This decision comes after chastising banks for their failure to adequately compensate depositors, despite reaping substantial gains from elevated official interest rates. The surge in rates has translated into significant profits for banks as they capitalized on the discrepancy between loan costs and deposit yields.

European bank shares were quick to respond, experiencing a sharp plummet as the euro zone bank index took a 4.5% nosedive. This marks the most pronounced single-day drop since the banking sector upheaval in March, triggered by the collapse of Credit Suisse.

Earlier in the year, the Italian government, led by Prime Minister Giorgia Meloni, had floated the notion of such a tax, but it had appeared to have been set aside. However, impressive financial results during the first half of the year revived discussions and spurred the government into action just before the onset of the summer political break.

Prominent Italian banks exceeded expectations by posting robust results for the initial six months of the year, prompting them to revise their profit forecasts upwards due to the impact of higher interest rates. Nevertheless, Italian banks only passed on an average of 12% of the rate increase to depositors, a far cry from the 22% observed across the broader eurozone.

Deputy Prime Minister Matteo Salvini highlighted the substantial profits amassed by banks in the first half of the year and accentuated the magnitude of the issue at hand.

The Italian banking share index took a staggering 7.7% plunge in the wake of the announcement, dealing a blow to sector leaders Intesa Sanpaolo and UniCredit, which saw their shares drop by 8.4% and 7% respectively.

This approach by European governments, including Spain's similar action the previous year, has ignited concerns among experts about the stability of the eurozone and the associated risk premiums.

Analysts estimated that the newly imposed tax could translate to a 2% to 9% reduction in the earnings of Italian banks.

The ripple effect of this development extended beyond Italy's borders, impacting banks in the currency bloc. Spain's Banco Santander and Germany's Deutsche Bank both endured declines exceeding 4%.

For the year 2023 alone, Italy has outlined plans to levy a 40% tax on banks' net interest margin, a metric reflecting the income banks derive from the disparity between lending and deposit rates. The government's projection of collecting less than 3 billion euros from this measure will be allocated towards aiding mortgage holders and implementing tax reductions. (ILKHA)