Taxing Times for Banking: Italy’s Surprise Move to Apply 40% Tax
Italy Imposes 40% Tax on Banks’ Profits from Higher Interest Rates
Italy has taken an unexpected step by instituting a 40% tax on banks’ profits stemming from increased interest rates and their failure to adequately compensate depositors, according to CNN.
The record-high interest rates have led to substantial profits for banks, as the surge in loan costs was not accompanied by equivalent increases in deposit payments.
The Italian government’s decision had a notable impact on European bank shares, causing a 4.5% drop in the Eurozone bank index, marking its largest daily decline since the sector’s turmoil in March following the collapse of Credit Suisse.
While the Italian Prime Minister Giorgia Meloni’s administration had initially proposed the tax earlier this year and seemingly abandoned the idea, the banks’ robust first-half results brought the issue back to the forefront. The government took action on the eve of the summer political shutdown.
Major Italian banks reported strong financial performance for the first six months, resulting in improved profit forecasts due to the elevated interest rates.
Jefferies, a financial services company, noted that Italian banks have passed on an average of 12% of the interest rate increase to depositors, in contrast to the 22% in the broader euro area.
Deputy Prime Minister Matteo Salvini emphasized the significant magnitude of banks’ first-half profits, stressing that the impact of the tax spans from millions to billions.
Following the announcement, Italy’s banking share index fell by 7.7%, with sector leaders Intesa Sanpaolo dropping by 8.4% and UniCredit plunging by 7%.
Gilles Guibout, Head of Equity Strategies at Axa Investment Managers in Paris, commented that such government interventions in Europe undermine stability and contribute to maintaining higher risk premiums in the eurozone.
Bank of America’s estimates, cited by CNN, indicate that the tax could cost Italian banks between 2% and 9% of their profits.
Italy’s deputy prime minister stated that the windfall tax will be used to support mortgage holders and reduce taxes.
Italy’s move follows similar steps taken by other European countries. Spain approved a temporary bank levy in December of the previous year, aiming to raise 3 billion euros by 2024 to alleviate cost of living pressures.
