Italian Bank stocks experienced a significant drop on Tuesday following the approval of a proposal by the Italian Cabinet to implement a 40% tax on certain bank profits. The tax is intended to assist consumers and businesses in coping with higher borrowing costs resulting from interest rate hikes by the European Central Bank (ECB). The ECB has been increasing interest rates as a means to combat inflation, which has made it more expensive for individuals to obtain loans for purchasing homes and cars, as well as for companies to acquire new equipment or construct facilities.
Shares of UniCredit closed nearly 6% lower, while Intesa Sanpaolo fell over 8.5%, Banco BPM dropped 9%, and both BPER and Banca MPS experienced declines of almost 11% on the Milan Stock Exchange. The Italian finance ministry defended the tax after markets closed, stating that it is in line with existing rules on extra bank margins in Europe. Furthermore, the ministry explained that the contribution from the new tax cannot exceed 0.1% of total bank assets.
The Association of Italian Banks has yet to publicly comment on the tax, which appears to have caught banks off guard. Analysts predict that banks will likely seek to modify or challenge the proposal in court if it is passed by Parliament. The five major Italian banks collectively reported a net profit of approximately €10.5 billion ($11.5 billion) in the first half of the year, representing a 64% increase compared to the same period in 2021.
The proposed 40% tax would be applicable to banks’ profits derived from the difference between the interest paid to customers on deposits and the interest earned on loans. Transport Minister Matteo Salvini, who announced the tax, stated that the tax revenue would fund tax breaks and assist first-time homeowners in obtaining mortgages. The proposal must now undergo conversion into legislation and be approved by the Italian Parliament, where the right-wing government holds a comfortable majority. The decline in Italian bank shares also had a broader impact on major banks in European markets, including Deutsche Bank, BNP Paribas, Societe Generale, HSBC, and Banco Santander.
The European Central Bank has implemented nine consecutive interest rate hikes to combat inflation triggered by higher energy prices following Russia’s invasion of Ukraine and supply chain disruptions caused by the global economic recovery from the COVID-19 pandemic. The bank tax was the final measure announced by the Italian Cabinet in its last meeting before the start of a summer break. Other measures included ending the mandatory isolation period for COVID-19 cases and increasing the number of taxi licenses in order to meet the growing demand caused by the tourism boom and upcoming events in Italy.
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