An IMF working paper published on 9 July 2024, written by Maneely Morgan and Lev Ratnovski, looks at the various new taxes on banks introduced by EU countries.

The paper notes that since 2022 banks in the EU have been making high profits. These profits are driven generally by the delayed pass-through of the monetary policy tightening to deposit rates; and are not likely to continue for a long time. Around half the EU member states have introduced new taxes on banks, designed in various ways in relation to tax base, rate, duration, and tax burden.

The IMF working paper looks at a number of trade-offs to be considered in the design of bank taxes. The analysis reveals that taxes on assets or liabilities can collect stable fiscal revenue; maintain the incentive for cost-efficiency investments by banks; and are more difficult to evade. However, taxes on profits, net revenue or net interest income (NII) are less of a burden on the banks during a downturn when income may decrease. Taxes on net revenue and NII maintain the incentives for cost-efficiency investment by banks.

The paper points out that new taxes that may be introduced in an ad hoc manner when there is a an increase in bank profits may be undesirable, because they may make the business environment less predictable. The paper notes that an alternative policy response to temporarily high bank profits, that might be used instead of or alongside bank taxes, is to lock in the profits as usable bank capital. This could be done, for example, by increasing countercyclical capital buffer (CCyB) rates. The paper notes that, when designing bank taxes, governments need to consider the effect of these taxes on their monetary policy stance and on financial stability.