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Italy Shocks Banking Sector with 40% Tax on Profits
In an unexpected move, Italy has taken a bold step that reverberated through the European banking sector by announcing a one-time tax of 40% on profits generated from surging interest rates. The decision comes on the heels of Italian authorities reprimanding financial institutions for their failure to adequately reward depositors. This move follows similar actions by countries like Spain and Hungary, potentially setting a trend across the continent.
The recent surge in official interest rates has translated into record profits for banks, as the expense of loans escalated while these institutions refrained from offering substantial returns on deposits. Although Italian Prime Minister Giorgia Meloni’s government initially seemed to have cooled on the notion, the resurgence of robust first-half financial results prompted them to readdress the proposal just before the summer political hiatus.
The unexpected announcement took even some government ministers by surprise during a cabinet meeting. An undisclosed government source disclosed that the measure aims to penalize what they consider to be unjust behavior by banks. In Italy, banks have distributed an average of 12% of rate increases to depositors, compared to the euro area’s 22%, as calculated by Jefferies, a financial services company.
The tax, applicable only in 2023, targets the net interest margin (NIM), representing the income derived from the difference between lending and deposit rates. Specifically, 40% of the NIM earned in 2022 or 2023 whichever amount is larger will be taxed, focusing on annual increments exceeding predetermined thresholds, now set at no less than 5% for 2022 and 10% for 2023.
As news of the tax spread, Italy’s banking share index plummeted 7.7%, sending ripples through the European sector. Intesa Sanpaolo, the leading bank in the sector, saw an 8.4% drop in its shares, while its competitor, UniCredit, experienced a 7% decline. Moody’s downgrade of some U.S. banks added to the pressure on the European index, which fell 3.3%. The government’s intention is to allocate the tax proceeds to aid those grappling with the escalating cost of living, including mortgage holders.
While the Treasury foresees collecting less than 3 billion euros from this measure, estimates suggest the tax could impact Italian banks’ 2023 net income by nearly 20%, according to Citi analysts. The government, meanwhile, is expected to reap between 2-3 billion euros, a figure similar to this year’s windfall tax on energy companies. The banking community, which experienced a surge of more than 50% over the past year, is now facing uncertainties as they prepare to comply with this unforeseen financial burden.