Extraordinary Tax on Credit Institutions in Italy Could Endanger Monetary Policy Transmission, Warns ECB

13 September 2023

By Mariana Somensi – NICOSIA (Econostream) - The European Central Bank on Wednesday said that Italy's plans to impose an extraordinary tax on credit institutions could threaten the transmission of monetary policy.

In an opinion published on the ECB's website, the Governing Council said that ‘caution must be taken to ensure that the extraordinary tax does not impact the ability of individual credit institutions to build strong capital bases and adequately provision for increased impairments and a deterioration in credit quality’.

'Curtailing the ability of credit institutions to maintain adequate capital positions or to prudently build provisions against the backdrop of a possible downturn in credit quality could endanger a smooth bank-based transmission of monetary policy measures to the wider economy', the ECB continued.

In the context of previous experience examining special taxes on banks, the ECB noted that it had 'underscored in general that imposing an extraordinary tax on the banking sector could make it more difficult for credit institutions to build up additional capital buffers, as their retained earnings will be reduced, making them less resilient to economic shocks.'

Such taxes could impede credit provision, the ECB said, as this function of banks depends on a firm capital base.

‘Higher costs and reduced credit supply, or higher costs of other banking services, can adversely affect real economic growth’, the ECB said.