Italy backtracks with cap on windfall tax after bank shares slide

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Italy said late on Tuesday it would limit the impact of its planned windfall tax on banks to ensure financial stability, in an apparent partial backtrack after the surprise levy plan caused bank shares to drop sharply.

The finance ministry said in a statement that the tax on net interest income would be capped at 0.1 per cent of risk-weighted assets, a fifth of the level that Citi analysts had earlier estimated the levy could reach.

A person with knowledge of discussions within government said the finance ministry had “scrambled” to come up with a solution that would at least “partially calm market jitters”.

The finance ministry said the cap was “aimed at safeguarding lenders’ financial stability”.

One banking source in Milan said the limit would make the levy “much more manageable” and would raise an estimated €1.8bn, in contrast with estimates of more than €4.5bn issued by analysts at Jefferies and Equita earlier on Tuesday.

An initial draft text setting out details of the tax, leaked after the measure was approved, had said the levy would be capped at 25 per cent of banks’ net assets, but a later official version on Tuesday afternoon failed to mention any cap, adding to the confusion.

Markets had reacted with shock, sending shares in major Italian lenders down by between 5.9 and 10.8 per cent by the time trading ended on Tuesday.

The finance ministry added on Tuesday evening that banks that had already adjusted their deposit rates “as recommended in a note by the Bank of Italy in February” would not see any meaningful impact from the proposed tax.

A banking executive in Milan said “the ping-pong was shocking” but added it signalled that the government had taken on board negative reaction.

The tax, approved in a cabinet meeting late on Monday, still needs to secure parliamentary approval. If it proceeds, it will be applied to the net interest income generated from the gap between banks’ lending and deposit rates.

The apparently hasty measure followed political pressure on Giorgia Meloni’s rightwing coalition to do more to help households hit by rising rates and inflation. Her administration had previously criticised banks that failed to pass on interest rate rises to small savers.

The move won some opposition support on Tuesday: the leader of the populist Five Star movement Giuseppe Conte said on social media: “Better late than never.”

The government said earlier on Tuesday that the threshold for imposing the 40 per cent levy would be based on the difference between net interest income in 2021 and the figure for 2022 or 2023, whichever was larger. Banks would pay the tax once their net interest income for the selected year exceeded 2021 by either 5 or 10 per cent.