The rise of windfall taxes on banks across Europe


Share post:

Italy became the biggest European market to impose a windfall tax on its banks this week, joining a wave of governments in the region seeking to raise cash by targeting the profits of lenders that have been buoyed by rising interest rates.

As governments face pressure to support citizens struggling with increased energy and housing costs, lenders enjoying bumper profits on the back of central bank policy rate rises are seen as easy targets to plunder.

“You are not going to lose too many votes by increasing taxes on banks,” said Giles Edwards, a banks analyst at S&P Global Ratings.

Italy’s 40 per cent tax on net interest income, announced on Monday evening, follows similar moves made by EU governments in Spain, Hungary, the Czech Republic and Lithuania over the past year.

Italian bank shares dropped sharply on Tuesday after the surprise announcement of the tax, prompting the government to say in the evening it would cap the impact of the levy on each bank. But the finance ministry indicated it would push ahead with the plan.

Since the global financial crisis a decade and a half ago, European banks have been hit by a barrage of levies. These have mostly aimed to recoup bailout costs, build resolution funds to protect against future failures, or encourage lenders to deleverage and de-risk.

But the recent spate of taxes is geared more towards bolstering government coffers, especially in countries with the fastest-rising policy rates such as Hungary and the Czech Republic, as well as in some eurozone nations.

Governments say they want to push some of the cash earned through higher rates towards households, where banks have failed to do so.

While most of the recent taxes are designed to be temporary, investors warn they could have longer-term consequences.

“Although measures like windfall taxes are easy to introduce, they can be challenging to retract due to political reasons,” said Filippo Alloatti, head of financials at fund manager Federated Hermes. 

Analysts also flagged that the levies could have unintended effects.

Italy’s new tax had sought to raise about €4.5bn — a figure later reduced to under €2bn by the hastily added cap — but its initial announcement by deputy prime minister Matteo Salvini led to more than €10bn being wiped off banking shares on Tuesday, noted Dan Neidle, founder of Tax Policy Associates.

“That’s what happens when you have a badly designed tax — one that destroys more value than it is supposed to collect,” he said.

Matteo Salvini, Adolfo Urso and Francesco Lollobrigida
Italy’s deputy prime minister Matteo Salvini announces the bank windfall tax alongside cabinet ministers Adolfo Urso, left, and Francesco Lollobrigida © LaPresse/Roberto Monaldo/Shutterstock

When Spain’s Socialist-led government announced its own windfall tax on bank profits last summer, shares in some of the biggest lenders dropped as much as 10 per cent.

Spain’s levy, introduced at the start of this year, aimed to raise €3bn to cushion people from surging energy prices by imposing a 4.8 per cent tax on banks’ income from interest and commissions for two years.

Banks were hit with the first instalment of the tax in February, which ate up a large chunk of their first-quarter profits, especially for lenders focused on the domestic market.

CaixaBank, Spain’s biggest lender by deposits, said the windfall tax cost it €373mn, equivalent to 44 per cent of the €855mn net profit it reported for the first quarter.

The proportion was much higher at Sabadell, which owns British bank TSB but has most of its business in Spain. Its windfall tax bill for 2023 was €157mn, or 77 per cent of first-quarter profit.

Spain’s two biggest banks by market capitalisation, Santander and BBVA, which have much larger international operations, were less badly hit.

Bank bosses in Spain have criticised the tax, claiming that they are only just returning to more normal levels of profitability after years of record-low interest rates. They argue that the country needs a strong banking sector and have begun to challenge the tax in the courts. The European Central Bank has also raised concerns.

Alberto Núñez Feijóo, leader of Spain’s People’s party — which won the most parliamentary seats but failed to achieve a majority in the country’s recent general election — told the Financial Times last month that should his party emerge victorious, he would reform the tax and make it legally watertight.

The tax has done little to encourage Spanish lenders to pass on more of the benefit they receive from rising policy rates on to customers, however: Spain has one of the lowest pass-through rates in Europe.

