A new windfall tax on Spanish banks – coupled with mortgage holidays in Poland that will halve banks’ profits – should give lenders across Europe pause for thought. More intervention in the banking sector is coming. The question is how much, and what banks should do.
Poland’s mortgage holidays have been accompanied by rising pressure from politicians for higher deposit rates, even while banks have argued that the holidays will force them to keep deposit rates low. In Spain, where the windfall tax aims to raise €3 billion across 2023 and 2024, the government has said it will fine banks that try to pass the new tax onto customers – which is what Spanish bankers have previously muttered would happen from such policies.
Proving a link between the windfall tax and higher mortgage rates or current account fees seems complicated. Yet it will be bad for Spanish bank profits if this environment makes it harder for them to implement any price rises at all.
Much as it is painful for banks, it may not be the best thing for them to loudly protest windfall taxes and mortgage holidays – going all the way to legal action, like Commerzbank in Poland. This could backfire. The same goes for the standard bank-lobby argument that such policies result in tighter credit to the real economy – another thing that’s impossible to prove – as it’s liable to prompt the response that banks aren’t lending to small businesses.
Exploiting the situation
In the UK, banks may think they are safer. I spoke to Kevin Hollinrake, a parliamentarian from the ruling Conservative Party. He has been vocal on banking as a member of the Treasury Select Committee and a leader of all-party parliamentary groups on banks. In line with others in his party, he insists that banks, like other companies, need a stable policy environment. But even in the UK, this could change if banks’ profits get much higher – as with this year’s windfall tax on UK oil and gas companies.
“I would rather say to banks, treat your customers fairly or we’ll intervene,” says Hollinrake. “We’ve seen banks announcing increasing profits on the back of higher margins, because interest rates have risen, and they haven’t passed those rises onto savers. They’re exploiting the situation, which I think is entirely wrong.”
European banks should heed such warnings, and pass higher monetary policy rates onto depositors, thinks Elie Farah, head of Oliver Wyman’s financial services practice in France. Indeed, they should probably be doing much more than that. Farah suggests stepping up efforts to flag to customers upcoming rises in expenses. And they must make sure that customers in temporary difficulty can lengthen the duration of mortgages or switch to interest-only repayments.
“People may see that the government is forcing the banks to do things that they should have done themselves,” says Farah. “The natural response to higher inflation will be to go to the chief risk officer, revise rates and tighten credit policies, but it’s not just a credit decision. Banks should be seen to be helping their customers navigate this environment, not just prioritizing their bottom line.”
Banks now stand alongside energy companies as ‘winners’ of what is becoming a humanitarian crisis
It goes back to the question of short-term versus long-term profit.
Banks face pressure from the investor and analyst community to ramp up profit in the next one to three years, often via cuts which come at a cost to the community and their own business. But by far the biggest issue over the longer term – as any banker will tell you – is regulation. Banks’ profitability slumped for the previous decade and a half because of adverse regulation after 2008, forcing them to set aside more capital, and because of things like bank taxes.
There is now a danger that higher energy prices and interest rates trigger such a crisis and that there’s a more extreme backlash against banks. Perhaps this could lead to more fundamental reform in some countries, so that banking becomes more a tool of social and economic policy, with even lower Germany-style profits. Note the growing debate about whether to deprive commercial banks of their ability to create money, after Switzerland’s 2018 referendum on that topic.
Banks now stand alongside energy companies as ‘winners’ of what is becoming a humanitarian crisis. “We’ve got to a bit of a breaking point, with millions of people getting pushed into poverty – people not putting the lights on, skipping meals,” says Fran Boait, executive director of Positive Money, a UK-based think-tank campaigning for systemic change in the financial system. “Having emergency taxes on the big winners of this crisis is fair. These winners are getting profits on the backs of people going into poverty.”
Certainly, banks need to understand how bad it looks to be posting higher profits today. And as rates rise – pushing more small businesses into insolvency, and families out of their homes – anti-bank sentiment could grow, even if their profits fall due to higher credit costs.
Private banks’ societal actions won’t stop this inflation crisis, but they could help mitigate the worst long-term effect of it on their own interests.
