Italy’s Banks Seen Sidestepping Meloni Tax With Payouts Intact

Most of Italy’s banks probably won’t pay the country’s new tax and choose to boost their capital cushions instead.

(Bloomberg) — Most of Italy’s banks probably won’t pay the country’s new tax and choose to boost their capital cushions instead.

That’s because the law, adopted by the Italian Parliament on Thursday, is structured in a way that will likely allow most banks to meet the opt-put conditions while keeping payout promises intact, according to analysts and experts. Banks don’t have to pay the levy if they add money to their reserves instead.

Boosting capital “is the best option by far” for Italy’s banks, said Rossella Locatelli, a professor of banking and finance at the University of Insubria, near Milan. That’s especially the case because most can do so “without hurting dividend policy.” Bloomberg Intelligence analyst Lento Tang echoed the view.

The Italian right-wing government under Prime Minister Giorgia Meloni first introduced the law in August as part of an effort to raise proceeds for its deficit budget. The bill subsequently got watered down after it triggered a steep drop in bank stocks and prompted the European Central Bank to issue a warning.

Read More: Italy’s Parliament Backs Softened Windfall Tax on Banks

It’s not clear how much money the Meloni administration stands to make from the tax if only few banks choose to pay it. The government, which has said it expects to generate almost €3 billion ($3.2 billion) from it, introduced the tax arguing that the rapid interest rate increases by the ECB have conferred a massive windfall profit on to lenders. That should be shared with consumers who are struggling from high inflation, the government says.

Luigi Lovaglio, the chief executive officer of regional lender Banca Monte dei Paschi di Siena SpA, and Cassa di Risparmio di Bolzano CEO Nicola Calabrò have already indicated they may choose to retain the money, rather than hand it over to the government. 

The new levy estimates how much banks have benefited from the ECB’s rate increases by comparing net interest income this year with the level two years ago and charging a 40% rate on most of the difference. The total amount owed is capped at 0.26% of risk-weighted assets, a regulatory metric of balance sheet size. 

Lenders don’t have to pay the tax if they add 2.5 times the amount owed to their capital cushions instead. 

Paying the tax could also expose executives to investor scrutiny as it would be hard to justify giving away money, according to Francesco Galietti, founder of Rome-based political risk consultancy Policy Sonar.

“Most if not all the banks will likely opt for capital bolstering, if only to avoid legal actions from shareholders who dislike the idea of paying the tax,” Galietti said 

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