Tough negotiations are underway between the Orbán government and the financial sector on the bank tax, which instead of the planned 13 billion forints will bring in 200 billion to the treasury this year.

It is still not known how the tax burden will be distributed among the banks, insurance companies, financial entrepreneurs and other various players within the financial sector.  Insurance companies joined banks in negotiations with the government this week and reported in relation to the distribution of the tax that they did not cause the financial crisis and - with the exception of the American insurance company AIG - did not receive state assistance. In other countries invested funds are being clawed back from banks and not from insurance companies. 

In the last ten years it has not been true on average that the profits of Hungarian insurance companies have been so high, insists Péter Kisbenedek, the president of the Association of Hungarian Insurance Companies (Mabisz).  Revenues from fees have nominally dropped since 2007.  The pre-tax profit of the insurance companies last year was 79 billion forints, but 40 percent of this was made by one single company, as a result of a special market effect. 

Six insurance companies made a profit of 66 billion forints, which comprises 90 percent of the sector, while the remaining profit was distributed among 25 insurers. Some insurers made a loss. Moreover, the floods and storms of recent weeks (the equivalent of eight times the amount of water in the Balaton in rain) have resulted in equally high record-breaking payouts anticipated to cost the sector 30 billion forints.   

The insurance companies understand that the government wishes to keep to its 3.8 percent deficit and are willing to take on a share of the burden, but they believe they are being asked to pay a disproportionate amount. According to their calculations, insurers cannot take on more than 20 billion of the 200 billion without their businesses being seriously damaged. As the president added: the special tax will force the smaller players in the sector to institute a capital increase. If they do not take such measures, they will be forced to withdraw from the market leaving only the big insurers.    

The Hungarian Banking Association released the following in regard to the ongoing negotiations with the government: the leading bankers proposed a fundamental modification in the present system of conditions to the cabinet, since they maintain that the form of the planned tax would significantly weaken the capital and crediting capacity of the banking system. In their summary they stated that the government's bank tax would have a significantly negative effect on the real economy and hold back economic growth.

But what will happen if the government goes ahead with its plans and, in one way or another, the financial sector is forced to pay 200 billion to the state treasury? According to experts, there are enough loopholes to allow the banks to pass on part of the extra costs to their clients. The code of ethics offers no protection to this as financial institutions can one-sidedly modify interest rates, for example if there is a change in the legal, regulatory circumstances, a rise in bank tax would fit into this category. The increased costs could be presented as an increase in credit and mortgage installment payments, or a raising of the fees and commissions related to certain banking services such as account management, bank card use or currency exchange.     

However, the Hungarian bank tax is not a unique phenomenon: the whole of Europe is desperately seeking solutions. The member states and leaders of the European Union agreed in the middle of the week that the banks must take on a share of the burden for the economic crisis; thus, the member states will levy taxes on financial institutions.

A revenue will also be introduced to facilitate the future managing of risks that may arise within the banking system. Moreover, the member states will - by the second half of next month at the latest - be announcing the results of a stress test designed to examine the capacity of banks to pay and their resistance.  So, finally it will emerge who the weakest banks in Europe are.