Wednesday, June 19, 2024
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ROME, Aug 8 – Italy has approved a temporary tax of 40% on the profits earned by banks from increased interest rates, with the intention of supporting mortgage holders. However, this move has triggered a significant drop in banking shares.

In recent times, the surge in official interest rates has led to substantial gains for banks. Financial institutions have been able to raise the costs of loans while avoiding paying more on deposits.

Several other countries, including Spain and Hungary, have already taken similar steps by introducing windfall taxes targeting the banking sector.

For the year 2023, Italy plans to impose a 40% tax on banks’ net interest margin, a metric that measures the income derived from the difference between lending and deposit rates.

Sources close to the matter have informed Reuters that Rome expects to collect less than 3 billion euros ($3.29 billion) from this tax. However, some analysts have projected higher figures.

Italy’s leading bank, Intesa Sanpaolo (ISP.MI), has stated that it anticipates earning over 13.5 billion euros solely from its net interest margin this year. Analysts from Bank of America estimate that the newly introduced tax could potentially impact banks’ earnings by 2% to 9%.

As a result of Italy’s decision, the banking index in the country experienced a significant decline, plummeting by 6% as of 0757 GMT.

The decision by Italy’s right-wing government to impose this tax comes after repeated criticisms of banks for not passing on the increased cost of money to depositors. The action was taken after banks reported record earnings in early August, which were boosted by higher interest rates.

Italian lenders across the board reported results that were substantially stronger than anticipated and raised their profit projections, citing the positive impact of elevated rates.

During a press conference in Rome, Deputy Prime Minister Matteo Salvini emphasized the significant magnitude of banks’ profits, stating, “One has only to look at banks’ first-half profits … to realize that we are not talking about a few millions, but … of billions.” Salvini highlighted the discrepancy between the rates applied to loans and deposits, underscoring the need for this measure.

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