INTERNATIONAL Monetary Fund's (IMF's) latest progress
report on Spain's ongoing financial sector reforms has called for a few tax initiatives
to improve the strengthening of banks.
The
third progress report released on 15 July has advised Spanish
Government to consider establishing a mechanism to convert deferred tax
assets (DTAs) into transferable tax claims (TTCs), conditional on the
degree to which banks take actions that have positive externalities.
The report has also pitched for revenue-neutral reforms to reduce tax impediments to asset disposal by the banks.
Pointing
out that proposed conversion of DTAs into TTCs would support the Banks'
capital, it observes that DTAs reflect factors such as past negative
profits that can be carried forward to reduce future profits for tax
purposes.
It
explains that DTAs are a low-quality asset because they are valuable
only if a bank generates profits at some point in the future. For the
same reason, DTAs may be unable to absorb losses in the event of
insolvency.
The report says:
“Given this, DTAs will be increasingly deducted from CT1 capital as
Basel III/CRD4 rules are gradually phased in. Spanish banks have a large
amount of DTAs - 5 percent of GDP, or 37 percent of their CT1 under
current regulatory definitions at end-2012 - due to their large losses
in 2012 arising from stepped-up provisioning.”
As
a result, Spanish banks do not appear strong when compared to their
peers on a fully-loaded Basel III basis, a measure on which markets
increasingly focus. To dispel uncertainty regarding the degree to which
Spanish banks will be able to make use of their DTAs and improve the
quality of their capital, a mechanism could be created to allow banks to
convert DTAs into transferable tax claims (Italy did this recently).
The amount of such conversions that a bank is eligible for should be
made conditional on the degree to which banks take actions that have
positive externalities in the current environment. Candidates for such
actions could include forgoing cash dividends for a period of years,
issuing more equity, stepping-up provisioning and disposal of distressed
assets, complying with restructuring plans, and/or easing the pace of
credit contraction, it says.
Calling
for more initiatives to help ease credit conditions and support
economic recovery, one measure that should be explored is to undertake “revenue-neutral
tax reform (e.g., replacing real estate transaction taxes with higher
taxes on property values) to reduce impediments to asset disposals, as
these could free space on banks' balance sheets for additional lending.”
Spain is undertaking a major program of financial sector reform with support
from
the European Stability Mechanism (ESM) . On June 25, 2012, Spain
requested financial assistance from the European Financial Stability
Facility (EFSF) to support the ongoing restructuring and
recapitalization of its financial sector.
The
objective of reforms include to strengthen the capitalization of
Spain's banking system and reduce uncertainty regarding the strength of
its balance sheets and revise the framework for financial sector
regulations to avoid re-acumulation of risks in the future.
The
Ministry of Economy and Competitiveness, the Bank of Spain (BdE), and
the European Commission (EC) requested that IMF staff provide such
monitoring via quarterly reports.
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