The proposal has already failed the basic criterion of any new levy — that it should raise more than it costs. The market value of Italian banks fell by more than €10 billion ($11 billion) at one point on Tuesday, compared with the €2 billion the government aims to raise. Though share prices have partially recovered, the financial impact on the banking industry remains uncertain.
The most important clarification needed is to whether a revised cap on the amount levied at 0.1% of a lender’s assets applies just to domestic operations or global balance sheets. This makes a major difference to the bill for the national champions of Intesa Sanpaolo SpA and Unicredit SpA. It’s unclear if lenders that have already raised savings rates by a reasonable amount — or how banks that increase payments on customer savings in the coming months — will be treated. Further details will be needed before the plan is presented to the Italian Parliament for ratification within 60 days.
The motivation for this tax grab is to help households impacted by increase in interest rates. But agreeing forbearance measures directly with Italian lenders such as granting interest-payment holidays and extending mortgage terms would have been simpler — an approach the UK recently adopted rather than increasing its domestic bank levy.
Italian banks are in much better health after major reforms following the euro crisis, but many are only just returning to profitability. The tax won’t imperil any lender’s stability, but it is evidently unfair. It can only hamper future share buybacks and dividend payments. What sort of investment message does it send that any success will be penalized? Banks can engineer reductions in their net interest income using various accounting maneuvers, so even more intensive monitoring of their results is probable.
Parliament is likely to approve the measure; Meloni has a comfortable working majority, and the leading opposition parties are broadly supportive. Hitting the banks is an easy populist target, as interest rates on savings accounts have lagged mortgage increases across the bloc. But it leaves Italian financial institutions hostage to the threat of further unexpected change, not just from regulators but their own government. Italian banks are the largest holders of the country’s debt so the relationship between the state and the financial sector is of paramount importance to avoid any recurrence of the sovereign bank doom loop suffered during the euro crisis.
The move is a major disincentive for investors in the region’s lenders. Bank dividends were already heavily restricted by the regulatory arm of the ECB during the pandemic, but its monetary committee has also been rapidly withdrawing favorable interest-rate facilities for banks. Profit and capital retention will be even more vital as the euro zone has slipped back into recession. Italian banks had been leading a renaissance for euro -area financial institutions this year after many years of underperformance compared with the US banking sector.
That makes this whole exercise a pyrrhic victory for pretty marginal short-term revenue. Investment relies on confidence that the goalposts won’t suddenly be moved to impact on future expected profits. John Bilton, head of global multi-asset strategy at JPMorgan Chase Bank, told Bloomberg TV that the measure raises concern “about the motivations of the Italian economic policy.”
It is unlikely to be a coincidence that this aggressive measure comes after Meloni secured the third tranche of EU pandemic recovery payments from Brussels in late July of €18.5 billion, about half this year’s allotment. Italy is poised to be the biggest beneficiary of the aid, with nearly €200 billion earmarked if it can achieve a series of economic targets that it has struggled to reach. So far it’s been given an easy ride as the political temperature has been kept low by Meloni, but the ECB will not appreciate being blamed. Meloni, on her Facebook page on Wednesday, wrote that the efficacy of the ECB’s policy of raising rates is “questionable.” Deputy Prime Minister Antonio Tajani, explaining the planned banking tax, told Italian newspaper Corriere della Sera that “we have been saying for months the ECB was wrong to raise rates and this is an inevitable consequence.”
Little seems to have been learned from Spain’s experience last year of imposing a temporary bank tax, which triggered a similar 10% slump in the market value of the banking sector. However, the Italian proposal is focused on so-called excess profits rather than overall revenue.
Windfall taxes on banks are not uncommon in the European Union, with Poland and the Baltic states also introducing levies in recent years. The concern for regulators is if access to credit and loan growth suffer as a result; the July ECB Bank Lending Survey showed corporate loan demand dropping by the most on record.
Such taxes are easy to impose but can be politically very hard to retract. Italy’s levy is only designed to apply to net interest income above a certain level for 2023; don’t be surprised if it lasts into 2024 and beyond.
What appears to be a convenient piggy bank for the Italian government to tap could turn out to deliver an expensive hit to stock-market confidence. After 15 years of financial turmoil, rushing to scythe the first tender shoots of banking profitability is not the smartest of moves.
More From Bloomberg Opinion:
• Italy Ruins Beach Time for Bankers: Rachel Sanderson
• Credit Suisse Bankers Can Learn From My Lehman Days: Shuli Ren
• HSBC Is as Good as It Gets For Europeans: Paul J. Davies
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.
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