ECB criticises Meloni’s windfall tax on banks

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The European Central Bank has taken aim at Italy’s windfall profits tax on banks, warning it could make the sector more vulnerable to a recession and urging Rome to carefully assess the impact of the levy.

The European Central Bank is non-binding legal opinionThe document, released when its governing board meets in Frankfurt on Wednesday, will add to tensions with Rome that have already grown after rate setters sharply increased borrowing costs.

The ECB said the proposed tax means banks with weaker capital levels or smaller institutions that rely on traditional lending activities “may not be able to absorb the potential downside risks of a recession” and called for more analysis of the measure.

It added that Italy’s tax could also harm euro zone financial stability by reducing banks’ retained earnings, limiting their ability to lend and limiting their ability to build capital buffers to absorb future losses.

Last month, Deputy Prime Minister Matteo Salvini announced a shocking decision at a late-night press conference to cut some of Italian banks’ net interest income, or income from loans, from payments to depositors. interest) is subject to a 40% tax. last month. That shocked investors and caused bank stocks to plummet the next morning.

Multiple versions of the details of the proposed tax have emerged, adding to the confusion as banks and investors seek clarification. Nearly 24 hours later, the Ministry of Finance partially withdrew, narrowed the scope of the tax, and capped the collection at 0.1% of the bank’s total assets.

Italy’s proposal follows similar moves last year by EU governments including Spain, Hungary, the Czech Republic and Lithuania, most of which faced similar rebuke from the ECB.

Prime Minister Giorgia Meloni defended the one-off tax, which she said was necessary to curb “illegal profits” made by lenders by failing to raise deposit rates, even if the European Central Bank raised policy rates. necessary. In a social media video, she called the move a “tax on unfair profits.”

Lenders challenged the tax, questioning its basic legality. The Italian Banking Association said in testimony to parliament this week that the tax violated the property rights principle of the Italian constitution given the “expropriation nature of the measure on corporate wealth.”

The association also believes that comparing current profit margins with those during a period when “interest rates hovered near zero” is not a fair parameter and may violate the EU’s basic principle of free competition.

The ECB warned that the tax’s “retrospective nature could exacerbate perceptions of uncertainty about the tax framework and trigger widespread litigation, creating legal uncertainty issues”.

While rising interest rates have boosted banks’ profits, allowing them to increase the cost of lending at a faster rate than the rates offered to savers, the ECB said this may not last as the sector is likely to suffer from lower loan volumes. and increased losses due to default. Existing loan.

Italy’s economy contracted 0.4% in the three months to June, reflecting a slowdown in manufacturing and the reduction of tax incentives for home renovations.

“The ECB recommends that the decree should be accompanied by a thorough analysis of potential negative consequences for the banking sector, in order to assess whether its implementation poses risks to financial stability, and in particular whether it is likely to undermine the resilience of the banking sector and lead to market distortions.” explain.

The analysis should examine the impact of the tax on banks’ “long-term profitability and capital base, access to financing, the provision of new loans and competitive market conditions, as well as its potential impact on liquidity,” the ECB added.

It said some lenders could see higher net interest income and overall losses if their fee-based businesses suffer setbacks. The tax could also lead to the fragmentation of the European banking system “due to the heterogeneous nature of such taxes.”