By Giuseppe Fonte
ROME, Dec 15 (Reuters) - Measures envisaged in Italy's 2026 budget could have "negative implications" on banks' liquidity because they might prompt lenders to cut interest paid on deposits to lower taxes, reducing liquidity buffers, the European Central Bank said.
In an opinion dated December 12 but published on Monday, the ECB also said higher taxes could persuade domestic banks to cut the already modest credit to families and firms while affecting investors' confidence in Italy.
Measures in the budget affecting banks and insurers, which also include curbs on the way lenders use interest expenses to lower their tax bills, are worth more than 11 billion euros ($12.93 billion) through 2028, according to Treasury estimates.
"The recurring introduction of ad hoc tax provisions unduly increases policy uncertainty regarding the tax framework, damaging investor confidence and potentially also affecting credit institutions' funding costs," the ECB said.
It is unlikely that Italy will radically revise its budget plans following the ECB criticism, given that the contribution from the financial sector funds more than 20% of the tax cuts and spending hikes that benefit households and businesses in the 2026-2028 period.
Both houses of Italy's parliament are due to approve the budget before the end of the year.
Among several measures, the government will oblige banks to spread over a longer period of time provisions on some loan losses which get deducted from income, while hiking by two percentage points the IRAP corporate tax weighing on domestic lenders and insurers.
"This might incentivise credit institutions to postpone or lower the amount of write-offs recognised on stage 1 and stage 2 loans in years affected by the change in taxation as they become more costly compared to the current situation," the ECB said.
Italian banks faced widespread criticism from Prime Minister Giorgia Meloni's right-wing coalition for failing to reward depositors or offer better lending conditions for firms, despite record profits driven by high interest rates and state guarantee schemes adopted in the wake of the COVID-19 pandemic.
The ECB, however, warned Italy that an increased tax burden on banks could lead to "abrupt adjustments" in their lending to the real economy, especially given the already moderate levels of bank lending in Italy.
"The elements of pro-cyclicality entailed in the draft law increase this risk of adverse lending adjustment," the opinion added.
($1 = 0.8507 euros)
(Reporting by Giuseppe Fonte; editing by Gavin Jones and Paul Simao)
