UPDATE 2-Slovak government plan to double and extend bank tax riles central bank

(Adds banking association, finance minister, graphics, details)

BRATISLAVA, Nov 6 (Reuters) - Slovakia’s government on Wednesday approved a bill to double a special tax on banks and extend it indefinitely instead of ending the levy next year, moves the central bank said would threaten financial stability. The banking tax was adopted in 2012 to build a buffer against potential future crises and scheduled to expire at the end of 2020.

The new plan to maintain and raise the tax -- imposed on banks’ liabilities after subtracting basic capital -- to 0.4% riled National Bank governor Peter Kazimir, who himself led the finance ministry until moving to the central bank in June.

“Today’s government decision increases risks to the financial stability of the banking sector, both in terms of the rate and the continuation of the tax,” he said.

“Amid long-term low interest rates...doubling this rate would mean that almost 30 percent of banks’ net profit will go towards the tax,” he added.

The three-party government coalition, heading into an election in February, is looking to shore up revenue to keep the fiscal balance under control after scrapping plans to balance public finances this year because of a slowing economy.

The main ruling party on Tuesday proposed the tax hike in reaction to what it called the “outrageous profits and rising fees” of the country’s banks, mostly foreign-owned.

The proposed bill is expected to raise an additional 130 million euros next year. To take effect, it must now be approved by parliament.

The levy, which is separate from the standard corporate tax that banks also pay, is currently held in a special fund for use in future financial crises, but the new bill would also allow proceeds to fund state corporations.

“The bill will help the government meet its goal to cut the public finance deficit after parliament recently approved measures that increase spending,” Finance Minister Ladislav Kamenicky said.

The ruling coalition has lost its majority but is still expected to be able to successfully pass the measure.

Slovakia’s banks, including KBC Group’s CSOB, Erste Group Bank’s Slovenska Sporitelna, Raiffeisen’s Tatra Banka and Intesa Sanpaolo’s VUB, saw their combined profit in the first nine months of 2019 drop 4.2% to 497 million euros.

Since 2015, banks have also contributed to the European Single Resolution Fund aimed at boosting banking sector resilience, making Slovakia the only EU country where banks pay twice for the same thing, the country’s banking association said.

“The European Central Bank’s easy monetary policy together with growing capital adequacy requirements on banks will lead to their inability to fund the country’s economy, especially the corporate sector,” it added.

Reporting by Tatiana Jancarikova Editing by Jan Lopatka and Kirsten Donovan Graphic by Jason Hovet