Other countries where banks have been slow to pass on rate rises have brought in taxes. However, it is debatable whether such moves are designed to change lenders’ behaviour — or are simply a means of raising quick revenues in a politically painless way.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.


Last year, Hungary introduced a two-year levy aimed at raising about Ft1.8tn (€4.6bn) across various sectors, with just over a quarter coming from banks. The tax targets bottom-line revenues rather than profits, with a 10 per cent charge on net revenues generated in Hungary in 2022 and 8 per cent in 2023.

Banks have frequently been the target of land-grab taxes in Hungary, with lenders subject to a levy based on the value of their assets since 2010. They also faced a one-off charge in 2020 to mitigate Covid-19 costs.

The Czech Republic and Lithuania have also targeted banks with taxes, though these are designed — like the Italian model — to eat into excess profits. Czech banks will be hit with a 60 per cent tax on profits over the next two years that exceed 120 per cent of their average annual haul between 2018 and 2021, on top of the country’s 19 per cent corporate rate.

Combined with a similar tax on energy companies, the Czech government hopes to raise CZK85bn (€3.5bn) a year, equivalent to just over 1 per cent of gross domestic product.

In Lithuania, the levy on net interest income, signed into law in May, aims to raise more than €400mn for defence, military and transport spending.

The UK has so far avoided raiding banks, though chancellor Jeremy Hunt did consider such a move ahead of his Budget last year in an attempt to fill a £40bn fiscal hole. Banks have also come under pressure in Germany over their failure to raise savings rates in line with the sharp rise in official interest rates.

In the UK, Hunt eventually dropped the UK’s 8 per cent surcharge on bank profits to 3 per cent while increasing corporate tax by 6 percentage points, resulting in an overall increase in bank taxes from 27 per cent to 28 per cent.

Since then, UK politicians have shown they are inclined to use regulatory action, rather than levies, to pressure banks to raise interest rates on savings products.

Last month, the Financial Conduct Authority laid out a 14-point plan to tackle problems in the savings rate market.

“The regulator is leaning on banks to explain whether they are getting balance right or if they need to raise rates further,” said Edwards of S&P.

“I imagine they would want to let that process play through rather than necessarily adding additional bank taxes, which doesn’t seem to be the immediate priority.”

Additional reporting by Emma Agyemang

Source link

Lisa Holden
Lisa Holden
Lisa Holden is a news writer for LinkDaddy News. She writes health, sport, tech, and more. Some of her favorite topics include the latest trends in fitness and wellness, the best ways to use technology to improve your life, and the latest developments in medical research.

Recent posts

Related articles

Daniel Křetínský nears deal to sell Le Monde stake to Xavier Niel

Receive free Daniel Křetínský updatesWe’ll send you a myFT Daily Digest email rounding up the latest Daniel...

UK press slams axing of Facebook News as ‘urgent threat to democracy’

Receive free Media updatesWe’ll send you a myFT Daily Digest email rounding up the latest Media news...

Auto industry recovery has favoured investors and bosses over workers

Receive free Automobiles updatesWe’ll send you a myFT Daily Digest email rounding up the latest Automobiles news...

US government heads for shutdown as Republicans squabble over spending

Receive free US government shutdown updatesWe’ll send you a myFT Daily Digest email rounding up the latest...

Bets on energy transition spark rise in North American pipeline deals

Receive free Energy sector updatesWe’ll send you a myFT Daily Digest email rounding up the latest Energy...

Giorgio Napolitano, Italian statesman, 1925-2023

Henry Kissinger, the US elder statesman, once told Giorgio Napolitano he was his “favourite communist”. With a...

Biden to supply Kyiv with long-range ATACMS missiles after months of lobbying

Receive free War in Ukraine updatesWe’ll send you a myFT Daily Digest email rounding up the latest...

EU trade chief warns of ‘new areas of concern’ in China relationship

Receive free EU-China relations updatesWe’ll send you a myFT Daily Digest email rounding up the latest EU-China...