Italy’s absurd obsession with banks’ windfall profits

The central issue of the forthcoming Budget Bill will be to find the resources to finance public spending, which in a pre-election year looks set to rise. The summer heat has helped to fuel the debate and dust off old ideas. One of these is the tax on banks’ windfall profits. The proposal raises problems from various points of view. The first concerns the very concept of windfall profits. How does one assess whether the profits of a sector, such as banking, are extraordinary or not? One initial criterion could be a comparison with the past. Looking at the sector’s average return on equity in 2025 (around 14 per cent), there has been a slight improvement over the last three years, but nothing exceptional. Admittedly, the improvement compared with ten years ago is significant. However, this is due not only to more stable macroeconomic conditions but also to the efforts to restructure the system as a whole.

Is the aim of taxing profits perhaps to penalise this effort, which has restored the financial soundness of the Italian banking system to levels comparable to, if not higher than, those of other European countries? Another criterion for assessment is a comparison with other productive sectors.

Based on data relating to the top twenty companies on the Italian stock market index, the profitability of other sectors – ranging from the automotive sector (Ferrari) to the energy sector (Snam), from defence (Leonardo) to plant engineering (Prysmian), the luxury goods sector (Moncler) and the services sector (Poste) – was in some cases higher than the average for banks. It is unclear why banks’ profits should be regarded as ‘extraordinary’ whilst those – of a similar magnitude – in other sectors are instead considered ‘normal’. Moreover, comparing return on capital without taking into account the cost of capital itself means ignoring the fact that the banking sector is typically riskier, if only because the very nature of banking is to take risks. This is why capital adequacy ratios are imposed.

Another argument sometimes put forward by supporters of this tax is that the banking system benefits from public guarantees. This argument is flawed. Following the reforms introduced in the wake of the 2008–2009 financial crisis, European governments can no longer intervene to bail out banks in difficulty unless shareholders – and, up to a certain amount, creditors too – are first called upon to contribute. Moreover, the European bank rescue fund is entirely financed by the banks themselves. This is precisely what makes the cost of capital for the banking sector higher than that of other sectors. The state provided guarantees on loans granted to households and businesses during the Covid-19 pandemic. However, these guarantees are being phased out over time and have mainly benefited borrowers, who would otherwise have paid higher interest rates.

Another argument used to justify taxing banks is that they have benefited from the consolidation of public finances and the improvement in the government’s credit rating. In reality, all companies in a country are affected, for better or worse, by the sovereign credit rating. In Italy’s case, the credit rating of some banks is actually better than that of the government, suggesting that the causal relationship might be the other way round.

In summary, there is no evidence that the banking sector’s profits are the result of irregular conduct or the outcome of distortions in its favour. The measure therefore appears to be discriminatory and lacks constitutional legitimacy.

The tax on banks’ windfall profits is not only unjustified; it is a mistake in economic policy. From various points of view. First and foremost, it ignores the central role of the financial sector in the economic system, which is to channel savings towards the most productive investments. A country’s growth depends on the efficiency and profitability of the financial system. If one taxes the intermediation between savings and investment, one is taxing economic growth. Furthermore, contrary to what has been claimed, the proposed tax is no longer an ‘extraordinary contribution’ or a ‘solidarity levy’, given that it is being proposed for the third consecutive year and that the revenue from this tax is being used to finance permanent public expenditure.

Finally, as with all taxes (as even the Americans have realised with their import duties), the price is ultimately paid by customers – that is, by those who put their savings in the bank and by those who take out mortgages. Put simply, the so-called tax on banks’ windfall profits is a tax on Italians’ savings and mortgages.

Perhaps it isn’t such a brilliant idea after all.