Bank Profits and Bank Taxes in the EU

IMF Working Papers, July 9, 2024

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Since 2022, EU banks have been enjoying historically high profits.
The profits are mostly driven by the delayed pass-through of the rapid monetary policy tightening to deposit rates and as such are likely transitory.
Against this background, almost half of EU countries have introduced new taxes on banks.

Drivers of elevated profits:
- Delayed pass-through of rapid monetary policy tightening to deposit rates.
- Resulting historically high bank profits since 2022, which are likely transitory.
Diversity in bank tax design across EU countries:
- Significant variation in tax base, rate, duration, and burden.
Implications for bank soundness and policy:
- Temporary profit increases raise policy design questions about revenue extraction versus financial stability.

Trade-offs in bank tax design include balancing revenue generation and distributional goals against potential adverse effects on bank incentives, risk-taking, and credit supply.
Heterogeneous tax designs imply differing impacts on banks’ balance sheets and on the distribution of tax burdens across banking sectors and countries.

The paper argues that an alternative or complementary policy response to temporarily high bank profits is to lock them in as usable bank capital.
- Example policy instrument: increase in countercyclical capital buffer (CCyB) rates.
Considerations for policy choice:
- Temporary, profit-driven taxation versus regulatory capital measures that preserve bank loss-absorption capacity.
- Trade-offs between short-term fiscal revenue and medium-term financial stability objectives.