Polish lenders are now subject to a bank tax similar to the one introduced by Hungary in 2010. How have Hungarian lenders fared under the highest bank levy in the western world?

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Starting this month, Polish banks and insurers will pay a 0.44% annual levy on their assets. While this bank tax is by no means unprecedented – it has been introduced in 14 countries since 2009 – Poland’s approach is unorthodox.

In most cases, governments content themselves with taxing liabilities instead of assets so as not to discourage lending and capital raising by banks. The only exception to this rule is Hungary, which decided to tax banking assets at a rate of 0.53% in 2010, imposing the highest bank levy in Europe. As in Hungary, the tax bracket in Poland is so low (4bn zlotys) that it includes nearly the entire banking sector.

The Hungarian experience offers some precedent for Polish lenders. Since the introduction of the levy, most of country’s large banks shrunk their balance sheets and capital ratios. Only two large institutions bucked the trend – OTP bank, which is Hungarian-owned and the biggest lender, and the subsidiary of Italy's UniCredit (see chart one).

The banks also curtailed their lending activity. Since 2010, corporate credit dwindled in most quarters, while household credit dropped in every single quarter (see chart two). This was accompanied by the deterioration of credit portfolios, with non-performing loans doubling between 2009 and 2013.

Admittedly, in recent years Hungarian banks were faced with a tougher economic situation than their Polish peers. Until 2014, Hungarian economy teetered on the edge of recession, whereas Polish banks can look forward to a GDP growth rate of 3.5% this year.

However, Poland is poised to take more cues from Hungary on banking regulation. In 2014, Hungarian banks underwent a forced conversion of Swiss-franc-denominated mortgages, the worst year in the recent history for local lenders (see chart three). Poland’s newly elected government plans to do the same, which could roil the industry since Swiss-franc loans play a prominent role on the local scene – according to the central bank nearly a fifth of all loans were foreign currency housing loans to households in March 2015. The banking sector could be stirred even more, since so far the numbers show that these loans are being diligently repaid.

Going by the example of Hungary, another consequence of the bank levy appears to be reduced presence of foreign lenders. While foreign banks in the country scaled back their operations, the largest lender, OTP Bank, increased its market share. In 2014, two foreign banks, German-owned MKB Bank and GE Capital’s Budapest Bank were sold to the state. 

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