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The European Central Bank has taken aim at Italy’s windfall tax on banks, warning that it risked making the sector more vulnerable to an economic downturn and urging Rome to carefully assess the impact of the levy.
The ECB’s non-binding legal opinion, published as its governing council met in Frankfurt on Wednesday, is set to intensify tensions with Rome, already elevated after rate-setters’ sharp increases in borrowing costs.
But in a Wednesday night interview, Italian prime minister Giorgia Meloni ruled out scrapping the tax, though she said the details could be amended provided the revenues remained “unchanged” and the tax still yielded the “just under” €3bn in revenues Rome was now expecting.
“If there are corrections to be made, it can be done, but I do not want to backtrack,” she said on state television.
Her comments came hours after the ECB warned that banks with weaker capital levels or smaller institutions more reliant on traditional lending activities “could become less able to absorb the potential downside risks of an economic downturn” as a result of the proposed tax.
It added that Italy’s tax could also hurt eurozone financial stability, by reducing banks’ retained earnings, constraining their lending capacity and restricting their ability to build up capital buffers to absorb future losses.
Last month’s shock decision to impose a 40 per cent tax on a portion of Italian banks’ net interest incomes — the margin between what they earn on loans and pay to depositors — was announced at a late-night press conference by deputy prime minister Matteo Salvini last month. It jolted investors and sent bank stocks tumbling the following morning.
Adding to the confusion, multiple versions of the details of the proposed tax emerged, as banks and investors sought clarity. After nearly 24 hours, the finance ministry partially backtracked, scaling back the scope of the levy and capping the collection at 0.1 per cent of banks’ total assets.
Italy’s proposal follows similar moves made by EU governments in Spain, Hungary, the Czech Republic and Lithuania over the past year, most of which have drawn similar rebukes from the ECB.
Meloni has repeatedly defended the one-off tax, which she said was necessary to curb lenders’ “illegitimate profits” from failing to raise deposit rates even as the ECB’s policy rates have increased. In a social media video, she called the move “a tax on an unfair margin”.
Lenders have contested the tax, questioning its basic legality. The Italian Banking Association said in testimony submitted to parliament this week that the levy violated the Italian constitutional principle of the right to property, given the “expropriation nature of the measure on the wealth of the company”.
The association also argued that comparing current margins with those from a period when “interest rates hovered around zero” was not a fair parameter, and could violate the EU’s fundamental principle of free competition.
The ECB warned the tax’s “retroactive nature may fuel perceptions of an uncertain taxation framework and give rise to extensive litigation, creating problems of legal uncertainty”.
Although rising interest rates have boosted banks’ profits by allowing them to increase the cost of lending faster than the rate they offer to savers, the ECB said this may not last as the sector could be hit by lower lending volumes and higher losses from defaults on existing loans.
The Italian economy contracted 0.4 per cent in the three months to June from the previous quarter, reflecting a manufacturing slowdown and the scaling back of tax incentives to renovate houses.
“The ECB recommends that in order to assess whether its application poses risks to financial stability, and in particular whether it has the potential to impair the banking sector’s resilience and cause market distortion, the decree law be accompanied by a thorough analysis of potential negative consequences for the banking sector,” it said.
This analysis should examine the tax’s impact on banks’ “longer-term profitability and capital base, access to funding and the provision of new lending and competition conditions in the market, and its potential impact on liquidity”, the ECB added.
It said some lenders may make higher net interest income while losing money overall if their fee-earning operations suffered a setback. The tax could also cause fragmentation of Europe’s banking system “because of the heterogeneous nature of such taxes”.