European shares dropped on Tuesday morning as the market considers a new tax introduced by the Italian government targeting extra profits.
Italy introduced a one-off 40% windfall tax targeting banks’ extra profits from higher interest rates, a move that sent European tumbling on Tuesday morning as the market weighs in on the country’s decision.
The new windfall tax will only apply to the accounting years of 2022 and 2023 and will affect banks‘ net interest margin, a measure of the net return on the bank’s earning assets, which normally includes loans, leases, and investment securities. The tax must be settled by June 2024.
Italy expects to collect at least €2 billion with the new tax, as sources close to the issue told Reuters. The 40% levy will be made if the net interest income recorded in 2022 exceeds the value of the financial year 2021 by at least 3%.
For the profits of 2023 compared to 2022, the threshold from which the tax will be levied goes up to 6%.
The proceeds of the tax, Italian politicians said, will be used to help struggling mortgage holders.
Similar taxes have already been introduced for the banking sector by countries like Spain and Hungary, where banks have also been reaping the benefits of higher interest rates.
“One has only to look at banks’ first-half profits […] to realise that we are not talking about a few million, but […] of billions,” Deputy Prime Minister Matteo Salvini of the far-right wing party Lega, part of Giorgia Meloni’s coalition government, said during a news conference in Rome on Monday.
“If [it is true that] the burden deriving from the cost of money has […] doubled for households and businesses, what current account holders receive has certainly not doubled,” he added.
The decision led the European stocks to take a dip, with the pan-European STOXX 600 index (.STOXX) down by 0.3% on Tuesday morning. Italian banks like Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI) fell by more than 5%, with the first dropping by 7.7% and the latter by 6.2%. Monte dei Paschi di Siena (Mps) fell by 7.3%.
Late last month, Intesa Sanpaolo said it expected to gain more than €13.5 billion this year from its net interest margin alone.