Italian Bank Shares Plummet as Government Imposes Surprise Windfall Tax

Italian banking shares experienced a significant decline after the government approved a 40% windfall tax on lenders' "excess" profits in 2023. This tax, which will be used to cut taxes and support mortgage holders, will impact banks' capital, profit, and cost of equity. The tax applies to "excess" net interest income resulting from higher interest rates and will be paid within six months after the end of the financial year. The introduction of this tax may lead to Italian banks increasing their cost of deposits to reduce extra profit.