(Bloomberg) -- The Italian government modified a controversial windfall tax on banks, giving lenders an option to avoid paying if they set aside additional capital reserves.

The changes, which are widely expected to be approved by parliament and become binding this week, signal a compromise from the right-wing government of Giorgia Meloni following a slump in Italian bank stocks and criticism from the European Central Bank. 

The levy, which took aim at profits pouring in from higher interest rates, also caused a split in the ruling coalition, drawing opposition from junior partner Forza Italia.

The impact of the change is still unclear, with the government still expecting inflows of almost €3 billion ($3.2 billion). 

Given the abundant excess of capital and the banks’ willingness to give high returns to shareholders, “we do not expect the majority of the listed Italian banks to opt for the capital strengthening,” said Luigi Tramontana, an analyst at Banca Akros.

Lenders can opt out of the tax if they allocate 2.5 times the amount owed to strengthening their common equity tier 1 ratio as non-available reserves, according to an amendment to the law, which is currently undergoing parliamentary approval. If those reserves are later distributed as dividends, banks will have to pay the full tax plus matured interest, an amendment seen by Bloomberg News says.

The amendment also caps the tax at 0.26% of lenders’ risk-weighted assets on an individual basis instead of 0.1% of their total assets. 

“The revision implies that for most banks the impact is a touch lower compared to previous calculations,” Marco Nicolai, an analyst at Jefferies, wrote in a report Monday.

The levy will apply to 40% of banks’ extra profits measured by the difference in net interest income between 2023 and 2021 above a 10% gain. The new draft has been calculated to generate the same amount of income for the government as the original version of the tax, according to the amendment.

UniCredit SpA turned negative in Milan trading, while Intesa Sanpaolo SpA was little changed at 10.30 a.m. following an initial rise. Banks shares are still close to recouping the losses they suffered in the summer when the government shocked markets with its tax proposal. 


Deputy Premier Antonio Tajani said Sunday that the change was made to show that the government isn’t punishing investors, but the overall inflow won’t vary dramatically. Meloni said earlier this month that even if the levy is modified, the state will still expect inflows of almost €3 billion. 

The amended levy will protect savings and market stability and create more credit for families and businesses, Tajani wrote late Saturday on X. 

It’s positive that the tweaked law includes the possibility of opting for strengthening capital instead of paying the tax, even if it’s still unclear how it will be applied, Nicola Calabrò, Chief Executive Officer of Cassa di Risparmio di Bolzano-Sparkasse, said in an interview with Corriere della Sera on Sunday. 

--With assistance from Tommaso Ebhardt and Alessandra Migliaccio.

(Updates with details, banks recovering from second paragraph)

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