The Irish Banking Federation is looking at whether the Governments's application of the bank levy and the Dirt tax on deposits breach EU state aid rules.

Speaking at its annual conference in Dublin today, IBF president John Reynolds said there was "considerable concern and disappointment" in the sector at the Government's €150 million bank levy, announced in last month's budget, and its plan to increase the Dirt rate of tax on savings to 41 per cent.

"Why is it that the same level of Dirt is not consistently applied across the deposit product range provided by An Post and the credit unions?" Mr Reynolds asked. "And why is it, as deposit takers, that those same institutions are not covered by the levy? We believe that such questions raise issues of possible state aid under the EU legislation and we are closely examining these."

He said the levy would undermine banks’ efforts to “rebuild their retail deposit base as a main source of funding again”.

Mr Reynolds said the sector here would be shaped by the new framework for banking regulation in the EU. “The outcome of the asset quality review and the EBA [European Banking Authority] stress tests to follow will be a defining moment for many banks,” he added.

He said there were signs of "strengthening" in mortgage activity in Ireland with 4,482 new home loans valued at €750 million drawn down in the third quarter. This represented a rise of 12.5 per cent year on year.

Mr Reynolds said Irish banks were “committed” to tackling legacy SME debt to help these companies become viable again. The IBF has drafted a new protocol to assist multi-banked SMEs in financial difficulty.

This will allow them to communicate with their lenders on a “collective basis” to try and resolve their debt issues. This protocol will take effect on January 2nd.

“We look forward to its having a beneficial impact on the bank/SME relationship.”