in. Because in order to qualify for the rebates, the largest banks have to grow their loan portfolio by an amount that is significantly higher than the growth in their loan portfolio that can realistically be expected.

"The most likely outcome is that banks will have to pay the tax - especially the big ones, but also a number of smaller ones. Higher taxes by definition cannot encourage lending. It's as simple as that," said Cerps.

According to him, the government has decided to go ahead with the idea despite these arguments because of the need to finance increased budget spending. "We agree that the state budget is increasing spending on national defense and security. This is something that the financial sector fundamentally agrees with and fully supports. The problem, in our view, is that this increased need to finance the budget is being addressed at the expense of one sector. This sets an extremely dangerous precedent in the tax environment for other sectors as well," stressed Cerps.

He also pointed out that the tax has a finite duration, but if the duration is as long as three years, there is no guarantee that the budget will generate enough additional revenue to easily abolish the tax afterwards. "This, in our view, is also a very big risk," added the Association's head.