BANK LEVY: Irish financial institutions have been stunned by the imposition of a new levy that will cost them €300 million over the next three years.

The sector has reacted angrily to the move, claiming it will put the Irish financial institutions at a disadvantage to their European competitors.

The levy will be borne by banks and other institutions who accept deposits from the public and is substantial enough to cause some short-term weakening in the share price of the Irish banks. Some analysts have estimated that it could reduce the earnings of the large financial institutions by between two and five per cent annually, with AIB and Bank of Ireland likely to pay the lion's share of the duty.

The Minister for Finance, Mr McCreevy, said the payment will be equal to 50 per cent of the Deposit Interest Retention Tax (DIRT) payable by each institution annually.

The contribution will be fixed at €100 million per annum for the three years between 2003 and 2005. The amount due will be subject to an upper limit and will be treated as a special stamp duty payable in October each year, according to the Minister.

Reacting to the surprise measure, the Irish Bankers's Federation (IBF), the industry body representing 60 financial institutions, said it was discriminatory.

"The proposed levy appears to be discriminatory - both as between institutions within the financial sector and as between the financial and other sectors in the economy. The measure will place institutions here at a competitive disadvantage in this respect vis-à-vis their counterparts elsewhere in the European Single Market."

The IBF added that it will be closely examining the details of the levy in the forthcoming Finance Bill.

Financial Services Ireland (FSI), the industry body representing financial institutions at Dublin's International Financial Services Centre, described the new tax as short-sighted saying it ran counter to the spirit of the agreement reached in relation to corporation tax rates.

FSI director Ms Aileen O'Donoghue said the new levy would send out a very negative signal internationally about the Government's attitude to the financial services sector.

"It is quite extraordinary that one industry in the economy has been singled out for such a significant tax measure. Financial institutions like every other business in the economy have to be able to compete.

"The current global economic situation is uncertain and this measure undermines the ability of the Irish banking sector to compete in this difficult trading environment," she said.

The association added that it will be seeking an urgent meeting with Mr McCreevy to discuss the implications of this new tax.

The announcement came too late yesterday evening to have any impact in the stock market but analysts suggest financial stocks will drift lower today.

By imposing the levy based on DIRT tax payable by each financial institution, some financial institutions will suffer more than others.

Some bank sources also questioned how widely the levy would apply and whether An Post and credit unions would also be forced to contribute additional taxes to the Exchequer.