The EU Commission is seeking information from Italy, Spain, Greece and Portugal in order to clarify whether the special treatment of deferred tax assets (DTAs) in their banks‘ balance sheets represents a form of hidden State Aid.
The value of DTAs relying on future profitability can only be realised if a bank actually generates taxable profits in the future. The Capital Requirement Regulation (CRR) therefore requires that these DTAs be deducted from Common Equity Tier 1 (CET1). However, Italy, Spain, Greece and Portugal have – in line with an exception in the CRR – introduced legislative changes that enable DTAs to be transformed into deferred tax credits (DTCs). DTCs are not contingent on future profits, and can be counted as capital regardless of whether the bank makes a profit or a loss. Consequently, DTCs effectively represent the free gift to selected banks of claim on a particular government to be used directly to boost bank capital.
We share the concerns of the European Commission that government guarantees to deferred tax assets in some membre states appear very much like State Aid. Furthermore, we fear that through these accounting manoeuvres the financial stability of the Eurozone as a whole might be at risk. The severe consequence of government guarantees to deferred tax assets is a further strengthening of the highly destabilising link between the banks and their sovereigns sovereigns. DTCs are in fact quite reliant on government intervention if the bank does not actually realise profits. In the worst case, if a state becomes insolvent, the deferred tax credit claim is worth nothing.
In order to address these issues, we have written a letter to Commissioner Vestager. The reply from Commissioner Vestager can be downloaded here.