Granted, elected leaders are within their rights to tax as they see fit, and Europe’s banks present an attractive target. They’ve been reporting fat profits amid rising interest rates, and promising billions of euros in added payouts to shareholders. Why shouldn’t they share the wealth more broadly, helping the government pay for worthy initiatives such as mortgage support for first-time homebuyers?
Problem is, the added levies will erode a fundamental guarantor of financial and economic resilience: banks’ loss-absorbing equity capital. The more they have, the better they’re able to weather crises and keep lending throughout the business cycle. European banks generally don’t have enough of such capital — on average, they fund about 5% of their assets with equity. For some Italian lenders, the new tax could, all else equal, shave off another few tenths of a percentage point. That’s hardly prudent, particularly at a time when the European Central Bank’s battle with inflation could end in recession.
Efforts to plug budget deficits at the expense of banks could also threaten the euro, by undermining progress toward the banking union crucial to the common currency’s viability. If Spain and Italy weaken their lenders by extracting capital, why should Germany help cover the cost of rescuing them or agree to mutual deposit insurance?
Italy and Spain are right about one thing: Europe’s banks should be making a larger contribution to the greater good. But they should do so by building capital buffers that will make them and the whole economy more resilient and dynamic, not by paying extra taxes that will render them more likely to need bailouts when the next crisis hits. As anyone in Willie Sutton’s line of work can attest, robbing banks is not the path toward long-term prosperity.
More from Bloomberg Opinion:
• Italy’s Windfall Bank Tax Fails Its Stress Test: Marcus Ashworth
• Italy Ruins Beach Time for Bankers: Rachel Sanderson
• My Personal Oil Price Shock — Olive Oil, That Is: Javier Blas
The Editors are members of the Bloomberg Opinion editorial board.
More stories like this are available on bloomberg.com/opinion
