Citing “financial stability”, Rome seeks to calm the market after unexpected measures.

Italian bank stocks rebounded on Wednesday as the government attempted to address market turbulence, partially retracting from the sudden 40% tax imposed on the banking sector.

The Ministry of Finance announced in a statement that the tax on net interest income would be capped at 0.1% of assets, though the exact measure was not specified. Analysts at Jefferies noted that this limit would mitigate the anticipated impact of the tax.

Italy’s Intesa Sanpaolo and UniCredit, the two largest banks, opened with gains of over 2% on Wednesday’s trading.

The Finance Ministry stated that the cap was aimed at “preserving the financial stability of creditors”.

A banking source in Milan mentioned that the cap would render the tax “much more manageable” and would raise approximately 1.8 billion euros. This is in contrast to previous estimates, which had projected over 4.5 billion euros, as calculated by analysts at Jefferies and Equita.

An initial draft outlining tax details had indicated the tax would be limited to 25% of net bank assets. However, a subsequent official version omitted any cap, contributing to uncertainty.

Markets initially reacted with turmoil, leading to significant drops in the shares of major Italian lenders, ranging from 5.9% to 10.8%, as trading concluded on Tuesday.

The Finance Ministry added that banks that had already adjusted their deposit rates, “as recommended in a note from the Bank of Italy in February”, would not experience significant impact from the proposed tax.

A banking executive in Milan noted the “ping-pong” of events had been unsettling but suggested it indicated the government’s acknowledgment of a negative response.

The tax, approved during a late Monday cabinet meeting, still requires parliamentary approval. If it proceeds, it will apply to net interest income generated from the difference between credit and deposit rates of banks.

The seemingly hurried measure followed political pressure on Prime Minister Giorgia Meloni’s right-wing coalition to do more to aid families affected by rising rates and inflation. Her administration had previously criticized banks for failing to pass on interest rate increases to small savers.

The movement gained opposition support on Tuesday; the leader of the populist Five Star Movement, Giuseppe Conte, remarked on social media: “Better late than never.” Legislators from the center-left Democratic Party also applauded the move.

On Tuesday, the government stated that the threshold for implementing the 40% tax would be based on the variance between net interest income in 2021 and the figure for 2022 or 2023, whichever is higher. Banks would pay the tax as soon as their net interest income for the chosen year surpasses 2021 levels by 5% or 10%.