The excess profit tax for Italian banks is coming

The excess profit tax for Italian banks is coming

The Italian government has approved a tax on banks’ “billion-dollar excess profits”. With this newly introduced 40 percent tax, the government hopes to take “a few billion” euros in order to relieve the burden on citizens, said Italy’s Deputy Prime Minister and Lega boss Matteo Salvini on Monday evening after a cabinet meeting. The measure initially only applies to the year 2023.

The deputy prime minister explained that the European Central Bank’s (ECB) rate hikes had boosted bank profits – and at the same time increased the cost of borrowing for households and companies. The new measure aims to support families and businesses that have been hit hard by inflation and interest rate hikes. The revenue from the new tax will be used to support mortgage borrowers and lower other taxes.

Salvini: gap between interest rates on loans and deposits

The right-wing government of Prime Minister Giorgia Meloni wants to use the tax to skim off profits that financial institutions bring in with the help of interest rate developments. The government had criticized the gap in interest rates for loans and interest rates for savings in favor of the banks.

“Let’s just look at the banks’ profits for the first half of 2023 to understand that we are not talking about a few million, but can assume a few billion,” said Salvini. Media reports estimate the revenue from the tax at between two and 3.5 billion euros.

Italian banks are currently making big profits due to high interest rates on loans. Italy’s largest bank, Intesa Sanpaolo, had increased its net profit by 80 percent to 4.2 billion euros in the first half of the year and expects income of more than 13.5 billion euros from interest margins this year. Unicredit achieved a profit of 4.4 billion euros in the first half of the year.

The Milan skyline with the headquarters of Unicredit and to the left the skyscraper of Intesa Sanpaolo.

come the excess profit tax in other countries?

“The tax that Italy imposed on the banks’ alleged excess profits came as a surprise and should raise fears that other countries could follow Italy’s example,” said Stuart Cole, chief economist at Equiti Capital, of the measure. Other countries such as Spain and Hungary have already introduced a profit tax for the banking sector.

Analysts at Bank of America estimated that the new tax could cost banks between 2% and 9% of their earnings. Other estimates assume up to 30 percent lower results.

News that rating agency Moody’s yesterday downgraded the credit ratings of ten US financial institutions by one notch was also seen as negative for the banking sector. “The news from the USA only adds salt to the soup and of course doesn’t help the mood either,” said Stephane Ekolo, equity strategist at Tradition.

Bank rates collapse

In response, the share prices of many Italian banks collapsed on the Milan stock exchange. Shortly after the start of trading, Intesa Sanpaolo lost 7.7 percent, Unicredit 6.2 percent and Monte dei Paschi di Siena 7.3 percent.

In Germany, too, the news weighed on the prices of local banks. Deutsche Bank’s shares fell more than three percent, Commerzbank shares lost more than 3.5 percent.

Action not on the agenda

According to information from the AFP news agency, the legal regulation is to be drawn up by June 2024; The annual financial statements of the banks from 2022 and 2023 should be affected. The 40 percent should be levied on the net profit of a financial institution that was achieved with interest. The tax should not be higher than 25 percent of a bank’s net assets.

Italy’s economy is weakening and is at the bottom end in an EU comparison; in the second quarter, gross domestic product shrank by 0.3 percent. The Italian government of Prime Minister Meloni therefore passed an extensive package with a number of economic measures yesterday. However, the introduction of an excess profit tax for banks in the last meeting before the summer break came as a surprise to many observers. The measure was not previously on the agenda of the cabinet meeting.

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