Italy recently passed a unique measure, a 40 percent income tax, targeting local banks allegedly gaining significant additional income due to soaring interest rates.
The Revenue Will Go to Help Mortgage Holders
The Italian government approved this unexpected tax at a cabinet meeting on Monday night. The government intends to use the revenue to help mortgage holders and reduce taxes. The decision comes in light of the current economic situation, where rising interest rates put additional strain on households.
Analysts estimate that the decision could force banks to collectively bail out the government by up to €4.9 billion (£4.2 billion), leading to a significant drop in bank shares. Shares in one of Italy’s largest banks, Intesa Sanpaolo, were down 8.67% at €2.338 on Tuesday afternoon. Similarly, Unicredit shares were down 5.9% to end trading at €21.28.
This coincides with similar actions taken by Spain last year and comes near an upward revision of profit forecasts for the current year by Intesa Sanpaolo, again raising fears of possible exploitation by major financial institutions.
At a recent press conference in Rome, Matteo Salvini, Italy’s Deputy Prime Minister, highlighted the banks’ significant financial gains in the first half of 2023. Part of these gains can be attributed to the rate adjustments made by the European Central Bank. The magnitude of these gains is substantial and could reach billions.
According to Salvini, if the assertion of an increased burden of cash spending on households and businesses is correct, it is clear that current account holders have yet to experience a similar doubling of benefits. He also highlights the significant divergence between interest rates on loans and deposits.
In recent quarters, there has been a significant increase in bank profits, primarily due to higher interest rates. This favorable trend has allowed banks to increase the fees charged to borrowers on loans and mortgages faster than the increase in deposit yields. The difference, called the net interest margin, is appropriated by lenders and is a critical measure of their profitability.
The Italian government’s proposed measure calls for a 40% tax on net interest margins, which could be imposed in 2023. Payments are expected to be made on the due date of mid-2024.
According to an equity analyst at Jefferies, the sudden introduction of the net interest margin tax was quite a surprise. It is worth noting that Italy’s Minister of Economy and Finance, Giancarlo Giorgetti, had previously expressed skepticism about the concept.
Jefferies estimates that the ten largest listed Italian banks could pay €4.9 billion due to this tax. However, the exact total amount remains uncertain. He noted that there is currently no official version of the law, adding further uncertainty to the potential impact of this determination.
In the UK, which has already implemented two taxes targeting the banking sector, it is not anticipated that comparable actions will be taken. In contrast, the focus has shifted towards banks that provide subpar savings rates, as regulatory bodies such as the Financial Conduct Authority have expressed their intention to pursue decisive measures against underperforming entities before the year concludes.
The Rishi Sunak-led government has taken measures to reduce the tax burden on financial institutions. These include reducing the bank surcharge instead of the earlier corporate tax hike.
The banking sector has also been included, expressing concern over the potential competitive advantage. According to UK Finance, the tax rate for banks based in London is superior to those in financial centers such as Dublin and New York.
A Labor Party source said Labour intends to replicate Italy’s approach only if it comes to power in the country.
The UK Is Already Getting a Lot of Tax Revenue
According to the Treasury spokesman, it was noted that the UK banking sector has two separate taxes – the bank levy and the bank corporation tax surcharge. It is worth noting that last year’s tax contribution to the UK banking sector amounted to around £39 billion, a significant sum that could potentially cover the cost of the whole police and judicial system.
The Chancellor’s position is unequivocal, emphasizing that banks should pass on interest rate rises to depositors so that they can reap the benefits. The recent introduction of the new consumer protection duty gives regulators the tools to deal with situations where such cases do not exist.