Italy dealt a surprise blow to its banks and shook Europe’s banking sector after it decided late on Monday to impose a one-off tax of 40% on bank profits made by raising interest rates, after chiding lenders for not rewarding deposits , Reuters and News.ro report.

Shares in European banks fell on Tuesday after Italy imposed a 40% tax on bank profits from 2023, a surprise move that risks dampening investor appetite for eurozone assets.

Sharply raised official interest rates have brought record profits to banks as the cost of borrowing has risen, while lenders have refrained from rewarding customers more for deposits.

Countries such as Spain and Hungary have already introduced income taxes in this sector, and other countries may follow suit.

The Italian government has said it wants to use the proceeds to help those struggling with the cost of living, such as mortgage holders.

A surprise even for some members of the Government

The government of Italian Prime Minister Giorgia Maloni floated the idea earlier this year, but then appears to have abandoned the plan. Since then, however, the banks’ poor performance in the first half of the year has brought the issue back into the spotlight and prompted the government to act just before the summer political break.

A government source said the move came as a surprise even to some ministers at a cabinet meeting on Monday evening. A second source said the government intends to “punish banks for misconduct.”

Lenders in Italy passed on an average of just 12% of rate hikes to depositors, compared with 22% in the eurozone, Jefferies estimated.

“We only have to look at the profits of the banks for the first half of the year to understand that it is not just a few million, but billions,” Deputy Prime Minister Matteo Salvini said at a press conference held in Rome late on Monday. . “If (it’s true that) the cost-of-money burden has doubled for households and businesses, what current account holders get certainly hasn’t doubled,” Salvini said.

What is the Italian government counting on?

Italy will apply the tax from 2023 and banks will pay the amounts until June 30, 2024. This measure is applied to net interest margin (NIM), a measure of income derived from the difference between lending rates and deposit rates. Italy will tax 40% of the net stamp duty earned in 2022 or 2023, whichever is higher, with annual increases above thresholds set at no less than 5% for 2022 and 10% for 2023. According to the original draft, the thresholds were 3% and 6%.

Late last month, Intesa said it expects to generate more than €13.5 billion this year from its NIM alone.

All of Italy’s major lenders reported much better-than-expected results for the first six months and improved their profit forecasts thanks to higher rates.

Unlike their counterparts in several other European countries, Italian banks have never charged deposit fees when official rates fell below zero. As rates rose, they cut the value of current accounts but refused to reward cash held in them, saying the money was for everyday use, not investment.

Based on preliminary estimates, analysts at Citi estimated that the tax could wipe out almost a fifth of Italian banks’ net profits in 2023, while Bank of America put the government’s revenue at 2-3 billion euros.

Sources said that the Italian treasury expects to receive up to 3 billion euros from the measure. This amount will be similar to the €2.8 billion raised in a similar way from a tax on excess profits introduced this year for energy companies.

Italian banks have grown by 50% in the past year, outpacing the 20% growth in the European sector.

result

As a result of the decision taken by the government in Rome on Monday evening, Italy’s bank share index fell by 7.7% by 12.12 GMT (15.12 Romanian time) on Tuesday, with sector leader Intesa Sanpaolo down 8.4% and rival UniCredit by 7%.

A one-off tax on profits that Italian banks receive from rising interest rates has sent tremors through the banking sector. Italian banks also sent the European index (.SX7E) down 3.3% as Moody’s downgraded some US banks. The indicator was about to register its biggest daily drop since the turmoil in the banking sector in March, when the Credit Suisse bank collapsed, writes Reuters.

“These government interventions in Europe are not helping to provide the stability needed to lower the risk premium associated with the Eurozone. It’s not just an Italian thing, Spain did the same thing last year,” said Gilles Guibou, head of equity strategies at Axa Investment Managers in Paris.

The fallout also hit other banks in the currency bloc, including Deutsche Bank and Commerzbank in Germany, BNP Paribas and Credit Agricole in France, and Spanish lenders such as Santander. All of their shares are down more than 4%.

The euro fell 0.5% on Tuesday as the derivatives market showed a measure of credit risk in the eurozone banking system posted its biggest one-day rise since mid-July.

The news that Moody’s downgraded the credit ratings of 10 American banks by one notch on Monday is also seen as negative for the sector.

“It’s about the capital gains tax, without a shadow of a doubt, the news from the US just adds salt to the wound and obviously doesn’t help,” said Stefan Ecolo, equity strategist at Tradition.