Italy: ECB Criticizes Tax On Excess Profit For Banks

The European Central Bank has intervened in a “legal decree” from the Italian government that would impose a tax on additional bank profits. This was done in the letter published on the ECB website in response to a request for opinion from the Italian Ministry of Economy and Finance.

The critical response from ECB President Christine Lagarde is based on concerns related to problems with monetary, financial, and banking supervision. The ECB acknowledges that growing interest rates have raised margins for institutions, but the long-term impact of tight monetary policy will be less positive, if not negative, for banks. Thus, the tax related to this first phase could cause excessive harm to banks that would then be unprotected for the second stage.

Then there would then be a need for “a clear separation between the emergency nature of revenues and the government’s general budgetary resources to avoid their usage for purposes of general fiscal consolidation,” Lagarde explains. The introduction of this tax may cause mistrust among investors in the banking sector, who could get discouraged by the possibility of a new “surprise” tax.

Finally, the ECB fears a strong negative reaction from smaller banks: “The emergency tax would particularly impact smaller institutions, which tend to focus more on offering loans, while larger institutions typically have a higher share of fee-based revenue.”