Tuesday, 26 November 2019

Questions (170)

Michael McGrath


170. Deputy Michael McGrath asked the Minister for Finance if deferred tax assets on losses carried forward in banks are included in the calculations for CET1 and fully loaded CET1 ratios; if these ratios will deteriorate if the deferred tax assets were removed from the balance sheet; if it will mean that banks would have to hold more capital if these deferred tax assets were removed; if this will increase the costs facing the banks; if this will have an impact on retail interest rates for customers; and if he will make a statement on the matter. [49041/19]

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Written answers (Question to Finance)

The Deputy may recall that my Department issued a Technical Note to the Committee on Finance, Public Expenditure & Reform and Taoiseach (FinPERT) in August 2018 which dealt with the potential consequences of changes to the treatment of Corporation Tax Loss relief in respect of banks. In answering the Deputy’s current parliamentary question I have used content included in this note where relevant.

Under CRD IV rules, deferred tax assets (DTAs), which are substantially made up of tax losses in the case of the Irish banks, are being phased out over a 10-year period which commenced in 2014. Accordingly, tax losses still make up a material portion of the transitional CET1 ratios of the Irish banks. It should be noted that transitional CET1 ratio is the ratio which the regulator uses when assessing compliance with the minimum ratio set for the bank.

In the Technical Note referred to above, it was estimated that the removal of DTAs from the banks’ balance sheets would have the following impact on the December 2017 CET1 ratios as follows:

Transitional CET1




Ratio as reported




Pro-forma ratios with DTAs removed




Reduction in CET1 ratios




As fully loaded CET1 ratios are calculated with the DTAs deducted in their entirety from regulatory capital, the removal of DTAs would not impact on the reported ratio in the reporting period in which they were removed. However, for subsequent reporting periods, fully loaded ratios would be negatively impacted as they would not have benefitted from the usage of the DTAs in the scenario where the banks continue to be profitable. This also applies beyond the transitional period.

The Deputy will be aware of the significant increase in regulatory capital which the banks are now required to hold since the financial crisis. It is not possible to estimate the potential reaction of the regulator should the DTAs be removed from the banks’ balance sheets in terms of addressing the impact of this on capital. However, as the impact would be significant, with the reported ratios at AIB, BOI and PTSB being reduced by an estimated 18%, 11% and 13% respectively, it would no doubt be a matter carefully considered.

In addition, it is difficult to estimate the precise impact of the removal of DTAs on the pricing of retail customer products. However, one of the key criteria used by banks when pricing products is the return on equity (ROE). ROE is an important metric for a number of stakeholders, including the regulator, when assessing the financial performance of a bank. Accordingly, should a bank be required to hold more capital arising from the removal of DTAs, this could put upward pressure on interest rates say, for example, in relation to loan products to ensure the bank is achieving an adequate ROE.

As a separate matter, it is important to highlight that the DTAs are a valuable asset on a bank’s balance sheet and the State benefits from this as it sells down its stakes in the banks. The original Technical Note estimated that the value of the DTAs, under current rules and on a discounted cash flow basis, was c. €2.283bn with the State’s share being c. €1.227bn (54%) reflecting its relative shareholdings in the banks.

During Committee Stage of Finance Bill 2019, I committed to providing the FinPERT Committee with updated figures on the Technical Note provided in August 2018. The updated figures will reflect the position at end-2018. Work is ongoing in this regard, and this information will be provided to the Committee members in due course.

For the convenience of the Deputy the following link is to the original Technical Note referred to above: