Deputy Prime Minister Matteo Salvini announced a 40% levy on the extra profits of lenders late Monday night, as part of a wide-ranging decree approved at a cabinet meeting. Analysts at Citi estimate it will wipe 12% from earnings.

The levy targets higher interest incomes following rate hikes by the European Central Bank, according to a government statement Tuesday. The decree could cost banks more than €3 billion ($3.3 billion) in taxes, according to Bloomberg Intelligence. 

Italy’s populist administration is looking for a cheap way of financing help for families hit by the cost-of-living crisis, including tax cuts and support for mortgages for first-time owners. However, the move requires approval by parliament, and could be changed. It could also be challenged in the courts, like a similar measure in Spain.

Italian banks were the worst performers among European stocks, leading declines on the Stoxx Europe 600 Index on Tuesday, with shares in UniCredit SpA down as much as 6.7% and those in Intesa Sanpaolo SpA down about 8.6%. The drop in banking shares erased as much as €9.5 billion in the market value of Italian lenders.

Italy’s FTSE MIB benchmark was down 2.1% as of 9:23 a.m., leading declines in Europe. The euro-area banks index slumped as much as 3.4%, the most since March.

John Bilton, head of global multi-asset strategy at JP Morgan Chase Bank, told Bloomberg TV’s Francine Lacqua that the measure raises concern “about the motivations of the Italian economic policy.” He added: “That of course is going to give investors some pause for thought when it comes to pricing Italian credit risk versus German credit risk. There’s going to be a few days to see how the markets discount that.”

The move comes shortly after Italian banks unveiled a bumper set of earnings with Intesa and Unicredit raising their full-year guidance for the second consecutive quarter on the back of the European Central Bank’s rapid policy tightening. Net interest income at UniCredit, for example, surged 42% in the first half.

What Bloomberg Intelligence Says:

Italian lenders, especially domestically focused banks, could collectively owe more than €3 billion in taxes if the government’s extraordinary levy is imposed, based on the six Italian banks in BI’s coverage. The tax would represent the majority of excess capital at some banks, such as BPER and Monte Paschi, though less of a burden to UniCredit and Mediobanca, our calculations show.

— Lento Tang, BI banking analyst.

The levy matches a similar pattern across Europe, with lenders unveiling a wave of share buybacks as they continue to benefit from higher interest rates and performed well in stress tests. But the backlash is growing against a backdrop of a cost of living crisis.

A spokesman for UniCredit declined to comment on the new levy, while Intesa’s representatives weren’t immediately available for comment.

Antonio Tajani, also a deputy premier, pointed the finger at the ECB on Tuesday. “We have been saying for months the ECB was wrong to raise rates and this is an inevitable consequence,” Tajani told newspaper Corriere della Sera.  

“We see this tax as substantially negative for banks given both the impact on capital and profit as well as for cost of equity of bank shares,” Citigroup Inc. analysts led by Azzurra Guelfi wrote in a note. “The new simulated impact is also higher than the simulation we ran in April.” 

The tax could bring Italy over €2 billion, Luigi Tramontana, an analyst at Banca Akros, wrote in a note. “We estimate an average impact of 7% on the EPS of the Italian banks under coverage,” he wrote.

The administration will choose between two options, picking the highest amount, according to the government statement. The money will be put into a fund to finance measures to reduce fiscal pressure on families and companies.

The first option would impose a levy of 40% on the difference between net interest income in 2022 and 2021 — when the difference exceeds 5%. The second option would target the difference in net interest income between 2023 and 2021 — with a floor of 10%. The tax cannot exceed 25% of the bank’s shareholders equity.

In the UK, banks have faced accusations of “profiteering,” as rising interest rates boost their lending margins more than their savings offers while heaping pressure on customers. Last month, the UK financial regulator told banks to speed up efforts to improve access to their best savings rates. Some opposition politicians are raising the idea of more windfall taxes in the wake of an ongoing cost-of-living crisis.

The Spanish government also surprised investors last year when it announced that it would slap banks with a windfall tax as interest rates soared, with the aim of raising €3 billion over two years. The tax is set be in place for 2023 and 2024 and is part of a battery of measures Socialist Prime Minister Pedro Sánchez put in place to fund policies aimed at mitigating the impact of inflation.

Spain’s largest lenders, including Banco Santander SA and Banco Bilbao Vizcaya Argentaria, have indicated that they may seek to challenge the tax in court. The banks are particularly unhappy that the tax targets their revenues instead of profits. The country intends to impose a 4.8% tax on banks’ income from interest and commissions.

Measures to raise taxes on commercial banks after rate hikes prompted larger profits are also being considered by some Baltic countries. Lithuanian lawmakers in May backed a temporary windfall tax on banks to finance defense spending. Estonia plans to raise the tax level on banks to 18% from 14% as part of a series of tax measures to narrow the budget deficit, and Latvia may follow.

–With assistance from Tom Metcalf, Tommaso Ebhardt, Thyagaraju Adinarayan, Zoe Schneeweiss, Jeff Black, Blaise Robinson, Alessandra Migliaccio and Dale Crofts.