Italian Government Imposes Surprise Windfall Tax on Banks, Shares Plummet

The Italian government has passed a one-off 40% tax on the profits banks earn from higher interest rates, resulting in a shock move that has seen shares plummet. The tax will be applied to the net interest income that comes from the gap between the banks’ lending and deposit rates. The proceeds generated from this tax will be used to assist mortgage holders and cut taxes, according to the government.

The decision to impose this windfall tax was made during a cabinet meeting led by Prime Minister Giorgia Meloni’s ministers. The government aims to invest the funds raised into supporting households and businesses struggling with the cost of borrowing. Deputy Prime Minister Matteo Salvini highlighted that the first-half profits of banks were in the billions, indicating the need to address their unfair behavior.

Foreign Minister Antonio Tajani defended the move by stating that the measure is not against the banks, but rather a measure to protect families and individuals struggling to pay mortgages. The intention of the windfall tax is to ensure a fair distribution of profits and provide support to those affected by higher interest rates.

It is estimated that the windfall tax will generate approximately €2bn (£1.7bn), which will be allocated for assistance to families impacted by the increased interest rates. The tax decree now requires approval from Italy’s parliament within the next 60 days to become law.

Following the announcement, shares in Italy’s two largest banks, Intesa Sanpaolo and UniCredit, dropped by 8% and 6.5% respectively. Banco BPM, the country’s third-largest bank, saw an 8.2% decline in its shares, while the state-owned Monte dei Paschi di Siena experienced a dip of 7.4%. Other banks, including BPER Banca, Banca Generali, and Mediobanca, also witnessed a decline in their shares.

Notably, Hungary and Spain have previously imposed similar windfall taxes on banks. A windfall tax is a levy imposed by a government on companies that have benefited from something they were not responsible for, often referred to as a windfall.

The imposition of this windfall tax on banks demonstrates the Italian government’s commitment to addressing unfair behavior and ensuring a fair distribution of profits. While it aims to support households and businesses struggling with borrowing costs, the impact on the banking sector, as evidenced by the significant drop in share prices, should be closely monitored. Investors and market participants should assess the potential consequences on the overall financial stability of the Italian banking industry.