Dáil Éireann Debate, Wednesday - 13 May 2020
79. Deputy Frankie Feighan asked the Minister for Finance the estimated cost of not allowing banks to write-off their past losses against future profits to reduce their corporation tax bill to zero; and if he will make a statement on the matter. [4686/20]
Amharc ar fhreagraThe 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. The Technical Note can be found at the following link:
https://assets.gov.ie/4003/071218113138-0ba1ccc1c89345388cbe4badabe7073a.pdf
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 the 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 |
AIB |
BOI |
PTSB |
|
Ratio as reported |
20.8% |
15.8% |
17.1% |
|
Pro-forma ratios with DTAs removed |
17.1% |
14.0% |
14.8% |
|
Reduction in CET1 ratios |
(3.7%) |
(1.8%) |
(2.3%) |
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 benefited 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 using the same data, it would no doubt be a matter carefully considered.
In terms of valuation, 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. €2.28bn with the State’s share being c. €1.22bn (54%) reflecting its relative shareholdings in the banks.
As a separate matter, the removal of DTAs would likely have an impact on the pricing of retail customer products. Although its difficult to estimate the precise impact, 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.
Finally, during the Committee Stage of Finance Bill 2019, I committed to providing the FinPERT Committee with updated figures on the Technical Note provided in August 2018. Although the figures had changed somewhat allowing for a further year’s data, the keys messages from the original Technical Note remain unchanged.
