November 25, 2019 / 1:53 PM / 14 days ago

UPDATE 1-Slovak central bank: higher bank tax would hurt sector stability, lending

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BRATISLAVA, Nov 25 (Reuters) - A government proposal to double indefinitely a tax on Slovak bank liabilities could hurt investment in the sector and erode financial stability and lending, the central bank said on Monday.

The banking tax was adopted in 2012 to build a buffer against potential future crises in the euro zone country and had been scheduled to expire at the end of 2020.

Last month, though, the government approved a new plan to maintain and raise the tax on banks’ liabilities after subtracting basic capital to 0.4% as it seeks to cut fiscal deficits at a time of slowing economic growth.

In a financial stability report released on Monday, the central bank said the higher tax, due to be discussed by parliament this month, would cut banks’ profits by 33% based on 2018 data.

It said the higher tax, if approved, should be only left in place for one year, otherwise it would likely erode the flow of credit, mostly to the corporate sector, and lead to structural changes in the banking sector, limiting their attractiveness for investors while causing cuts in investments on innovations.

The tax, separate from standard corporate tax, is held in a special fund for use in future financial crises, but proceeds improve the state’s balance sheet.

Slovakia’s banks, including KBC Group’s CSOB, Erste Group Bank’s Slovenska Sporitelna, Raiffeisen’s Tatra Banka and Intesa Sanpaolo’s VUB, saw combined profit in the first nine months of 2019 drop 4.2% to 497 million euros ($548 million).

The European Central Bank’s easy monetary policy, together with growing capital adequacy requirements, will put further pressure on the banks’ business model, the central bank said.

Romania this year softened a bank sector tax it had introduced at the end of 2018 after criticism from the ECB that it had not been consulted and its tax threatened financial stability.

While Romania is not a euro zone member, European Union (EU) member states are required to consult changes affecting financial institutions and markets.

Hungary has also maintained a banking sector tax on banks’ adjusted balance sheets since 2010 but has eased the rate in recent years. It is set to provide 52.9 billion forints ($174.37 million) in revenue to the 2019 budget.

$1 = 0.9073 euros Reporting by Tatiana Jancarikova; Additional reporting by Gergely Szakacs in Budapest and Luiza Ilie in Bucharest; Editing by Andrew Cawthorne

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