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European countries differ over windfall taxes on banks amid rising interest rates

Some European countries have imposed windfall taxes on banks’ profits to help fund their response to the economic and social challenges caused by the COVID-19 pandemic and the surge in energy prices. However, the measures have sparked controversy and criticism from the banking sector and the European Central Bank (ECB).

Italy approves a one-off tax on banks’ profits

Italy approved on Aug. 8 a one-off 40% tax on profits banks reap from higher interest rates and it plans to use the proceeds to help mortgage holders. It expects to collect less than 3 billion euros ($3.3 billion) from the tax, according to sources. The Italian economy ministry later clarified that the tax cannot be higher than 0.1% of lenders’ total assets.

The tax was part of a wider package of measures aimed at easing the impact of rising inflation and energy costs on households and businesses. The government said the tax was justified by the “exceptional and temporary” situation created by the pandemic and the ECB’s monetary policy, which has boosted banks’ net interest income.

However, the tax has been criticized by the Italian banking association ABI, which said it was “unfair, discriminatory and damaging” to the banking system and the economy. ABI argued that the tax would reduce banks’ ability to lend and support the recovery, and that it would penalize banks that have invested in government bonds.

European countries differ over windfall taxes on banks amid rising interest rates

The tax has also raised objections from the ECB, which is preparing to send a letter to Italy raising concerns about the tax and criticizing Rome for not previously informing either the Bank of Italy or the ECB as it is supposed to do under European Union rules.

Other European countries have also introduced windfall taxes on banks

Italy is not the only European country that has decided to hit banks with a windfall tax in response to the economic and social challenges posed by the pandemic and the energy crisis. Below is a snapshot of the status of windfall taxes or bank-specific duties across European countries, in alphabetical order:

  • Czech Republic: The Czech lower house of parliament approved a 60% windfall tax on energy companies and banks in November, aiming to raise $3.4 billion this year from profits deemed excessive to fund help for people and businesses hit by soaring electricity and gas prices.
  • France: President Emmanuel Macron said in March that companies with more than 5,000 people should share more of their “exceptionally high” profits with employees instead of buying back shares. But he and Finance Minister Bruno Le Maire ruled out the possibility of a windfall tax. That is because French banks are subject to an anti-usury law that limits the pace of quarterly growth in loan prices. France also has a popular regulated savings scheme, which accounts for almost 20% of bank deposits, with an inflation-linked return that adjusts more quickly than loan rates.
  • Germany: For some of Germany’s biggest banks, net interest income has risen between 50% and 70% from lows during the COVID-19 pandemic, but a windfall tax has not been a topic for discussion under pro-business Finance Minister Christian Lindner. Germany’s finance ministry declined to comment on Italy’s move in August but noted that tax increases are ruled out under a German coalition government agreement.
  • Hungary: The Hungarian government has tweaked windfall taxes imposed on key sectors of the economy in a decree published in June, saying banks can reduce their 2024 windfall tax payments by up to 50% if they increase government bond purchases. It also imposed a 13% “social tax” on certain types of investments, including investment notes and interest rate gains on bank deposits.
  • Lithuania: Lithuania’s parliament approved in May a windfall tax on the banking industry’s net interest income for 2023 and 2024 following a sharp rise in European Central Bank interest rates.

Windfall taxes on banks face legal and economic challenges

The windfall taxes on banks have been met with resistance and criticism from the banking sector, which argues that they are unfair, discriminatory, and harmful to the financial stability and the economic recovery. The banks also claim that they are not the only beneficiaries of the higher interest rates, as other sectors such as insurance, pension funds, and asset managers also benefit from them.

Moreover, the windfall taxes on banks face legal and economic challenges, as they may violate the EU’s principles of non-discrimination, proportionality, and subsidiarity, and may interfere with the ECB’s monetary policy. The ECB has warned that the windfall taxes on banks could undermine its credibility and effectiveness, as they could create uncertainty and distortions in the transmission of its policy signals to the economy.

The ECB has also expressed concern that the windfall taxes on banks could have negative spillover effects on other countries, as they could affect the cross-border integration and diversification of the banking sector in the euro area. The ECB has urged the countries that have introduced or plan to introduce windfall taxes on banks to consult with it and the relevant national authorities before taking any measures that could affect the banking sector and the monetary policy.

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