Several experts have argued that the new bank tax – the Solidarity Tax – will discourage foreign investment. However, the result has been different, with the promise that we will soon see a new bank in the country. Aren’t additional taxes scary? How would the population benefit from a new player entering the market? Iveta Danieliūtė investigates in lrytas.lt.
Banks are not scared off by an additional fee?
According to Lukas Jakubonis, head of the Financial Market Development Centre of the Bank of Lithuania (FMDC), it is only a matter of time before a foreign bank enters Lithuania, and it will not be a small but a “large calibre” financial institution. We may see the results in the next six months or a year.
And even the new bank tax has not scared away investors, as some experts predicted.
“I have never once been asked about it by potential banks. This shows that the issue has minimal significance for Lithuania’s investment climate.
It is not seen as a risk and does not diminish the jurisdiction’s attractiveness.
The solidarity contribution is a temporary, short-term and targeted measure. It clearly defines who should pay it, and a new entrant would not be subject to the contribution,” Jakubonis told lrytas.lt.
Although the measure is temporary, how do we know it will not be done again once it is introduced?
Thus, one of those who thought that the Solidarity Tax would hurt Lithuania was Algirdas Bartkus, PhD, associate professor at the Faculty of Economics and Business Administration of Vilnius University (VU). He told the portal lrytas.lt that politicians can invite foreign banks as much as they want, but they will certainly not come to Lithuania because of such taxation because commercial banks, like other businesses, have the aim of making money, so it is better for them to operate in a country where there are no additional taxes.
After the announcement of the new bank by the LB, Bartkus acknowledged that this would be a lesson for everyone – now we will know that tax instruments are essential, but not everything. The chances of new banks entering Lithuania may have diminished but have yet to disappear.
“But still, nobody is pleased about the tax, although they might not be too scared. Foreign banks reason, understand the risks and see that this sector receives exceptional attention in Lithuania and can be taxed at any time,” A. Bartkus told lrytas.lt.
He believes that banks considering entering Lithuania may be looking for different strategies, for example, to apply such favourable pricing for residents and businesses that they would never have to earn solidarity tax and, together with very attractive offers, take over a significant part of the market from existing banks.
“That is the strategy I would choose in their place”, said the economist.
At the same time, Saulius Skvernelis, chairman of the Democratic Union for Lithuania’s Name and former prime minister, said that the tax and investment environment is a crucial aspect of the negotiations but that many foreign banks are turning away from Lithuania because of the size of the market, he said. This is why negotiations have always been, and probably still are, complicated.
“More than one bank had to come to Lithuania. I invited them, and the former government invited them, to dismantle this Scandinavian oligopoly, but they were all put off by the market size. Lithuania is too small a market, that was the biggest obstacle”, the politician told lrytas.lt.
He had approached banks in several countries but admitted that most of the attention was focused on the financial institutions of the neighbouring country, Poland.
This is still the case now because, according to the LB representative, the most promising negotiations are with German and Polish banks.
“But if a Polish bank comes in, it may be more of a political decision than an economic one, especially given that Poland has a government-owned bank, if it is the latter,” Skvernelis said.
Only pluses for Lithuanian residents
Jakubonis identified the main reason Lithuania needs a new bank as too much concentration in the country. We have a few banks or their branches, which might be enough if it were not for the attention of the big Scandinavian banks, which dictate the competitive conditions for others.
“People and companies keep most of their money in Scandinavian banks, which reduces the cost of services for those banks and allows them to offer cheaper loans. But smaller players find it challenging to attract deposits of cheap funds, so they are forced to lend on more expensive terms or to operate with very low margins, which is also not sustainable.
We are concentrated on the larger or big banks. We are encouraging smaller banks to come in and actively talk to them, but it would take time for the smaller banks to grow, and that could take 10-30 years. They would create competition and reduce concentration, but only after 30 years, which is different from our desired result.
At that time, a big bank coming to Lithuania could immediately create a concentration spillover effect, and the same happened with supermarkets when Lidl came. So, we are looking for Lidl for the banking sector to go with fireworks and make up for some of the concentration,” the representative of the LB argued in the Lietuvos rytas TV programme New Day.
Bartkus thinks that if it is one of the biggest Polish banks, it would “give the Scandinavians a good bath” within a few years.
“If the new bank applies more favourable lending conditions to residents and businesses, Swedbank and SEB will have to do the same. They will certainly not want to say goodbye to their customers easily. This would boost competition considerably”, the economist said.
However, as Skvernelis stressed, it has to be a big bank, providing all services, from everyday services for the population to business financing, with its branches in Lithuania, where customers can visit them live.
“The arrival of a new player would at least change the current attitude towards people because, in business, it is usual that the customer is always right, but when we deal with banks, it seems that the customer is not only not right but also has become almost a hostage to the bank. So even a change of attitude would be important and useful”, the politician stated.
Bartkus also saw another benefit – new and well-paid jobs.
“This is excellent news for the employees of the commercial banks in Lithuania, their department heads and analysts because they will all be needed by the new bank. All these employees are already happy because they know they will see new job offers.
And if the existing banks don’t want to lose their analysts, brains and intelligence, they will have to pay them more,” said Bartkus.
In this case, we should not see the burden of rising wages being shifted onto the shoulders of consumers, i.e., the prices of services should stay the same, otherwise, it will be just another incentive for the population to switch to another bank.
“Scandinavian banks will simply have to sacrifice part of their earnings”, he stressed.
Moreover, the economist said that the entry of a new bank into Lithuania would also signal other corporations to consider investing abroad. It would show that the country is worth setting up in and is a promising country that can offer certain benefits.
Banks from further afield would be needed
The arrival of a new bank in Lithuania is good news, but Bartkus would be happier if it were a French or Spanish financial institution rather than a Polish or German one.
As he explained, the Polish and German economies are strongly linked to Scandinavia, so if, for example, the Swedish economy were to be hit by a crisis, it would affect the related countries, and therefore, both Poland and Germany and thus their banks and the credit conditions they offer.
France and Spain, on the other hand, France and Spain are not so dependent on Scandinavia, and in Spain, there is an additional tax on the banks, so they would not be affected; they would know what to do in such situations.
“We need to diversify our banking system so that they are less interconnected. But maybe the banks of those countries do not want to come to us, and maybe they have plans in other regions”, Bartkus said.