Italy Treads Fine Line as It Tries to Introduce Windfall Bank Tax

Italy’s government is navigating a narrow path as it tries to impose a special tax on bank profits without spooking markets and discouraging foreign investments.

The surprise move, in which Prime Minister Giorgia Meloni’s populist-leaning administration aims to take some of the profits banks have reaped since interest rates began rising last year, sent bank shares plunging Tuesday. They recouped some on Wednesday after the government capped the amount banks would have to pay. Some analysts estimated the cap cut in half the amount banks could be taxed.

Behind Italy’s decision to levy the one-off tax lies domestic politics and finances. The proceeds from the move are to be used to lower the monthly payments of homeowners with variable rate mortgages and to fund tax cuts. Real estate group Tecnocasa estimates that almost 75% of Italian mortgages taken out in the first half of the year have a fixed rate, limiting the impact of the potential mortgage relief.

The tax gives Meloni and her deputy Matteo Salvini, the government’s most vocal supporter of the special bank tax, ammunition to try to increase their appeal to lower-income voters who stand to benefit from the measures. The government has come under criticism from opposition politicians and labor unions for its decision in May to scrap a program that doled out payments to lower-income people.

While Meloni doesn’t have to face a national election for four years, next year’s elections for the European Parliament would be an important test of her popularity two years into her term as Italy’s first female leader. While opinion polls show her far ahead, Italian voters can be fickle and have often quickly turned on politicians who were popular while in opposition and then stumbled when they gained power.

The European election will be key also for Salvini, who appeared to be positioned to become prime minister a few years ago but has since seen his popularity plunge. While he has embraced the role as Meloni’s junior partner, he has been angling for issues that he can use to try to boost his poll numbers.

Economists warn that while windfall taxes such as the one Italy is planning can quickly inject money into the state’s pocket, in the long run they can erode investor confidence and lead to higher borrowing costs for consumers and businesses. 

“The damage far exceeds the short-term benefit of some extra cash,” said Lorenzo Codogno, founder of consulting firm LC Macro Advisors and a former official at the Italian Treasury. “But decisions are driven more by the need for near-term political consensus than long-term economic health considerations.”

The government has said it is intervening to protect individual savers who have suffered from higher interest rates on their mortgages and in other ways but haven’t benefited like the banks have.

According to Codogno, the potential long-term effects of the new bank tax include lower valuations for bank stocks, Italy being less attractive to investors and a lingering fear that the government could target new sectors said to be too profitable.

The idea of Italy’s new tax is to grab some of the profits banks have made due to rising interest rates that they haven’t extended to their customers. Banks in Italy are now making more than 4% on customer deposits, but most people have bank accounts that pay little or no interest.

Net interest income, the amount that banks make on lending money and the figure that Italy plans to tax, at six of Italy’s largest banks rose 21% in 2022 and could advance another 40% this year, according to Scope Ratings.

“When you make this kind of money, you are going to attract a lot of attention,” said

The bigger effect on Italy could come in the way of eroded investor confidence in the country, according to analysts. Troiano said the retroactive nature of the new tax could spook investors who seek a stable environment to make their bets.

The Italian Banking Association lobbied against the tax, saying that it would lead to less lending to families and businesses.

Last year, Italy raised about €3 billion from a windfall tax on energy companies that benefited from the steep rise in the price of oil and natural gas.

Italy’s new tax on banks follows similar moves by Spain and other countries and could have negative knock-on effects on banks based in other European countries, according to Berenberg analysts.

“A precedent is beginning to be set, which could result in other countries imposing bank taxes or levies to claw back some of the profits generated from higher interest rates,” Berenberg analysts wrote in a note to clients.

Write to Eric Sylvers at [email protected] and Patricia Kowsmann at [email protected]