It is still very difficult to understand how the government plans to apply the requirement for banks to reduce interest rates on mortgage loans by 50 percent, Johan Akerblom, Chairman of the Management Board of Citadele Bank, told LETA.
“It is still very difficult to understand how these requirements are intended to be applied. It is easy to understand that mortgage rates are to be cut by 50 percent. But how this could happen in practice is still a big question. Who will pay for it, how will it work legally, how will the European Central Bank (ECB) look at it?” said Akerblum.
He also noted that it is difficult to see how the government can force the banks to change their contracts with the borrowers. “We have a contract with each of our clients. We don’t have a contract with the government… I don’t understand how this can be done legally. This raises concerns about the message we are sending to other industries and investors who are planning to invest money in Latvia,” Akerblum said.
He also noted that the Latvian banks operate in the European Union and the euro area, under the supervision of the ECB. “So it is complicated. Similar decisions have been taken, for example, in Poland, but here we have to bear in mind that Poland is not part of the euro area and its central bank is not linked to the ECB in this sense,” the Citadele CEO added.
Akerblum pointed out that the banks are ready to work with the government to find a sustainable solution, taking into account all stakeholders and ensuring that Latvia continues to be an attractive location for foreign direct investment, which requires a stability and predictability of the investment environment.
“We have been working and will continue to work with the government to find the best solution for Latvia not only in the short term, but also in the long term. Every tax-related decision must be given serious consideration and there should not be a perception that as soon as an industry starts making money it should be penalized. In that case, nobody will want to invest money in Latvia, because there will be a feeling that as soon as there is money, the government will try to take it away through taxes that did not exist before. For an economy to be able to attract investment, it must be predictable. That is why we will work with the government to come to a solution that is found through cooperation, not confrontation,” the Citadele CEO said.
Akerblum recalled that the ECB introduced negative interest rates in 2014, and although banks cannot fully operate in a negative interest rate area, they did not charge a fee on retail deposits. “We covered this negative difference ourselves from 2014 to 2020,” he said.
The Citadele CEO also pointed out that the interest hike was not the commercial banks’ decision but an ECB measure aimed at curbing high inflation. “Inflation is higher than expected, which was not foreseen by the central banks, although negative interest rates were introduced at the time with the intention of increasing inflation. As banks, we do not control EURIBOR rates, we did not decide that EURIBOR would be 3.5 percent or 4 percent,” Akerblum said.
He also argued that when rates were low, bank clients could be more far-sighted and lock their loan rates, but very few did so because it meant paying a little more in the short term. “But that is the price of a fixed rate in the long term. The very nature of a variable rate is that it goes up and down, and when rates go up you have to pay more for the loan, and that is where we are now. This is how the banking business works, and it is no secret. But now it has become a populist issue,” Akerblum noted.
The discussion, in Akerblom’s view, should be about how to take care of financially struggling people and how to help them through this cycle, because interest rates will not be high all the time.
“Will the state be prepared to compensate the banks for the lower rates? Most probably not, and we don’t expect them to in any way, because we are a private company,” Akerblum said.
He also said that if the draft legislation is indeed adopted, the banks will need to figure out exactly what it says and what it means. After a thorough analysis, a decision would be taken on the next steps.
“I don’t want to speculate on that at the moment because I assume there will be several more rounds of decision-making. We still believe that the best option is to find a solution that does not require this type of law, as it could cause significant damage to Latvia for a long time. We live in a society where a balance has to be found between business and politics, and the prosperity of a country depends on capitalism. This means that people develop businesses, but for them to be sustainable, they must make profit. If the state suddenly starts interfering and changing the rules, it sets a negative precedent,” the Citadele CEO warned.
Asked how the Finance Ministry’s draft amendments to the Corporate Income Tax Law, which would oblige the banks to make a 20 percent advance tax payment from the previous year’s profit, Akerblom said that this tax was not successful in Lithuania, but that banks would respect such a decision.
“Almost all countries have a corporate income tax. In Latvia and Estonia, if profits are not distributed, no tax is charged, and it is applied when dividends are paid. We therefore have no strong objection to the advance payment of the tax itself. We do object to changing conditions almost every year. Predictability and stability are very important, not only for us, but for attracting any investment from outside. But I would stress again that there is no objection to the advance payment as such,” said Akerblum.
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