Italy and Spain defend bank tax credits to Brussels

Italy and Spain are defending their use of tax credits to bolster their banks' capital, in an effort to fend off a possible European Commission probe into whether these schemes amount to illegal state aid.

Margrethe Vestager, EU competition commissioner, recently sent out a letter to Italy, Spain, Portugal and Greece asking for information on so-called deferred tax asset schemes, which allow banks to accumulate future tax credits from credit losses. Although the EU has not decided whether to pursue a full investigation, its scrutiny has raised alarm bells in southern European capitals - and among their banks.

Pier Carlo Padoan, Italy's finance minister, last week said he had met Ms Vestager last week in Brussels about the possible probe, and Italy was supplying the information requested. "I had a very frank, very useful, very constructive meeting with commissioner Vestager," he told reporters. "The Italian position is that there is no state aid problem with DTAs," Mr Padoan said.

The Spanish government is also disputing the need for an inquiry. "The guarantees on deferred tax assets cannot be considered state aid because they are not applied in a discriminatory way to a single sector but to any Spanish company," an official at the economy ministry said.

The top lobbyists for Italian and Spanish banks are also weighing in - even more aggressively.

Giovanni Sabatini, chief executive of the Italian Banking Association, said the EU's move had been "surprising".

"I find it bizarre to think that a measure that is intended to level the playing field between Italian banks and those of other countries should be considered state aid," Mr Sabatini said.

Italian banking officials note that the main purpose of the DTAs is to offset the impact of the country's tax treatment of credit losses on non-performing loans, which can only be deducted from taxable income over a long period of time. Until 2013, the deduction had to be spread over 18 years, but two years ago the timeframe was shortened to five years. Still, in many EU countries a full tax deduction can be taken immediately, they note.

"DTAs are compensation for a disadvantage," one senior Bank of Italy official said at a briefing on financial stability last week. "Our stance is that they are not state aid," he added.

Italian officials have also pointed out that the penalty imposed by the country's tax system is procyclical, meaning it gets worse in unfavourable economic conditions such as the current one.

Jose Maria Roldan, president of the Spanish Banking Association, had similar concerns: "Spain has only tried to compensate for the distortions created by different tax regimes in Europe. It does not create a competitive advantage for our banks."

He also pointed out that the solution implemented in Spain was based on international banking regulations, and on EU law itself: "We did not invent anything. This step was foreseen by the Basel III regulation and the European legislation that implemented it. It was also part of the banking bailout programme agreed with the rest of the EU. Everything was done completely transparently," Mr Roldan said.

Whether this pressure from Rome and Madrid helps to stamp out any EU probe before it begins in earnest is unclear.

Officials involved in the case in Brussels stressed that the requests for information did not mean that the EU would necessarily pursue a formal investigation. One described the case as being in "very early days".

There is also some tension between the EU's competition authorities and the financial policymakers in Brussels about the timing of any probe and the consequences that it could have in fragile southern European economies, particularly Greece. This could work in favour of the southern European governments, if they are able to persuade the EU that the uncertainty of such an investigation could hamper the recovery of their banking sectors and dampen lending.

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