Italy’s Bank Windfall Tax Would Backfire
A discriminatory levy on lenders would weaken financial intermediation and ultimately raise costs for savers and mortgage borrowers. A commentary by Lorenzo Bini Smaghi
The central issue in Italy’s next budget law, for 2027, will be how to find the resources needed to finance public spending, which is likely to increase ahead of next year’s general election. The summer heat has helped fuel the debate and revive some old ideas. One of them is the League’s proposal for another tax on banks’ so-called windfall profits.
The proposal is problematic in several respects.
The first concerns the very notion of windfall profits. How can we determine whether the profits earned by a sector such as banking are extraordinary?
One possible benchmark is past performance.
The Italian banking sector recorded an average return on equity of about 14 per cent in 2025. Profitability has improved slightly over the past three years, but there is nothing exceptional about such an increase.
The improvement compared with a decade ago is certainly significant. But it reflects not only more stable macroeconomic conditions. It is also the result of the extensive clean-up and restructuring of the banking system as a whole.
Would taxing bank profits not amount to penalising the very efforts that brought the capital strength of the Italian banking system to levels comparable with, and in some cases higher than, those of banks elsewhere in Europe?
Another possible benchmark is the performance of other industries. Data for the 20 largest companies in Italy’s benchmark stock market index show that profitability in several sectors has in some cases exceeded the average recorded by banks.
Examples range from carmaking, with Ferrari, to energy infrastructure, with Snam, defence, with Leonardo, cable systems, with Prysmian, luxury goods, with Moncler, and services, with Poste Italiane.
It is difficult to understand why bank earnings should be considered “excessive” while profits of a similar magnitude in other sectors are regarded as “normal”.
Moreover, comparing returns on equity without considering the cost of that equity ignores the fact that banking is typically a riskier business. Banks’ core function is, after all, to take and manage risks. This is precisely why they are subject to prudential capital requirements.
Supporters of the tax sometimes make another argument: that banks benefit from public guarantees.
This argument is mistaken. Following the reforms adopted in response to the 2008-09 financial crisis, European governments can no longer rescue troubled banks without first imposing losses on shareholders and, up to a prescribed threshold, creditors.
The Single Resolution Fund, the Banking Union’s mechanism for financing bank resolution, is funded entirely by contributions from the banking industry. These rules are one reason why banks face a higher cost of capital than companies in many other sectors.
The Italian government did provide guarantees for loans extended to households and businesses during the Covid-19 pandemic. But these guarantees are gradually expiring and primarily benefited borrowers, who would otherwise have paid higher interest rates.
A further argument used to justify the tax is that banks have benefited from the improvement in Italy’s public finances and the upgrading of the country’s sovereign credit rating.
In reality, the sovereign rating affects every company operating in a country, for better or worse. Some Italian banks are even better rated than the sovereign itself, suggesting that the direction of causality may run the other way.
In short, there is no evidence that the Italian banking sector’s profits result from abnormal behaviour or from distortions that favour it. Singling out banks therefore appears discriminatory and raises serious questions about the measure’s constitutional legitimacy.
A tax on banks’ windfall profits is not merely unjustified. It is also a mistake in economic policy, for several reasons.
First, it ignores the central role of the financial sector in the economy, which is to channel savings towards the most productive investments. A country’s growth depends on the efficiency and profitability of its financial system. Taxing the intermediation between savings and investment ultimately means taxing economic growth.
Second, contrary to what its advocates claim, the proposed levy can no longer be described as an “extraordinary” or “solidarity” contribution. The banking sector is now being asked to make such a contribution for the third consecutive year, while the revenues are being used to finance permanent public spending.
Finally, as with every tax, a point that Americans have once again discovered through import tariffs, the cost is ultimately passed on to customers. In this case, that means people who keep their savings in banks and households taking out mortgages.
Put simply, the so-called windfall tax on banks is a tax on Italians’ savings and mortgages.
It doesn’t look like a brilliant idea after all.
A previous version of this article was published in the Italian daily Il Foglio
IEP Bocconi does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
