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Bank levy could make financial system vulnerable, delay recovery - ECB

The European Central Bank warned Hungary in an opinion published on Friday that an extraordinary bank levy would make the country's financial system more vulnerable and could delay the recovery of the economy.

The levy approved by Parliament as part of a package of legislation related to the government's 29-point action plan, unveiled early in June, is set to raise HUF 187 billion in revenue in 2010 alone. Details of the levy for 2011 and 2012 are to be outlined in separate legislation.

The ECB argued that the revenue from the tax should be used to guarantee deposits rather than to support the budget.

“Using the proceeds for general budget purposes is not desirable as it does not serve the general objective of enhancing financial stability," the ECB said. The size of the tax could make it more difficult for banks to finance their lending activities, weakening solvency positions and "making the financial system more vulnerable to potential further shocks,” it added.

Lenders may try to pass the cost of the tax on to borrowers, making loans more expensive and slowing domestic demand, thus “delaying recovery of the Hungarian economy”, the ECB said.

Foreign parent banks may cut back their activities in Hungary, further limiting the availability of financing, the ECB warned. “Such ad hoc taxing of an industry may create uncertainty for business and thus have a detrimental impact on long term growth,” it added.

“Given these concerns, the ECB strongly recommends a comprehensive impact assessment of the proposed measure,” the ECB concluded. (MTI-Econews)