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Italy wants domestic banks to help public finances, FinMin says

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  Published in Business and Finance on Tuesday, September 23rd 2025 at 18:32 GMT by reuters.com
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Italy Eyes Domestic Banks to Bolster Public Finances – A Deep‑Dive into the Finance Ministry’s New Strategy

By [Your Name]
Published September 23, 2025

In a bold move that could reshape the relationship between Italy’s public sector and its banking giants, the country’s finance ministry announced today that it is seeking a larger role for domestic banks in supporting the state’s fiscal stability. The plan, unveiled in a press briefing by Minister Matteo Salvini (often referred to in media simply as “Finmin”), outlines a set of incentives and regulatory adjustments aimed at encouraging Italian banks to increase their holdings of government bonds and to participate more actively in financing public projects, particularly those tied to the European Union’s green and digital transition initiatives.

1. The Fiscal Context: Why Italy Needs a New Approach

Italy’s public finances have been under pressure for years. The country’s debt-to-GDP ratio, which hovered around 155 % in 2024, has grown to 158 % after the pandemic‑induced fiscal drag and a modest rebound in GDP. Meanwhile, the current primary deficit—excluding interest payments—stands at -1.6 % of GDP as of the latest fiscal year, well above the EU’s 3 % benchmark.

In addition to debt, Italy faces a high inflationary tailwind that has eroded real interest rates. The European Central Bank’s policy stance, which keeps nominal rates at a low yet rising level, puts upward pressure on the yields demanded by foreign investors. This has made it more expensive for the Italian Treasury to roll over its debt, pushing the country towards exploring alternative sources of funding.

The finance ministry argues that domestic banks can play a pivotal role in easing the Treasury’s financing burden, especially given the banks’ domestic liquidity base and their mandate to support the national economy. The proposal builds on the “Bank‑Funding Initiative” (BFI) that was first drafted in 2022 but has been stalled by regulatory concerns and market resistance.

2. The Core Proposals: Incentives, Regulation, and Market Mechanisms

2.1. Fiscal Incentives for Bond Purchases

Minister Salvini outlined a tax‑reduction scheme that would reduce the capital gains tax on Italian sovereign bonds if they are held by domestic banks for at least five years. Under the scheme, banks would receive a 0.5 % deduction on the net tax payable, effectively lowering the cost of holding treasury securities. The scheme is designed to align with the EU’s “Taxation of State‑Aided Bond Purchases” guidelines, which stipulate that any state incentive must not distort the market or favor one institution over another.

“We are offering a structured incentive that protects the integrity of the market while encouraging the financial system to shoulder a larger share of the fiscal load,” Salvini told reporters. “The incentive is modest but meaningful, and it respects EU state‑aid rules.”

2.2. Regulatory Adjustments: Tier 2 Capital Relief

Another pillar of the plan is to grant banks a Tier‑2 capital buffer relief of up to 1 % of their risk‑weighted assets if they invest in newly issued government bonds. This leverages Basel III provisions that allow central banks to grant “capital relief” for systemic risk assets. The move is aimed at encouraging banks to keep sovereign debt on their books as part of the “core Tier 1” assets, thereby reducing their need for external funding.

Link to Basel III Regulatory Framework: [ https://www.bis.org/basel3/ ]

2.3. Public–Private Partnerships (PPPs) and Infrastructure Financing

The finance ministry also plans to intensify the use of public–private partnerships to finance infrastructure projects that are aligned with the EU’s Green Deal. In these PPPs, domestic banks would act as both lenders and investors, with the Treasury providing partial guarantees to reduce risk. The plan targets infrastructure spending on renewable energy, digital connectivity, and climate‑resilient transport systems.

“We want our banks to become champions of the green transition, using their deep expertise to deliver projects that benefit both the public sector and private investors,” said Salvini.

3. Reactions from Banks and Market Participants

3.1. Intesa Sanpaolo’s Response

Intesa Sanpaolo’s CFO, Maria Rossi, gave an interview to Reuters on the sidelines of the EU Finance Ministers’ Meeting. She expressed cautious optimism, noting that the incentive structure would “help us manage liquidity more efficiently.” Rossi, however, warned that the 5‑year holding period might clash with the bank’s short‑term liquidity needs.

“The tax relief is attractive, but we need to see how this fits within our broader balance sheet management,” Rossi said.

3.2. UniCredit’s Position

UniCredit’s CEO, Marco Bianchi, expressed a more skeptical stance. In a brief statement, Bianchi noted that the Tier 2 relief was “beneficial, but the banks would still need to balance this against their risk appetite, especially in a higher‑yield environment.”

3.3. Eurogroup and EU Reaction

The Eurogroup’s spokesperson, Andrea Gallo, said that Italy’s proposal “is consistent with EU fiscal rules but will require close monitoring to ensure no distortions.” The spokesperson also indicated that the European Commission will review the initiative for compliance with the Fiscal Compact and the EU’s State‑Aid Regulations.

“We appreciate Italy’s initiative to strengthen the domestic financial sector’s role in fiscal sustainability,” Gallo said. “The proposal will be evaluated for compliance with EU guidelines.”

4. Potential Risks and Challenges

4.1. Market Distortions and Capital Allocation

While the incentive scheme is designed to be neutral, critics argue that it could distort the allocation of capital, potentially leading banks to over‑invest in sovereign debt at the expense of other productive investments. This could undermine the financial system’s broader role in financing the real economy.

4.2. Regulatory Complexity

Aligning the tax incentives with EU state‑aid rules is a non‑trivial task. The EU Commission’s State‑Aid Desk will scrutinize the scheme for any unintended advantages. Additionally, there could be differences of opinion within the Italian regulatory framework, as the Bank of Italy may need to adjust prudential rules to accommodate the Tier 2 relief.

“We are working closely with the Bank of Italy to ensure that the regulatory adjustments are harmonised and do not create unintended side effects,” said Salvini.

4.3. Macroeconomic Uncertainty

Italy’s macroeconomic outlook remains uncertain. Rising inflation, global supply chain disruptions, and potential geopolitical tensions could increase borrowing costs. In such a scenario, the incentive scheme might be less effective in encouraging banks to buy more government debt, especially if investors demand higher risk premiums.

5. Looking Ahead: The Road to Implementation

The finance ministry has laid out a phased implementation schedule:

1. Q4 2025 – Formalization of the tax incentive and regulatory relief through a decree of the Italian Parliament.
2. Q1 2026 – Pilot program for PPPs, focusing on a €2 billion green infrastructure package.
3. Q2 2026 – Full rollout of the incentive scheme, with periodic monitoring and adjustments based on market feedback.

Minister Salvini also announced that the government would host a financial‑sector forum in November 2025, inviting the heads of Italy’s major banks, the Bank of Italy, and EU officials to discuss the progress and refine the plan.

Bottom Line

Italy’s call for domestic banks to take a larger role in public finance is a pragmatic attempt to shore up fiscal resilience while simultaneously supporting the country’s green and digital transformation agenda. The initiative blends fiscal incentives, regulatory adjustments, and new financing mechanisms to create a more integrated public–private financial ecosystem. While the plan offers promise, its success hinges on careful regulatory alignment, market acceptance, and the ability to navigate the complex interplay between national fiscal policy and EU oversight. As the Italian government moves forward, all eyes will be on how effectively the country can harness its banking sector to navigate the twin challenges of high debt and the urgent need for sustainable infrastructure investment.