In the second half of 2024, there was an intense public discussion and various legislative initiatives aiming to impose an additional tax on bank profits. We strongly contested these initiatives and explained with reasoned arguments the banking sector’s opposition of an additional bank levy.
Since mid-2022 Cypriot banks, in line with other EU banks, have been recording increased profitability, mostly driven by the tightening of the ECB’s monetary policy. The effects of tighter monetary policy on bank profitability are expected to be temporary, and any legislative proposals for an extraordinary tax, especially when initiated by political parties and not the government, send the wrong signals to current and potential investors.
Our Association took part in the discussions at the Finance Committee of the House of Representatives as well as with other stakeholders, and strongly disagreed with the proposed bill for the following reasons:
- The legislative proposal essentially constitutes a third direct tax on banks. Apart from the tax on profits, they pay a “special tax” levy on total deposits (liabilities) imposed in 2011, irrespective of profitability. For the period 2017-2023 banks paid a total of over €400m in special tax, despite the fact that in some financial years they recorded significant losses due to increased provisions to cover credit risk losses.
- Profitability is a sign of a healthy financial system as it allows banks to boost their Tier-1 capital. Retained and undistributed earnings enable banks to strengthen their capital base and to continue to provide funding to the economy. During previous years when the European Central Bank was applying an expansionary monetary policy, banks in Cyprus strove to absorb and not pass on the cost of negative euro deposit rates to their customers, thereby adversely impacting their income and profitability. As a result, the recent gains from this stage of the policy cycle can be seen to counter the previous losses, as well as to maintain adequate provision for possibly increased impairments as the repayment capacity of borrowers deteriorates in the future.
- Current geopolitical risks significantly affect the economy and its prospects. In the financial sector, a slight credit risk deterioration was observed, and as a result the European Central Bank has cautioned banks to be prepared to manage any negative developments that may result in potential losses in banks’ loan portfolios.
- The sovereign rating of Cyprus as well as its attractiveness as a foreign investment destination depends on the stability of the legal and taxation framework. Any sign of instability or uncertainty impacts negatively the reputation of Cyprus, thwarting efforts to attract significant foreign investments not only in the banking sector but in other sectors of the economy.
Over the past twelve years, both the Cypriot economy and the local banking sector have come a long way towards strengthening the resilience of the economy and the banking system. This success story has occurred in a period of consecutive financial and geopolitical crises, from the economic and financial crisis in 2013, to the covid-19 pandemic in 2020 as well the wars in Ukraine and the Middle East in 2022 and 2023 respectively.
Both the sovereign rating as well as the credit rating of the Cypriot systemic banks have been consistently improving and have now both been upgraded to investment grade. This is very positive news for the Cypriot economy and the financial sector and an indication of the great potential ahead. Despite the difficult challenges faced in the last decade, the economy and the banking sector successfully adapted to the new geopolitical and business realities and we are confident they will continue to grow for the benefit of local businesses and households.
