European banks hit today by Italy 40% tax on excess profits generated by the variable interest loans that dominate their real estate market. Hopefully this doesn't ripple and create a banking crisis in Europe. Law of unintended consequences et al Italy is following Spain's lead here Bank shares plummet after govt's windfall-tax surprise (msn.com) The share prices of Italian banks plummeted on Tuesday after the government announced on Monday that it was imposing a 40% windfall tax on lenders' surplus profits. Italy's banks registered big profits in the first half of the year, with revenues boosted as a result of the European Central Bank's interest-rate hikes. Among other things, this has caused payments on variable-rate mortgages to soar. The tax will be paid in 2024 on the surplus profits of 2023. Deputy Premier and Transport Minister Matteo Salvini said Monday that the money raised by the windfall tax would be used to help households and businesses cope with higher interest rates. The slump in bank stocks saw the Milan bourse's FTSE Mib index drop over 2%, with around 27.7 billion euros in capitalization going up in smoke, including around 8.96 billion in bank stocks, after the markets were taken by surprise by the government's move. Bper Banca shed 10.9%, MPS 10.8%, Finecobank 9.9%, Banco Bpm 9%, Intesa Sanpaolo 8.67%, and Unicredit 5.9%. Italy's banks have not released a statement about the windfall tax, amid reports of irritation within the industry, especially because it came out of the blue. According to initial estimates, it should generate between 2.5 and 2.8 billion euros. Spain has already introduced a similar tax. It has generated 637 million euros so far, with the aim of taking that figure up to three billion over two years. (ANSA).
Sounds like a bad idea…. When interest rates are high, it costs banks more to lend money if they are issuing bonds to pay for the loans… also they probably have higher default rates on variable loans. Taking away their “excess profits” could be very damaging. sounds like the stock market it getting this right.
i guess if they socialized the cost of the banking failures they are also socializing some of the profits
I wonder why there wasn’t this kind of reaction when Spain did it. Maybe their percentage was lower. While generally speaking I’m not against governments clawing back rapacious profits, 40% across the board is awfully high.
It is a kind of a double kick in the ass. If inflation goes up, the value of the bank’s mortgage receivable goes down. It would make sense that the bank would draw more interest on a variable rate mortgage in a period of inflation. But then the government takes away their inflation compensation.
Italy is a prefect place for union Joe Biden to move to....and ruin even further. You need a license to be a babysitter, yet you don't have to admit to all your grandkids.
tax rate aside, it is bad policy over time to have discretionary taxation like this. Take a farmer. Assume she has corn. She can eat it or plant it. She should know the tax rate on the crop at the time she makes the decision of how much to plant & how much to eat. If tax rates can be changed after the corn's in the ground, it will not lead to optimal investment or consumption. Discretionary monetary policy acts in a similar fashion vs. a rules based monetary system. You can fleece a sheep many times, but you can only skin it once.
Agreed, you can debate the merits of windfalls profits taxes, but to implement in such an arbitrary fashion is bad policy.
PIIGS gonna PIIGS. As an aside, if you are in Italy: The German banking system is the driver behind interest rates in the Eurozone and by extension your country. In their country, fixed rates are the norm, and homebuyers there curtail purchases when rates are high, allowing the bank freedom to leverage rates to keep inflation under control. Residential mortgage rate Germany 2023 | Statista Please do not choose a variable interest loan to finance your mortgage. Thank you.
I am not following... If the loan costs and defaults are going up for banks they wont have "excess" profits. They apparently do because they are passing on more than just the costs to the consumers and making bank, excuse the expression. Happened in a lot of industries in the US which made inflation worse than it had to be but made companies rich. I dont know if the tax is a good idea but I think its because the banks are taking advantage of consumers in the short run.
Italy is trying to address the fact banks are charging much higher interest rates to borrowers than banks are providing interest to their account holders providing the funds the banks are lending. Basically the delta between the two, which always exists, grew substantially. Italy shocks banks with 40% windfall tax for 2023 Is it a good idea? I don’t know - they’ve already taxed energy companies this year for similar reasons, and two other Euro countries have already taxed banks in this manner. But like @docspor says, capricious legislation will have negative effects.
