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Italian bank shares experienced a rebound on Wednesday following the government’s efforts to alleviate market tensions caused by its unexpected imposition of a windfall levy on the sector.
The finance ministry announced that the tax on net interest income would be capped at 0.1% of the bank’s total assets. According to analysts at Jefferies, this cap would significantly reduce the impact of the measure, reducing the total levy collection from €4.5 billion to €2.5 billion or less.
Shares in Italy’s two largest banks, Intesa Sanpaolo and UniCredit, increased by 2.8% and 4.4% respectively by mid-afternoon, although they remained below last week’s levels.
Government officials engaged in frantic discussions with furious bankers on Tuesday to find a solution that could partially calm market jitters after the banks experienced a €10 billion loss in market capitalization.
The finance ministry announced the cap in the evening, citing the aim of safeguarding the financial stability of lenders. The unexpected windfall tax announcement on Monday triggered a sell-off in bank stocks, resulting in major Italian banks experiencing losses of between 5.9% and 10.8% the following day.
In response to the proposed tax, the finance ministry stated on Tuesday night that banks that had already raised interest rates on savings accounts, as recommended by the Bank of Italy in February, would not be significantly impacted.
Prime Minister Giorgia Meloni broke her silence on Wednesday, posting a video on Facebook criticizing banks for their unfair interest rate margins and their negative impact on the economy. She stated that introducing a tax on these interest rate margins was the only way to intervene.
The government’s approach to the tax was heavily criticized, with Filippo Alloatti, head of financials at Federated Hermes, calling it an “epic fail.” He noted that the government’s press release lacked details regarding how the tax receipts would be utilized.
A leaked document that circulated on Tuesday was followed by an official government statement featuring different numbers and terminology, causing confusion among analysts. The draft text must still be approved by Italy’s parliament.
Following the late-night announcement of the cap on Tuesday, the finance ministry clarified on Wednesday that the limit would be based on total assets and would not consider risk exposure.
The industry welcomed the cap, with a banking executive in Milan expressing shock at the back-and-forth nature of the measure but acknowledging that the government appeared to have taken the negative reaction into account.
If approved by lawmakers, the tax will be applied to the net interest income generated from the difference between banks’ lending and deposit rates.
The imposition of the hasty measure was driven by political pressure on the rightwing coalition led by Prime Minister Giorgia Meloni to provide more assistance to households affected by rising interest rates and inflation.
The move received support from some opposition figures on Tuesday, with Giuseppe Conte, leader of the populist Five Star movement, stating on social media, “Better late than never.” Lawmakers from the centre-left Democratic party also applauded the tax.
According to the government, the threshold for implementing the 40% levy will be based on the difference between net interest income in 2021 and the figure for 2022 or 2023, whichever is higher. Banks will only pay the tax if their net interest income for the selected year exceeds 2021 by a specified percentage, either 5% for 2022 or 10% for 2023.
Alloatti attributed the imposition of the tax to the banks’ own rhetoric on profitability, stating that their constant boasting of record profitability made them an easy target for politicians seeking to replenish state coffers.
Morningstar analyst Johann Scholtz suggested that the most damaging consequence of the tax would be the increased risk premium that investors would demand to compensate for the risk of future government intervention.
Additional reporting by Owen Walker and George Steer in London
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