The shock announcement came late on a Monday evening, at the press conference following the Italian government’s final cabinet meeting before the summer break.
Many bank executives were already away at coastlines or poolsides for the annual August shutdown and had little warning of what was coming – even finance minister Giancarlo Giorgetti was not present to drop the bombshell.
Instead, it came from interior and transport minister Matteo Salvini, the macho populist who is the deputy prime minister in the right-wing coalition headed by Giorgia Meloni.
“Minister Giorgetti is not here,” Salvini began mysteriously in remarks to the gathered journalists. “However, he brought before the cabinet a law, which was approved, for social equity.”
He explained that hikes to interest rates by the European Central Bank to rein in inflation had caused mortgage bills for households with floating rates to soar, though the interest paid out to savers had not kept pace.
Banks were making “extra multibillion profits” by hoarding the difference, he continued, saying the new law would tax these profits by 40 per cent in 2023. “We aren’t talking about a few million, we’re talking about billions,” Salvini said of the potential revenue, vowing to use it for “help for home mortgages” and “tax cuts”.
Few saw it coming. “Neither the Italian Banking Association, nor senior bankers, nor key members of the government coalition knew anything about it,” newspaper La Stampa reported.
There was a rout when markets opened the following morning, recalling the aftermath of the British government’s rash mini-budget under Liz Truss last year.
Italian bank shares plunged, some by 10 per cent or more. All in all, €8.65 billion was wiped off the Italian banking sector. That kind of bloodbath brings back bad memories of the financial instability that followed the financial crisis over a decade ago, which hit Italian banks hard.
Until not so long ago, cash was flowing in the other direction. The Italian state has been forced to repeatedly inject money into the banking sector, most recently by approving €20 billion in public borrowing in 2016 to support banks’ financial stability. Investors still habitually look to Italy’s banking sector as Europe’s weak point whenever a fresh crisis threatens to appear.
The Italian government scrambled to provide reassurance after the market turmoil, announcing the levy would be limited to 0.1 per cent of bank assets, cutting potential revenue from the measure to €2.5 billion from earlier estimates of €4.9 billion.
Though the announcement is widely viewed to have been mishandled, the policy itself is not an outlier.
It was inspired by a similar move in Spain that aimed to raise €3 billion from interest rate profits to help households with energy costs, while the Czech Republic and Lithuania have also introduced levies on excess bank profits.
[ Irish mortgage rates hit decade high above 4%Opens in new window ]
[ Why Ireland’s two biggest banks are making their highest profits since 2007Opens in new window ]
At the heart of this issue lies that fact that while Europe’s banks have been happy to rake in extra income from floating rate mortgages, they have been miserly when it comes to passing on the benefits of higher interest rate to savers.
Banks now earn 3.75 per cent interest merely by depositing money with the European Central Bank overnight. Those rates are very far from being passed on to consumers – and Irish banks are among the worst offenders in Europe.
Ireland’s banks ranked last among 20 European countries for the proportion of interest rates that they transfer to their customers: they passed on a mere 7 per cent of the benefit, according to data from S&P Global Ratings published by the Financial Times.
This is reflected in the difference in rates on saving accounts – and the surge in profits reported by Irish banks this year.
Instant-access savings accounts offering north of 3 per cent interest are available in France and Sweden – while savers in Britain are on the pig’s back, with rates of a lordly 5 per cent available.
The best on offer for Irish savers is about 1.5 per cent – with lowball restrictions on the amount of money that savers can deposit – while many accounts still only pay out 0.1 per cent or even zero.
Interventions like the Italian government’s are the result of political pressure from inflation-strapped households on the government to “do something” – though bank profit levies don’t necessarily help savers, as they may well reduce the chances of banks passing on interest rates.
When it comes to public pressure over interest rate profit hoarding however, it’s frankly surprising that in Ireland there hasn’t been more.