Central Bank Governor opposes taxation of banks’ windfall profits - "It discourages foreign investments"

The small size of the Cypriot economy, coupled with the surplus liquidity in the banking sector, contributes to slower adjustment of interest rates compared to larger Eurozone economies, stated Central Bank of Cyprus (CBC) Governor Christodoulos Patsalides while addressing the Finance Committee on the 2025 state budget.

"The small size of the economy contributes to slower adjustment of interest rates compared to larger economies. This is further slowed by the exceptional surplus liquidity of the Cypriot banking sector – the loan-to-deposit ratio stands at 49.3%, compared to 106.5% in the EU," noted Patsalides.

He highlighted that lending rates in Cyprus have shown a downward trend across most loan categories, especially for businesses. The average interest rate for new loans to businesses decreased to 5.32% in September from a peak of 6.06% in October 2023, aligning with the downward trajectory of Euribor. Similarly, for new loans to households, the average mortgage rate dropped to 4.53% in September, down 0.66% from the high of 5.19% in January 2024.

Deposit rates are also on a downward trend, with the average rate for new household term deposits of up to one year falling to 1.98% in September from 2.24% in March. Deposit rates for businesses remained stable at 2.14% in September, close to the yearly average.

While the gap between deposit and lending rates remains unsatisfactory for the CBC, it does not have supervisory authority to intervene directly, said Patsalides. However, the CBC ensures transparency through the publication of interest rates, he added.

Foreign investment concerns over windfall taxation

Regarding a proposal currently tabled at parliament by main opposition AKEL to tax banks’ windfall profits, Patsalides warned that even temporary taxation could have long-term consequences. He emphasised that an unpredictable tax framework deters foreign investment in Cyprus.

Budget stability and structural reforms

The Governor expressed satisfaction with the 2025 budget, noting that it promotes fiscal discipline, structural reforms, and economic stability. However, he stressed the need for careful management of non-discretionary expenditures, particularly during uncertain times when government revenues may be at risk.

"In prosperous periods like now, revenue flows easily due to inflation and tax income driven by rapid growth. However, for surpluses to be sustainable, they must endure during economic downturns," he said, calling for caution in managing unjustified non-discretionary expenses.

Economic outlook and banking sector resilience

The CBC projects GDP growth of 3.5% for 2024, up from 2.5% in 2023, the second-highest in the Eurozone. Growth is expected to continue at 3.1% in 2025 and 3.2% in 2026. Inflation is forecasted to decrease to 2.2% in 2024 from 3.9% in 2023, further dropping to 1.9% in 2025 and 2026.

The CBC has also introduced measures to enhance banks' reputation risk management, requiring them to adopt comprehensive approaches that consider social aspects. New governance guidelines effective 29 November aim to address reputation risks through adequate strategies and measures.

Profitability and challenges for banks

While the extraordinary profitability of Cypriot banks is temporary, their overall profitability is not, said Patsalides. Cypriot banks have the highest liquidity in the Eurozone (328% in H1 2024) and recorded profits of €0.6 billion during the same period. This liquidity largely stems from non-performing loan sales and bond issuances to strengthen capital, as well as benefiting from the European Central Bank's high interest rates.

"The current excess liquidity and benefits will diminish as interest rates decrease," he said, predicting that while banks will remain profitable, their extraordinary profits will taper off.

Challenges ahead include digitalisation, cybersecurity risks, financing the economy amidst uncertainty, and adapting to climate change risks.

Regulatory and strategic developments

Addressing delays in licensing financial institutions, Patsalides acknowledged room for improvement and included it in the CBC’s 2025 action plan. He also revealed that the CBC is developing a strategy for licensing electronic money institutions.

Regarding the potential re-establishment of cooperative banks, the CBC will assess any submitted proposals, the Governor said.

Finally, Patsalides expressed scepticism about cryptocurrencies, citing a lack of reliable data on market size and price determination mechanisms.

Kyriakos Mitsotakis says no plans to impose extraordinary taxes on banks

Greek Prime Minister Kyriakos Mitsotakis, who is attending a two-day investment conference organised by Morgan Stanley and the Athens Stock Exchange (ATHEX) in London, made it clear that there are no plans to impose extraordinary taxes on banks in discussions that opened the conference, according to reports.

The London event, now in its third year, features participation from 39 listed companies. During his visit to the British capital, Mitsotakis is also holding a series of meetings with investors.

Sources indicate that these meetings conveyed that the Greek government knows what it expects from banks, has the means to implement its goals, and that extraordinary taxation of their profits is not among the options being considered.

In essence, during a private meeting with investors, the Greek Prime Minister categorically ruled out the possibility of extraordinary taxation on banks.

(Source: InBusinessNews)