The surprise announcement of a new tax had sent share prices plunging.
Italian bank shares, which fell sharply on Tuesday, rallied on the Milan stock exchange on Wednesday morning after Giorgia Meloni's government decided to cap a tax on their "excess profits".
"In order to preserve the stability of banking institutions", the decree provides for "a ceiling on the contribution, which may not exceed 0.1% of a bank's total assets", the Ministry of the Economy announced on Tuesday evening, anxious to calm the stock market storm.
The surprise decision by the far-right coalition government to levy a 40% tax on banks' "excess profits" generated by the rise in interest rates sent financial sector stocks tumbling on the stock market on Tuesday.
Transport Minister Matteo Salvini had announced the tax at a Monday evening news conference, saying it was a measure of “social equity” to make up for a series of interest rate hikes from the European Central Bank.
Intesa Sanpaolo and Unicredit lost 8.6% and 5.9% respectively at the close. Monte dei Paschi di Siena fell by 10.8%, Bper Banca by 10.9% and Banco Bpm by 9%.
On Wednesday morning, Intesa Sanpaolo was up 2.3% and its rival Unicredit was up 4%, in line with other banking sector stocks.
"We have been saying for months that the European Central Bank is wrong to raise interest rates", and this tax "is the inevitable consequence", said Deputy Prime Minister Antonio Tajani on Tuesday.
Italian banks have seen their interest income soar in the wake of the interest rate hike, but without increasing the interest on their customers' current accounts to the same extent.
Banks that have "already adjusted their rates" by reducing the gap between lending rates and current account interest "will not be significantly affected" by the tax, the Ministry of the Economy promised on Tuesday evening.
Following the Ministry's statement, economists sharply revised their estimates of the tax's revenue downwards.
Capping the contribution at 0.1% of assets "considerably reduces the impact of the tax", commented Jefferies analysts on Wednesday, who now estimate the total cost to banks at €2.5 billion, compared with €4.9 billion previously.
The tax on banks' "excess profits", which will have to be paid by June 2024, will apply to accounting periods beginning in 2022 or 2023.