The Italian government "suddenly" taxes banks with 40%

Italy's right-wing coalition has surprised financial markets by announcing a "sudden" 40 percent tax on bank profits generated by higher interest rates, sending shares of the country's lenders tumbling.

Shares in Intesa Sanpaolo and UniCredit, the country's two biggest banks, fell 8 percent and 6.5 percent respectively after Italy announced the tax on Monday night, saying it would use 2 billion euros to fund financial relief for households. hit by higher interest rates.

Prime Minister Giorgia Meloni's government has been critical of banks for failing to pass on interest rate hikes to small savers, even as they raise lending rates.

The 40 percent tax, along with a host of other last-minute measures, will apply to net interest income generated by the difference between banks' lending and deposit rates.

The European Central Bank has increased rates by 4.25 percentage points since last summer, increasing the base deposit rate from minus 0.5 percent to 3.75 percent.

The one-off tax, due by the end of June 2024, will only apply if a bank's net interest income in 2022 exceeds the level recorded in 2021. The measure must secure parliamentary approval within 60 days , to enter into force.

However, there was uncertainty about the exact specifications of the tax. Some banking analysts calculated that it could raise much more than the official estimate of 2 billion euros.

Adding to the uncertainty and signaling a fracture in the ruling coalition, Finance Minister Giancarlo Giorgetti did not attend the cabinet meeting.

Italy's five largest banks have reported total profits of 10.5 billion euros in the first half of 2023, 64 percent more than a year ago, according to rating agency DBRS Morningstar. Performance was boosted by higher net interest, resilient net charges and strong cost control.

Banks are likely to resist the retroactive measure, resulting in bitter battles as the government tries to secure parliamentary support, analysts said.

Matteo Salvini, the deputy prime minister, told a press conference that the tax was "logical". The money raised will fund measures such as tax cuts and mortgage subsidies for first-time home buyers, he said, aimed at helping families and businesses hit by rising interest rates.

Italy's foreign minister, Antonio Tajani, called on the ECB last month to stop raising interest rates, saying the higher rates were burdening borrowers while failing to curb inflation.

Almost 1 million Italian households defaulted on loan and mortgage payments in March, totaling 14.9 billion euros, as rising interest rates strained household finances, according to national bankers' association Fabi.

Fabi said borrowers who took out a 30-year, variable-rate mortgage in 2021 had their monthly payments doubled.

Italy's move echoes the Spanish government's decision last year to impose a surprise tax on bank profits to fund government initiatives to help consumers hit by the cost of living crisis. / The Financial Times