Legal challenge to levy would be an own goal for banks

It's hard to know whether to laugh or cry at the news that the Irish Banking Federation is weighing a legal challenge to the Government's decision to impose a levy of €450 million over the next three years on the banks.

It seems preposterous that a sector that was bailed out by the State to the tune of €64 billion, plus interest, after the global financial crash in late 2008 should even contemplate challenging the Government’s right to claw back €150 million a year out to 2016 to pay for the day-to-day running of the country.

This was one tax that voters were happy for the Government to introduce, which is precisely why Minister for Finance Michael Noonan included it in his budget speech last October.

The Minister would also say that he did the banks – primarily AIB and Bank of Ireland – two big favours last year. In March, he ended the Eligible Liabilities Guarantee, which is gradually winding down as liabilities mature.

Generating fees
It had been a good earner for the State, generating fees from the banks of €1.2 billion in 2011, just more than €1 billion in 2012, and €576 million last year as the liabilities matured.

Noonan also loosened the restrictions on how deferred tax assets could be offset by banks against future profits from their Irish operations. This is beneficial to AIB and Bank of Ireland which, at the end of June, had €5 billion in deferred tax assets between them.

So the banks will be well in credit this year when it comes to fees paid to the State.

And whatever the rights and wrongs of the hated bank guarantee of September 2008, the whole retail financial sector here could have crashed spectacularly without this dramatic intervention by the government. The guarantee kept the sector on life support and, as such, was as much to the benefit of foreign-owned banks as the domestic ones.

Broad church
A bit like Fianna Fáil, the IBF is something of a broad church. Its membership comprises the main retail banks, a raft of IFSC companies and other specialist finance providers.

Its decision to seek legal advice on the levy was a matter of good housekeeping by the industry body, and something that the membership would have expected. The IBF would argue that the levy is not helpful to efforts being made by the banks to return to profitability and lend into the economy, which would generate the best returns for taxpayers.

This argument doesn't really hold water. Bank of Ireland chief executive Richie Boucher told me earlier this month that it plans to release €33 billion in "new" lending into the economy here by the end of 2017 as it pursues a sustainable return to profitability. The levy doesn't seem to be holding him back.

And we discovered yesterday that AIB is angling for the cap on executive pay to be lifted by the Government, along with the restriction on paying bonuses.

For sure, this levy doesn’t sit well with foreign-owned retail banks. Nationwide UK (Ireland) is wholly unimpressed by the idea of having to pay a levy here, given that it had no role whatsoever in the property bubble or the lax lending to developers in the boom years.

It only entered the market after the crash and has focused on collecting deposits. Why should it have to pay for the sins of others?

Ulster Bank's parent Royal Bank of Scotland was bailed out by the UK government and has had to pay its own levies over there. It's not impressed at effectively having to pay on the double. It is also probably not helpful to its local management team, led by Jim Brown, as they seek to minimise the pain from the outcome of RBS's group-wide strategic review, the results of which will be announced on February 27th.

Law firm Mason Hayes & Curran has advised the federation that the levy could breach EU State aid rules, principally because it is not being applied to credit unions or An Post, which has its own range of deposit products and is owned by taxpayers.

Of course, having grounds for a challenge and actually winning a legal action are two very separate things.

Decision time
Ultimately, a decision on whether or not to pull the trigger on a legal challenge will fall to IBF president David Duffy, the chief executive of AIB, which is 99.8 per cent owned by the State.

Duffy took over the presidential seal of office at the beginning of this month. It was something of a surprise given that the role has usually been filled by the head of retail at one of the big banks, or the CEO of a small bank.

Would Duffy be prepared to press the button on a legal action by the IBF against the majority shareholder of the company he runs on a daily basis?

Former road safety chief and IBF chief executive Noel Brett would do well to steer him clear of this potential collision.