Windfall tax on bank profits

I refer to Mr Frans van Avendonk's letter (The Sunday Times, May 14). In my letter of May 7 I did not advocate an increase in tax on ordinary profits. I advocated a windfall tax - windfall by definition, a bonanza of huge and often unexpected profits, made in this instance by most banks in Malta in recent years.

While our economy contracted by 1.5 per cent in 2004 and expanded by a reasonable 2.5 per cent in 2005, some banks registered an increase in profits of more than 90-92 per cent to be exact. Now that is no ordinary decent profit. The Bank of Valletta has just announced another astounding record of Lm18 million profit (pre-tax) for the first six months of this financial year - that is nearly doubling its profit over its already record profit for last year. HSBC made a record profit before tax of Lm36.7 million in 2005, an increase of 11.7 per cent on the previous record profit of 2004.

One well may ask how these profits are being generated. A large part of these profits came from net interest income - the difference between the miserly interest paid to account holders in credit and the interest charged to borrowers. Net interest income for the two major banks in 2005 was an incredible Lm91 million (HSBC: Lm46.9 million, Bank of Valletta: Lm44.5 million for 2005). Is that a fair profit? All this at a time when most households, pensioners and the business community are struggling hard to make ends meet, particularly with the added burden of the surcharge on electricity and fuel bills due to the rising cost of oil.

So much of these enormous profits for the banks came from all those who hold bank accounts in credit and who essentially supplied the banks with their deposits receiving paltry interest rates when compared to the interest rates being charged to borrowers. One should also note that most of these profits do not belong to pensioners, as is being implied - most of the profits belong to foreign shareholders, at least 70 per cent in the case of HSBC. With these profits HSBC recouped the price they paid for Mid-Med Bank in a period of approximately two years! Nearly Lm17 million in 2005 (some €40 million) went to foreign shareholders in HSBC - money which was promptly taken out of the local economy.

Government should intervene to remedy the situation and bring in a balance of fair play with benefits to society as a whole. That is why I proposed that Government should impose a windfall tax on these huge bank profits, and that this should be in the region of 30 per cent. This would be a good tax; it would immediately create a fund of around Lm25 million. How this fund would be used would, of course, be a government decision and my proposal that it could be used to reduce or abolish the energy charge is based on the fact that this would benefit the economy as a whole.

It would help safeguard jobs and stimulate the economy. Incidentally, pensioners do not pay 35 per cent on profits from bank or other shareholding dividends - unless, of course, they have other income on top of their pension, which brings their tax liability to the 35 per cent band.

Windfall taxes are nothing new. Many countries have imposed windfall taxes when corporations make huge profits compared to the rest of the economy. In Britain, windfall taxes were imposed by both the Conservative Party and the Labour Party.

Margaret Thatcher's Chancellor Geoffrey Howe imposed a windfall tax on banks in 1981 while Labour's Gordon Brown imposed windfall taxes on selected industries in 1997.

My proposal of a windfall tax would immediately alleviate the hardship on the business community as well as on the ordinary household; it would also ensure that this money is injected back into the economy at this much-needed time. I am convinced from the feedback I have received that a windfall tax on banks' profits would be well endorsed by the electorate.