Shares in Intesa Sanpaolo, Unicredit and other Italian banks fell sharply on Thursday.

Italy dealt a surprise blow to its banks and sent shockwaves across the sector in Europe by setting a one-off 40% tax on profits reaped from higher interest rates, after reprimanding lenders for failing to reward depositors.

Sharply higher official interest rates have yielded record profits for banks, as the cost of loans soared while lenders held off paying more on deposits.

European bank shares tumbled on Tuesday. A gauge of euro zone banks fell 4.5%, and was set for its biggest daily drop since the turmoil in the banking sector in March, when Credit Suisse collapsed.

Italian Prime Minister Giorgia Meloni’s government had floated the idea earlier in the year, but appeared to have cooled on the plan. Since then, however, bumper first-half results from banks brought the issue back into focus and prompted the government to act on the eve of the summer political shutdown.

All main Italian lenders reported much stronger than expected results for the first six months and upgraded their profit outlook thanks to higher rates.

Lenders in Italy have passed on to depositors on average 12% of the rise in rates, versus 22% in the euro area, Jefferies has calculated.

“One has only to look at banks’ first-half profits … to realize that we are not talking about a few millions, but … of billions,” Deputy Prime Minister Matteo Salvini told a news conference in Rome late on Monday.

Italy’s banking share index plunged 7.7% on Tuesday, with sector leader Intesa Sanpaolo (IITSF) down 8.4% and rival UniCredit (UNCFF)down 7%

“These government interventions in Europe do not help provide the necessary stability to lower the risk premium attached to the eurozone. This is not just an Italian thing, Spain had done the same last year,” said Gilles Guibout, head of equity strategies at Axa Investment Managers in Paris.

Analysts at Bank of Ame