You must pay all the fees that PayPal charges i.e. it will be deducted from your earnings. There are two fees, the first is a fee on processing the payment when someone buys your game or asset. The second is the fee for processing the payment when Itch.io pays you.
You could spend the money from your PayPal account - i.e. use it to buy something else. In which case you don't have to link a bank account to it.
Itch.io uses US dollar, so if PayPal allows you to hold funds in US dollar, you don't have to convert it. If they don't - they will convert it and you'll pay a conversion fee which is normally built into the conversion rate.
If you bank it, and your bank account is in a different currency then either PayPal or your bank must convert it. And that will depend on the arrangement your bank has with PayPal.