Italy has stunned its banks and sent shockwaves across the European banking sector by announcing a one-off tax of 40% on profits earned by banks from higher interest rates. This move comes after the government criticized lenders for failing to provide adequate returns on deposits. The recent surge in official interest rates has led to record profits for banks, while they have refrained from increasing their deposit rates. Countries such as Spain and Hungary have already implemented windfall taxes on banks, and it is possible that other countries may follow suit.
Prime Minister Giorgia Meloni’s administration had previously considered the idea of a tax, but appeared to have backed away from it. However, bumper first-half results from banks reignited the issue, prompting the government to take action. The unexpected move surprised some ministers during a cabinet meeting on Monday. The government aims to penalize what it sees as banks’ unfair behavior.
Italian banks have only passed on an average of 12% of the rise in interest rates to depositors, compared to 22% in the eurozone. Deputy Prime Minister Matteo Salvini addressed this issue, emphasizing that banks have earned billions in profits while the benefits to current account holders have not followed suit. The Italian banking share index plummeted 7.2% following the announcement, with leading banks Intesa Sanpaolo and UniCredit experiencing significant declines.
The government intends to utilize the proceeds from the tax to assist those struggling with the rising cost of living, including mortgage holders. Analysts at Citi estimate that the tax could reduce Italian banks’ net income by nearly 20% in 2023. Bank of America predicts that the government will collect between 2-3 billion euros from the tax. The tax will be applicable only in 2023, with banks required to make the payments by June 30, 2024. It will target the net interest margin (NIM), which is the income earned from the difference between lending and deposit rates. The tax will cover 40% of the NIM earned in either 2022 or 2023, depending on which amount is higher, with thresholds set at a minimum increase of 3% for 2022 and 6% for 2023.
Italian banks have consistently refrained from charging for deposits even when official rates fell to negative levels. While they have reduced current account costs, they have not rewarded cash held in those accounts, arguing that such funds are meant for daily usage rather than investment purposes.