The European Central Bank has warned the Slovenian government that a temporary tax on bank total assets designed to finance post-flood reconstruction could be potentially damaging for the banking sector and the economy as a whole.

In an opinion issued at the request of the Slovenian Finance Ministry, it says that unlike other member states, Slovenia would not levy the tax on net interest income or a value related to the interest margin, but by taking the entire balance sheet into account.

"Caution must be taken so that such tax base does not incentivise credit institutions to contract their balance sheet by reducing their lending activity beyond that which would be warranted from a monetary policy perspective.

"To this end, the ECB notes that a reduction in lending volumes has already been observed in Slovenia, and the introduction of the additional tax could further inhibit lending activity," the opening reads.

According to the ECB, inhibited crediting could make lending conditions worse for bank clients, whereas higher costs and lower supply of credit could have a negative impact on real GDP growth.

A similar warning was issued by ECB vice-president Luis de Guindos, who told the newspaper Finance in an interview run on 9 November that the ECB was not in favour of such taxes.

The Slovenian Bank Association has likewise been warning that a tax on total assets would have a negative impact on crediting as well as the resilience and competitiveness of the bank system.

Stanislava Zadravec Caprirolo, the association's president, told the newspaper Delo that the tax would be significantly higher than in some other countries, and unlike in some other countries, it would not be a one-off tax.

According to the Finance Ministry proposal, Slovenia would levy a 0.2% tax on bank total assets for five years, whereby certain ceilings are set benefiting large banks in particular.

Zadravec Caprirolo said the Slovenian proposal was significantly worse for investors and shareholders because it would affect the availability and price of capital, and lead to a contraction of credit activity.

In response to the concerns raised, the Slovenian Finance Ministry said the ECB did not oppose the planned tax but advised caution, "which is its role and had been expected".

The ministry said that in drawing up the proposal it had taken into account recommendations that the ECB had issued in similar cases - the dedicated purpose and temporary nature of the tax, surplus buffers and mechanisms to safeguard financial stability.

According to most recent available data from the central bank, banks in Slovenia made a net profit of €650 million in the first eight months of the year, more than double what they made in the same period a year ago.

The country's leading banking group, NLB reported a net profit of €387 million for the first nine months of the year, up 2% year-on-year.

As part of the post-flood reconstruction efforts, the government is also planning a temporary increase in corporate income tax, from 19% to 21% in 2025 and by an additional percentage point until 2028. Businesses have been vocally protesting against the proposal.