Should the Government introduce a windfall tax on banks?

Over the past few weeks the three main Irish banks have announced huge profits. 

For example AIB posted a net profit of €854 million for the first half of the year alone, up 79% on the same period in 2022. And Bank of Ireland (BOI) did even better, posting a profit of just over €1 billion.  

This is unsurprising. 

Banks always do well in a rising interest rate environment. They earn more money (currently 3.75%) on any excess customer deposits that they place with the European Central Bank. And the delay in passing on interest rate increases to savers behind mortgage holders allows banks to easily pocket millions. For example the best interest rate on offer to savers is currently 3% - but this is only available on a select number of accounts which usually require keeping your money locked away for a certain period. The rates on some demand-deposit accounts are only a fraction of this. Meanwhile, the average interest rate on a new mortgage in Ireland is much higher at over 4%. And lending rates on personal loans are even higher.

It’s not just in Ireland. Banks all over Europe have been posting huge profits, much to the ire of hard-pressed households who are being faced with rocketing mortgage costs.  

This led to a surprise move by the Italian government to place a one-off 40% windfall tax on its banks’ profits, though the measure has since been watered down.

Nevertheless, it’s got people asking whether we should do the same here? 

Is there a windfall tax anywhere else?

Yes. 

Hungary and Spain have imposed similar windfall taxes on their banks and in May, Lithuanian lawmakers backed a temporary windfall tax on banks to help defence spending. 

And Estonia is planning to raise the tax level on banks to 18%, up from 14% at present.

So Italy was by no means unique in what it did - its main problem seemed to be that it took so many by surprise. 

Should we do the same in Ireland? 

Given the huge profits being made by the banks right now, it’s easy to see why there are calls for some type of a windfall tax on bank profits. Especially in Ireland where none of the Irish banks would even exist if it weren’t for the billions injected into them by taxpayers just over a decade ago. It doesn't help that Irish banks hardly lead the way in terms of innovation or customer service. 

However we need to remember that the Irish Government still has a big stake in both AIB and Permanent TSB (PTSB) so is reaping benefits from the banks’ improved profitability anyway. AIB will no doubt post a large dividend at the end of the year, a lot of which will go to the Irish Government. 

PTSB is currently barred from paying dividends by European regulators, but this will no doubt change soon given its much improved profitability.

The record profits also mean the banks’ share prices have increased hugely in recent weeks. Although the Government no longer has any stake in BOI, it owns just under 50% of AIB and around 60% of PTSB. Bigger profits and a higher share price mean more money for the Government and the taxpayer when the Government eventually goes to sell its remaining stake in both banks.

Be careful what you wish for

There is little competition in the Irish banking sector right now as Ulster Bank and KBC have both left and Starling Bank, which operates in the UK, pulled out at the last minute despite having received a banking licence from the Central Bank. All cited issues with doing business here. The utter disdain with which banks are still held by the media and the wider public in Ireland probably didn't help.

A lack of competition always spells bad news for consumers. 

Introducing a huge tax on bank profits will no doubt play well politically in the short term, but if it puts off much needed new competition from entering Ireland, it may do more damage than good in the longer run. And if the tax then leads to a drop in the share price of AIB and PTSB, as happened in Italy, then it will end up costing the State money when it comes to sell its stake in both banks.      

Many people’s pensions are also partly invested in Irish banking stocks meaning a drop in their share price would also affect them.

"Make the banks pay" is a popular slogan still. And it's totally understandable given what they put the Irish taxpayer through. We just need to be sure it's not done at the expense of others.  

However all this isn’t to say money can’t be raised… 

What can be done?

Many people forget that we already have “The Bank Levy”, which was introduced in 2014. 

It’s designed to bring in a fixed amount each year. It currently brings in just under €90 million a year and has raised around €1.3 billion since its inception. 

Rather than introduce a brand new tax, which would likely require new legislation, take a year or more to enact, and even be subject to appeal, the Government should look at temporarily increasing the levy at the next budget by a few hundred million instead. The levy could also be extended to include more players in the wider banking sector, as at the moment the lion's share is paid by AIB, BOI and PTSB. 

Temporarily increasing an existing levy might also be less likely to spook the markets and help preserve the share price of the banks. 

Improving the return on State savings products is another option, as it would force the banks to match it.

At the moment the best return the State is offering savers who lend it money is only 1.50% AER over 10 years (so around 16% in total over the full decade). But returns are paid out tax-free, which means a 1.50% tax-free return is similar to getting around 2.50% from one of the banks on which you'll pay DIRT at 33%.

However the Government is now paying international investors over 3% to lend money to it. Why do international investors get over double what the State's own citizens get?

Increasing the rate (to 2.50% or 3% say) would be quick and easy and again be unlikely to spook the markets much.

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