The European Central Bank (ECB) has voiced its concerns over the Italian government's imposition of a windfall tax on surplus profits made by the country's banks following the ECB's interest rate hikes. The bank warned that this extraordinary tax could increase costs for banks seeking to attract new equity capital and wholesale funding, as it might deter both domestic and foreign investors.
The ECB's concerns, expressed on Wednesday, stem from the uncertainty this tax introduces into the investment climate. The 40% tax on Italian banks' surplus profits could lead to an increase in policy uncertainty regarding the tax framework, potentially damaging investor confidence and affecting the cost of funding for non-financial corporations. The retroactive nature of this tax could also create legal uncertainty due to potential litigation.
The announcement of this one-time windfall tax last month by Italy's hard-right government led to a decline in shares of Italian banks before the government revised the plan. The new tax is now capped at 0.1% of a bank's assets.
The ECB also highlighted that this extraordinary tax could make it more challenging for credit institutions to build additional capital buffers, as their retained earnings would be reduced, making them less resilient to economic shocks. The bank further pointed out that the tax does not consider the long-term impact of higher borrowing costs, which could lead to increased credit risks as households and businesses struggle with more expensive loans.
Smaller banks, whose income heavily depends on lending activity, could be particularly affected by this windfall tax. The ECB criticized the sudden announcement of this special measure, stating it created uncertainty that could deter future investors and make it costlier for Italian lenders to attract funding.
Despite these criticisms, Italian Prime Minister Giorgia Meloni has defended the windfall tax as a just measure, stating that the revenue generated from the tax will be used to finance a fund for mortgages on first homes and to reduce the tax burdens of households and businesses. The government's intention is to help citizens cope with the rising cost of living after the ECB's rate moves boosted banks' profits but increased the burden for borrowers.
The ECB's assessment echoes its criticism last year of Spain's windfall tax on banks. However, it's important to note that the ECB's opinion is non-binding.
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