Additional taxes on Bulgarian bank profits could raise borrowing costs and weaken lending by reducing funds available for capital, an analysis published by the Bank for International Settlements said.
The Bulgarian National Bank analysis, published Oct. 26 as “On taxes, credit and growth” in the BIS central bankers’ speeches series, said expected revenue alone cannot establish the proposal’s benefit. It called for an assessment of costs to investment, growth and government financing before a final decision.
The central bank said the proposed tax would apply to profits above a threshold based on historical earnings. Its assessment considered the proposed 2020-2025 reference period and how banks might respond to additional taxation in 2027.
That period included the pandemic, unusually low interest rates, an energy and inflation shock, and a sharp change in interest rates, the analysis said. Including depressed earnings from 2020 in the average could classify part of the later recovery as excess profit.
The central bank said banks also expanded their assets, lending and capital during that period. Higher profits could therefore reflect normal returns on a larger business and greater risk, rather than earnings that warrant additional taxation.
Profits help banks build capital, the financial cushion that supports lending and absorbs losses, the analysis said. During the pandemic, the Bulgarian National Bank strengthened capital and liquidity while banks deferred payments on more than 9 billion lev of loans by September 2020.
Those reserves helped banks withstand the disruption and gave households and businesses time to recover, the central bank said. It argued that taking more from profits could affect the resources available during another shock.
Banks could respond by cutting dividends, which the analysis said would have the smallest effect on the economy. They could also change loan prices, lending requirements or deposit terms, passing some costs to customers.
The extent would depend on competition, individual banks’ capital and conditions in the lending market, the central bank said. It also said Hungary’s expensive business credit could not fairly be attributed to a single bank tax.
The analysis said banks might favour lower-risk government debt over private lending if capital became more costly. Alternatively, limiting their government debt purchases could raise public borrowing costs, potentially extending the expense beyond a one-off tax receipt.
More costly or restricted credit could reduce investment and consumption, shrinking receipts from other taxes and social contributions, the central bank said. It also said Bulgaria’s banks are well capitalised, liquid and profitable, making immediate financial stability the wrong test for the proposal.
The central bank called for assessments under both baseline and adverse conditions, covering credit, capital, growth and public finances. It said the decision should account for how the tax interacts with requirements to build bank reserves and with monetary policy.
