Italy Imposes 40% Tax on Bank Profits from Higher Interest Rates

Italy has surprised its banks and sent shockwaves across the European banking sector by announcing a one-off 40% tax on profits generated from higher interest rates. The move comes as banks have recorded record profits due to the soaring cost of loans. Italy’s decision follows in the footsteps of countries like Spain and Hungary that have already imposed windfall taxes on the banking sector.

Italian Prime Minister Giorgia Meloni’s government had previously floated the idea earlier this year but seemed to have backed away from it. However, the government recently acted on the issue after strong first-half results from banks brought it back into focus. Some ministers were reportedly surprised by the decision at Monday night’s cabinet meeting.

European bank shares took a hit following the announcement, with Italy’s two largest lenders, Intesa Sanpaolo and UniCredit, experiencing significant losses. Banking analysts from Citi estimated that the tax could reduce Italian banks’ earnings by up to 12% in 2023. Bank of America estimated that the government could collect between 2-3 billion euros ($2.2bn-$3.3bn) from the tax.

The tax will be applied in 2023, with banks required to pay the sums by June 30, 2024. It will target the net interest margin (NIM), which measures the income generated from the difference between lending and deposit rates. Banks will be taxed on 40% of the NIM earned in either 2022 or 2023, depending on which sum is larger. The tax will specifically focus on the yearly increase above predetermined thresholds of at least 5% for 2022 and 10% for 2023.

Italy’s decision to impose the tax reflects its dissatisfaction with banks’ failure to reward deposit holders despite the increasing cost of money for households and businesses. Italian banks have cut current account costs but have not provided incentives for deposit holders, arguing that such funds are for day-to-day use rather than long-term investment.