Europe flag and stacks

Italian bank stocks plunged Tuesday after the Cabinet approved a proposal to apply a 40% tax on some bank profits this year to help consumers and businesses cope with higher borrowing costs.

Transport Minister Matteo Salvini announced the tax at a Monday evening press conference, saying it was a measure of “social equity” to make up for a series of interest rate hikes from the European Central Bank.

Those increases are aimed at fighting inflation and make it more expensive for people to get loans to buy homes and cars or for companies to get new equipment or build facilities.

UniCredit shares fell over 7%, Intesa Sanpaolo was down more than 8%, Banco BPM dropped more than 8.5%, and BPER and Banca MPS both plummeted over 10% in early afternoon trading on the Milan Stock Exchange.

The Association of Italian Banks has not yet commented publicly on the tax, whose approval apparently took banks by surprise. Analysts said banks would surely try to change the proposal or challenge it in court if it’s passed by Parliament, the next step in the process.

The five major Italian banks reported a combined net profit of about 10.5 billion euros (US$11.5 billion) in the first half of the year, up 64% from the same period in 2022, according to credit rating agency DBRS Morningstar. It pointed to higher interest income, resilient fees and cost management.

The 40% tax would be applied to banks’ profits from the difference between the interest they pay customers on deposits and the interest they earn on loans. Salvini said the tax revenue would amount to “a few billion” euros that would be used to fund tax breaks and help first-time homeowners get mortgages.

“It is a levy on banks’ extra profits,” he said, adding that the measure was proposed by Finance Minister Giancarlo Giorgetti, who didn’t attend the press conference to announce it.

The proposal must now be converted into legislation and be approved by Italy’s Parliament, where the right-wing government enjoys a comfortable majority.

“Banks are widely expected to push back against the measure during the parliamentary process, but within the ruling coalition, there is a solid component supporting the move,” Wolfango Piccoli, co-president at Teneo consultancy, said in a statement. “Absent significant amendments before its parliamentary approval, the retroactive tax will likely be challenged in the courts.”

The drop in Italian bank shares weighed on major banks more broadly in European markets, with Germany’s Deutsche Bank, France’s BNP Paribas and Societe Generale, Britain’s HSBC and Spain’s Banco Santander all falling in early afternoon trading.

The ECB has raised interest rates nine straight times in its campaign to stamp out high inflation unleashed by higher energy prices after Russia invaded Ukraine and supply chain backups as the global economy recovered from the coronavirus pandemic.

The bank tax was the last item announced in a series of measures adopted by Italy’s Cabinet in its final meeting before a summer pause, ranging from ending mandatory isolation for Covid-19 cases to a decision to increase the number of taxis that can operate.

The 20% increase in the number of taxi licenses that cities can issue is aimed at better responding to a boom in tourism that has created long lines at taxi stands this summer, with demand only expected to grow with the Vatican’s 2025 Jubilee, the 2026 Winter Olympics in Milan-Cortina and a view to Rome’s bid to host the 2030 Expo.