If Latvia’s economy and people’s well-being lags behind our Lithuanian and Estonian neighbors, it is clear that the banks are to blame. If there are not enough well-paid jobs in Latvia, the banks are to blame. Because they do not finance the creation of new companies. If someone with a bad credit history or income of dubious origin cannot get a loan, the banks are to blame. Such a “landscape” of opinions has been formed (is being formed?) in recent months about and around the banks operating in Latvia. Society is being “prepared” for the introduction of a new tax in the banking sector, because due to the monetary policy implemented in the Eurozone, aimed at reducing inflation, the banks are making too much money. But in the next budget it is already known that there are quite a lot of gaps.
Regular reference to banks in various contexts proves how important the financial system is in the functioning and development of the national economy. Banks are aware of this and well understand the situation of both individuals who have to face the consequences of limiting inflation – increasing credit rates, as well as entrepreneurs whose desire and ability to borrow are affected by many uncertain issues – from war-induced instability to the energy resource crisis and the search for new markets. Credit institutions constantly review customer issues if they have difficulties paying the loan and provide individual, targeted support suitable for a specific person within the framework of the legal framework.
Following the public communication, it might seem that the banks that have been working in Latvia for a long time, suddenly, in 2023, have become distinctly “unfriendly” to the development of the Latvian economy. It helps to understand this illogical generalization if we take a closer look at the main assumptions and stories that have been spun against Latvian commercial banks in the last six months.
Competition
The first story: there is too little competition in the banking sector, where there are nine commercial banks and two branches of foreign banks. Here we have to ask, will a new tax really increase competition? Rather the opposite. It is doubtful whether any local or foreign investor will want to invest in a country where a new tax can appear at any moment. It should be reminded that the annual investment environment index published by the Council of Foreign Investors indicates that, according to investors’ opinions and evaluations, the investment environment in Latvia has deteriorated rather than improved. The introduction of an additional tax will certainly not improve the investment environment and the competitive situation – politicians are giving a clear signal that in Latvia, for the purpose of “patching” the budget, they can take action against profitable companies at any time. The next in line after the banks on the “red carpet” may be already publicly mentioned, for example, retail companies. Furthermore, even if a lack of competition is identified, should firms in the industry actually be penalized for it? It should be noted that the promotion of competition in the financial sector is not the task of the banks themselves, but of policy and economic makers, whose responsibility is to attract more players to the market.
Lending
The second story: banks do not lend to companies. Let’s start with the fact that higher lending indicators, for example, in Estonia and Lithuania, mean only one thing – in Latvia, the “limp” business environment is hindered by the shadow economy, corruption and other absences that hinder the development of companies. Because the fact that many Latvian companies are located in the so-called “gray economy” zone prevents them from granting loans. I hope no one thinks that groups of international commercial banks working in the Baltics have chosen Latvia as one of the Baltic countries where they will deliberately lend less.
Will a new additional tax promote lending? No, because it in no way solves the basic problem – the spread of the shadow economy in Latvia. It must be argued that even a one-time tax introduction has significant, far-reaching consequences. The effect of any reduction in the volume of loans caused by the additional tax will be carried over to the following years due to the investment deficit, which can cost the economy and the state budget several tens of millions of euros every year.
Earning capacity
The third story: Banks make too much money. Is it really so? Since the beginning of the 1990s, banks have earned and suffered losses, according to the cycles of economic development. The most important indicator showing the ability to develop, invest in new services and technologies is the return on bank capital. For example, if we look at the operation of Latvian banks starting from 2004, the average return on capital (ROE) of banks was 6.7%, which is a lower indicator compared to other sectors. The average ROE indicator from 2017 to 2021 for all sectors of the Latvian economy was 12.7%. Are we really going to wait for a favorable market situation to hit a sector of the economy, and then apply a surplus tax to it every time? What will happen in economic downturn cycles when banks can also suffer losses? Will the state compensate for the lost income?
It should be reminded that the 2023 increase in profits in the banking sector was caused by the decisions of the European Central Bank (ECB) to rapidly increase interest rates in the fight against high inflation. Interbank lending rates Euribor (it reflects the average price of borrowing and lending in the interbank market) a rise means that monthly payments are rising, for example, for those paying mortgage loans. The rise in rates stems from one main goal – the ECB’s efforts to curb record high inflation. In short, more expensive borrowing means less consumption (demand) and therefore the price rise must stop. As soon as the price increase stabilizes within the limits of 2% growth per year, the ECB will not continue to raise rates and the monthly payment of loan payers will no longer increase.
In the environment of higher interest rates, the cost of loan interest also increases, as a result, when the negative phase of the economic cycle enters, loan losses will increase. Therefore, there is no reason to believe that the high profitability of banks will remain at the current level in the years to come. Namely, such profit is a short-term phenomenon, and its best use would be to invest in economic development by financing innovative, legally operating companies. I would like to emphasize that banks have lent and are lending to Latvian companies and individuals, because lending is the core business of banks. However, banks must comply with the regulator’s requirements and cannot afford to give loans to companies that pay envelope wages, are tax debtors, whose ownership structure is not transparent and, among other things, pose risks of facing sanctioned individuals or companies.
Imposing a new additional tax on banks is a politically tempting thing – it is relatively easy to withdraw money from one sector and redistribute it to urgent needs, of which there are and will be much more than opportunities. Namely, the new tax will go to the “patching” of the state budget. It should be noted that it is not intended directly to provide support to citizens, their social needs, or as support to sectors where it is critical, such as the health or home affairs system. A much more complicated, but more valuable approach for the national economy and the country would be to reduce the share of the gray economy by at least a few percentage points, which would simultaneously generate additional money in the budget and make Latvian companies creditable.
The author is the chairman of the board of the Financial Industry Association
2023-08-30 03:53:29
#wrong #medicine #economic #ailment #IR.lv
