Italy imposes 40% windfall tax on banks in 2023.
Italy imposes 40% windfall tax on banks in 2023.
Italy Surprises Banks with 40% Tax on Profits, Sending Shockwaves
/cloudfront-us-east-2.images.arcpublishing.com/reuters/KUQ4TMIPB5K4LF2UPSVWPDYJNY.jpg)
Italy has dealt a surprising blow to its banks and sent shockwaves across the European banking sector by announcing a one-off 40% tax on profits earned from higher interest rates. This follows the government’s reprimand of lenders for failing to reward deposits. The move came as a surprise, even to some ministers at the recent cabinet meeting.
The higher official interest rates have resulted in record profits for banks, with the cost of loans soaring while banks hold back on paying more interest on deposits. Countries such as Spain and Hungary have already imposed windfall taxes on the sector, and it is possible that other countries may follow suit in light of Italy’s decision.
Italy’s Prime Minister, Giorgia Meloni, had initially floated the idea earlier in the year but seemed to have cooled on the plan. However, bumper first-half results from banks brought the issue back into focus and prompted the government to take action on the eve of the summer political shutdown.
Deputy Prime Minister Matteo Salvini highlighted the disparity between the rise in the cost of money and what is being received by current account holders, stating that if the burden has doubled for households and businesses, the amount received by account holders has certainly not doubled.
Lenders in Italy have passed on, on average, only 12% of the rise in rates to their depositors, compared to 22% in the euro area, according to calculations by Jefferies. Salvini pointed out that the profits of Italian banks for the first half of the year reach billions, which further highlights the discrepancy between what banks earn and what account holders receive.
- Tesla executive, seen as a potential successor to Elon Musk, has le...
- Delta Reserve Business Card Review 2023
- Top Amex Business Cards – August 2023
The announcement had an immediate impact on the Italian banking share index, which plunged 7.2%, with sector leaders Intesa Sanpaolo and UniCredit experiencing significant drops. This decline also dragged down the European index by 2.8%. Italian banks have seen significant growth of 50% over the past year, outperforming their European counterparts.
The Italian government intends to use the proceeds from the tax to provide assistance to those struggling with the high cost of living, such as mortgage holders.
Windfall for the Treasury
According to Citi analysts, the tax could potentially reduce Italian banks’ net income for 2023 by almost a fifth. Bank of America estimated that the government could raise between 2-3 billion euros from the tax. Sources from the Treasury indicated that they expect to collect less than 3 billion euros from the measure. This estimate is similar to the 2.8 billion euros raised from this year’s windfall tax on energy companies.
The tax will be applicable only in 2023, with banks required to pay the sums by June 30, 2024. The measure specifically targets the net interest margin (NIM), which measures the income derived from the difference between lending and deposit rates.
Italian banks reported much stronger than expected results for the first six months of the year, with all major lenders upgrading their profit outlook due to higher interest rates. Unlike their counterparts in some other European countries, Italian banks did not charge for deposits when official rates fell below zero. Although they have reduced current account costs, they have refused to reward cash held in these accounts, stating that it is meant for day-to-day use and not for investment purposes.
The impact of the tax on Italian banks’ profitability remains to be seen, but its introduction sends a clear message to the banking sector. Italy’s decision to impose the tax serves as a reminder to banks that they must not neglect their depositors while reaping record profits from higher interest rates. The move also raises the question of whether other countries will follow suit and impose similar windfall taxes in the future.
