ECB criticizes new Italian tax on windfall bank profits

A view shows the logo of the European Central Bank (ECB) outside its headquarters in Frankfurt, Germany March 16, 2023. REUTERS/Heiko Becker/File photo

FRANKFURT  -The European Central Bank criticized on Wednesday the Italian government’s proposed tax on windfall bank profits, saying it did not consider lenders’ long-term prospects and could make some of them vulnerable to an economic downturn.

Last month, Rome dealt a surprise blow to the country’s lenders by imposing a one-off 40 percent tax on their profits resulting from higher interest rates, after reprimanding them for failing to reward deposits.

Bank shares tumbled before the economy ministry clarified that the new tax would amount to no more than 0.1 percent of lenders’ total assets.

“The amount of the extraordinary tax might not be commensurate with the longer-term profitability of a credit institution and its capital generation capacity,” the ECB said in a non-binding legal opinion.

“As a result of the general application of the extraordinary tax, credit institutions that have lower solvency positions or are more focused on lending activity (such as small banks) or have challenging capital projections could become less able to absorb the potential downside risks of an economic downturn,” the ECB added.

Italian lawmakers are expected to table proposals this week to soften the impact of the tax, including allowing banks to deduct what they have to pay from their overall corporate income tax bill.

Other amendments could revisit the cap on the tax by anchoring it to risk-weighted assets (RWAs) instead of total assets, according to ruling politicians.