The proposed additional tax on bank profits could lead to more expensive or less accessible loans, restrict private investment and increase the cost of government financing, Bulgarian National Bank (BNB) Governor Dimitar Radev warned on Friday. “Raising taxes comes at a cost,” Radev said in a statement published on the BNB’s website. According to him, when a tax affects financial intermediation, part of the burden may be shifted beyond the formal taxpayer.
The BNB is not taking sides in the political debate over budget priorities, but is providing a professional assessment of the possible consequences for the financial system and the economy, he stressed. The proposal has a clear budgetary rationale and the expected revenue can be calculated relatively easily, but “the macroeconomic calculation is different”.
Bank profits are not only a tax base, but also a key domestic source of capital formation, Bulgaria’s central bank governor said. Their capital determines banks’ ability to take on risk, provide loans and absorb losses in the event of adverse economic developments.
As an example, he recalled the measures taken to strengthen the banking system’s capital and liquidity in 2020, as well as the private moratorium on loan payments introduced by banks. By September that year, deferred obligations had exceeded BGN 9 billion. The accumulated reserves enabled banks to absorb the temporary pressure, while giving businesses and households time to overcome the shock.
Therefore, current bank profits are not merely income that can be distributed, but a resource that supports lending and the resilience of the system in the event of future shocks, Dimitar Radev said.
According to him, the use of the 2020-2025 period as a basis for determining “excess profits” also needs to be carefully analyzed. This period includes the pandemic, unusually low interest rates, the inflationary and energy shock, and the subsequent sharp change in the interest-rate environment. The starting year, 2020, was a crisis year with sharply reduced bank profits, meaning that some of the subsequent recovery could be presented as exceptionally high returns.
During the same years, bank balance sheets, loan portfolios and capital increased. Therefore, higher nominal profits may include an economic rent, but they may also reflect a normal return on larger amounts of capital and the additional risk taken, Radev explained.
Formally, the additional tax will be paid by banks, but its economic burden will not necessarily remain with them. Banks may respond through lower dividends, but also by changing interest rates on loans and deposits, tightening lending conditions or restructuring their assets.
For households, this could mean more expensive or less accessible credit, while for businesses it could mean a higher cost of capital. This determines which investment projects will be undertaken. The extent to which the burden will be passed on to customers “must be measured, not assumed”, the BNB governor stressed.
Radev also pointed to the possible impact on government financing. Bulgarian banks are among the main institutional investors in government securities. If the higher cost of capital leads them to favour low-risk government debt at the expense of private lending, businesses and households will receive less financing. If banks reduce their investments in government securities, the consequence could be a higher cost of government financing.
This effect is particularly important when there is a significant need for new government debt, Radev noted. Revenue from the one-off tax may be temporary, while higher interest on long-term government bonds is paid throughout their maturity.
The additional tax could also have the opposite effect on other budget revenues. If more expensive or more restricted credit slows investment and consumption, lower economic activity will reduce the tax base for VAT, corporate taxes, income taxes and social security contributions. Therefore, the gross revenue from the measure is not the same as its net fiscal effect, Radev said.
Following its accession to the euro area, Bulgaria should focus its efforts on accelerating investment, productivity and real convergence with more developed European economies, the BNB governor said. This requires a predictable tax environment, disciplined budgetary policy and a financial sector capable of directing funds towards productive private investment.
Radev also highlighted a possible conflict between macroprudential and fiscal policy. The BNB requires banks to build up capital buffers when lending is strong and profitability is high, while an additional tax would take away part of the resources used to build those buffers. If both fiscal and banking reserves weaken at the same time, the state will have fewer options to respond in a crisis, while banks will have more limited capacity to maintain lending.
The banking system is “well-capitalized, liquid and profitable”, and there is no reason for the issue to be presented as an immediate risk to financial stability, Radev stressed. The main question, in his view, is whether the proposed measure will improve the overall economic outcome.
Before a final decision is taken, the budget assessment should be supplemented by an analysis of the impact on bank capital, lending, interest rates, investment, growth, other tax revenues and the cost of government financing. According to Radev, the analysis should include both a baseline and an adverse scenario and take into account the interaction with monetary policy and financial resilience measures.
“This is not an argument in defence of bank profits or against the government’s right to propose tax changes,” the BNB governor clarified. “It is about the difference between the ‘accounting calculation’ and an assessment of the overall consequences for the economy and public finances.”
Central Bank Governor Warns Higher Tax on Bank Profits Could Make Loans More Expensive THE NEWS FROM BULGARIA – NEWS AGENCY 2009-2025 2026-09-25 10:42:08
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