Windfall Profits: Not in Banking

Recent article of KPMG in relation to the hypothetical new tax that the Spanish Government has announced for Large Spanish Banks. KPMG points out that the possible dysfunctions in the performance of (highly regulated) sectors such as the financial sector must be resolved through regulation and not through fiscal policy. Consequently, this is a purely tax revenue-oriented measure.

According to the article, the hypothetical creation of a new “windfall profit tax” for the banking sector raises several problems:

• The ways in which this announcement was launched were manifestly improvable. Banks were caught off guard by the announcement, which also surprised analysts and investors around the world. Given the near-total uncertainty around it, investors opted for caution, and bank share prices fell sharply.
  
  
• No amount of taxation to banks is going to contain rising inflation, nor the rise in Euribor, nor will it in any way improve the situation of debtors of any kind.
  
  
• Under current corporate tax (the rate borne by banks is already higher than that of other companies and sectors), if banks' profits are higher, their corporate tax contribution will also be higher.
  
  
• “Windfall profits“ is an aspect that deserves severe qualification in the case of banks, bearing in mind that:

- For at least a decade, the European Central Bank has been pursuing a very expansionary monetary policy to counteract the effects of successive economic crises, with artificially low, even negative, interest rates. 

- The rise in the Euribor should not lead to excessively high interest rates (rather reasonable) and that the abnormality has been the years of zero or negative interest rates. The banking business itself has been very unprofitable in Spain.

- The combination of high inflation and higher interest rates will affect the payment capacity of families and companies, which will end up having an impact on banks, either by increasing delinquency or by slowing down the demand for credit.