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ECB expected to highlight vulnerabilities in its non-binding assessment of the Spanish tax policy

epa05208888 A photograph made available on 13 March 2016 showing a Euro symbol projected onto the European Central Bank (ECB) in Frankfurt am Main, Germany 12 March 2016. The European Central Bank (ECB) is participating in Luminale, a light show that takes place every two years in Frankfurt. Both the ECB?s main building by the river Main and the Eurotower in the city centre will be illuminated by a ?symphony? of light consisting of bars, lines and circles ? primarily in blue and yellow, the colours of the European Union. It will be based on Ludwig van Beethoven?s Prelude to the Ode to Joy, the European anthem. The euro symbol will be projected onto the south facade of the main building and will be visible to passenger planes on approach to land at Frankfurt airport. The light show takes place every day from 20:00 CET to midnight from 13 to 18 March 2016. EPA/BORIS ROESSLER

Two sources with first-hand knowledge of the situation claimed that the European Central Bank is planning to warn in a forthcoming non-binding opinion of the negative effects of a proposed tax on the industry and a greater credit cost on the viability of Spanish banks.
One of the individuals who spoke on the condition of anonymity said attention will be directed to the unfavourable impact on liquidity and concerns for the implementation of monetary policy, since higher taxes may lead to a rise in the cost of loans.
The ECB chose not to respond.

It is common for the ECB to express a position on similar tax measures, as it did in 2019 for the finance market of Lithuania and other eurozone nations when it issued a warning about potential negative effects for the sector.
The risks of any current proposals on credit and financial stability are described in the central bank’s opinions.
Governments are not required to consider such comments, but most do so when cautions that could be interpreted negatively are included in proposals.
The temporary fee on banks and major energy corporations was proposed by Spain’s leftist government coalition in July to earn $3 billion by 2024.
The sector may have more ammunition to potentially change the legislation that is being discussed in parliament if the ECB’s warnings are taken seriously.
To help disadvantaged households cope with rising living expenses at a time where lenders were already profiting from higher borrowing rates, the government justified the imposition of that tax.
However, banks have issued warnings about the adverse effects on credit and the economy as a recession approaches and lenders may be required to make further preparations to weather the crisis.
Minor Spanish lenders and branches of international banks operating in Spain are not subject to the banking tax, which imposes a 4.8% fee on banks’ net interest earnings and net commissions beyond a barrier of 800 million euros.
Because Spain taxes income rather than profits, even a bank that may incur losses may be subject to taxation, which would reduce its capital, according to the first source.
The opinion, which is anticipated soon, is being developed by a team of specialists from the ECB as well as the Bank of Spain and fields like supervision, financial stability, economy, and monetary policy.
These experts’ internal assessments indicate that the levy may reduce the capital of Spanish banks by an average of about 0.5 percentage points.
Although it has an impact on solvency and financial stability, Spanish banks will not ultimately be at risk, according to the first source.
Despite claims made by bankers that it was possible to challenge the law in court, a senior executive from a leading Spanish bank recently stated that no legal remedies were currently being considered.

Despite the government’s attempt to limit these side effects, the ECB will find that the tax plan could result in loans that are more expensive since banks may pass on the cost of the tax to businesses.
That implies that as a result of this levy, the implementation of financial regulation in Spain will differ from that in Germany.
The source said the tax idea also poses a threat to competition because, under the current plan, it is only being implemented in one country from the eurozone.
Meanwhile, on the topic of policies, on the Asian side of things—it is reported by private equity sources, that banks are being wary about the terms for financing leveraged buyouts in Japan as a result of the court-mandated rehabilitation of automotive parts supplier Marelli Holdings Co Ltd, which is owned by U.S. private equity and business firm KKR & Co Inc (KKR.N).
They claimed that despite this, Japan has a more stable investment environment than the United States because of its ultra-easy policies. Despite market challenges this year, there have been several sizable acquisitions in Japan recently, including a $3.1 billion deal for the microscope division of Olympus Corp. (7733.T) by Bain Capital.

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