Italy reduces bank windfall tax

Italy has further diluted its windfall tax for banks by adding a clause that gives lenders the option of paying the levy instead. This is a concession made to critics, including the European Central Bank.

Giorgia Melons, the Italian prime minister, recently said that she would not scrap the tax, but was open to changes. She said she accepted full responsibility for the widely criticized tax, which sent the bank shares plummeting last month.

According to a draft, the amendment would allow Italian banks to use their gains from an increased net interest margin to boost underlying reserves rather than paying a one off tax.

Before the changes, it was expected that the levy would raise approximately €3bn. Parliament is expected to approve the provisions this week.

The ECB offered an escape clause for lenders less than two weeks ago, after Rome was urged to reassess windfall tax. It warned that this could make Italy’s banking system more vulnerable to a recession.

Taxes also caused tensions in Meloni’s coalition of three parties, especially Forza Italia – the junior partner that was previously led by Silvio Berlusconi.

Marina Berlusconi’s daughter, the former Premier, has publicly criticised this tax during a recent meeting of Confindustria, an influential business lobby.

Berlusconi said, “I dislike the term ‘extra profit’. I find it misleading, and demagogic.” His family holding company Fininvest owns a 30% stake in Italian asset manager Mediolanum which would have been affected by the tax.

She asked, “Who decides when a gain is extra or normal?” If it’s ‘extra,’ how much is it?

Matteo Salvini, the deputy prime minister of Italy, shocked international markets by announcing late at night that Rome planned to impose a windfall tax on profits derived from a surge of banks’ net-interest margins when the ECB began a tightening interest rate cycle.

Meloni’s government had repeatedly complained that banks were increasing their lending rates, but refusing to increase the deposit rates of savers. This led to a higher net profit margin and higher net interest rates.

The morning following the announcement, bank stocks fell by nearly 10%. However, they recovered some of their losses on the next day after the Finance Ministry clarified that this tax would not exceed 0.1 percent of the banks’ total assets.

According to the latest amendments, lenders can opt out of paying the tax by allocating 2.5 times what they would have owed if the tax had been in place. This amount will go towards strengthening their core Tier 1 capital reserves. The tax is also capped at 0.26 percent of risk-weighted assets of banks instead of the previous 0.1 percent of total assets.

The new Forza Italia leader, Antonio Tajani (former foreign minister), praised these changes and said that they would protect savers, calm the international markets, and improve the measures.