Italian banks hit with surprise windfall tax

Italy has passed a one-off 40% tax on the profits banks earn from higher interest rates, in a shock move that has seen shares plummet.

A hike in official interest rates resulted in record profits for Italian banks.

The tax will apply to the net interest income that comes from the gap between the banks' lending and deposit rates.

Proceeds will be used to help mortgage holders and cut taxes, the government says.

The surprise move was agreed by Prime Minister Giorgia Meloni's ministers at a cabinet meeting late on Monday. They vowed to invest the funds raised into helping households and businesses struggling with the cost of borrowing.

"One has only to look at banks' first-half profits to realise that we are not talking about a few millions, but of billions," Deputy Prime Minister Matteo Salvini told a news conference in Rome late on Monday.

The decision shows the government intends "to punish banks' unfair behaviour", a source told the Reuters news agency,

Defending the move, Foreign Minister Antonio Tajani told the Corriere della Sera newspaper that the measure was not against the banks, "but a measure to protect families" and those struggling to pay mortgages.

Around €2bn (£1.7bn) is reportedly expected to be generated from the levy, which will be used to fund support for families hit by higher interest rates.

Italy's parliament now has 60 days to pass the tax decree into law.

Shares in the country's two largest banks, Intesa Sanpaolo and UniCredit, dropped by 8% and 6.5% respectively on Tuesday morning following the announcement.

Shares in Banco BPM, the country's third-largest bank dropped 8.2%, while the state-owned Monte dei Paschi di Siena dipped by 7.4%. Other banks including BPER Banca, Banca Generali and Mediobanca were also down.

Other European countries including Hungary and Spain have imposed similar windfall taxes on banks.

A windfall tax is a levy imposed by a government on companies that have benefited from something they were not responsible for - in other words, a windfall.