The Italian Job…

The Italian Job…

Quite clearly the Italians have a somewhat different interpretation of how to deal with a failing bank than the rest of the EU, as has been demonstrated quite clearly in the case of Banca Popolare di Vicenza and Veneto Banca, both of which faced a deadline of the end of June for a decision on how their increasing non-viability would be addressed.

Unlike the Spanish authorities in the case of Banco Popular, who appear to have followed the letter of the European Bank Resolution and Recovery Directive (BRRD), the Italians decided to do things differently. As a result they have arguably put into question the credibility of the BRRD as a mechanism that will be applied even-handedly, with the distinct impression given that the ECB and the European Commission acquiesced in actions which will ultimately cost more than if the BRRD had been applied.

For example, the ECB determined that the banks were “failing or likely to fail”, as a result of which the Single Resolution Board (SRB) needed to decide whether they should be “resolved”. If that had been the SRB’s decision, the outcome would likely have been losses being imposed beyond the level of shareholders and subordinated debt holders and into the “senior” section of the banks’ capital stack. This did not happen. Instead, the SRB decided that the banks were not sufficiently important for this to be required. As Martin Sandbu of the Financial Times quite rightly pointed out, this was a paradox, because, hitherto, the Italian government had persuaded the EU to permit it to support the banks because of their importance to financial stability, even though their combined assets totaled no more than 2% of the domestic banking system.

So, the SRB permitted the Italian Government to apply instead Italian insolvency laws, which allowed (with EU acquiescence) the state to shield the banks’ senior bond holders from losses. Not only that, but in order to clean up the mess it had created, the state then sold the “good” assets with attendant liabilities to Intesa, enticing it to do so with a grant of EUR 4.8BN and public guarantees of EUR 1.2BN, so that it would not suffer any detriment. Contrast this with Spain, where Santander had to raise EUR 7BN to support its acquisition of Banco Popular. To add insult to injury, the Italian taxpayer is on the hook for up to EUR 12BN of state guarantees to enable the orderly winding-down of the now-failed banks.

The Italian government acted in this way because a significant portion of senior debt had been sold to retail investors, and the authorities appear terrified of a political reaction if yet more voters find themselves, yet again, to have been duped. While one can understand that action in political terms, nevertheless the Italian authorities have created a much larger and less certain liability on the part of Italian taxpayers, instead of directly addressing allegations of mis-selling and any claims that might arise as a result.

In doing so, they have created a precedent, while making it obvious that the EU’s institutions can be “persuaded” to do favours if one of the largest member states is persistent enough. Of course, what Italy has done further adds to the financial obligations of an already over-indebted central government. If it is lucky, the sums at risk will at least be sufficient and bring to an end fears about the overall health of the Italian banking system. Somehow, we doubt this is the final act in the long saga of procrastination and special-pleading.

However, at Awbury, we continue to work to provide our banking clients with more effective and rational solutions with which to address their problematic assets and capital needs- and in ways that do not put the long-suffering taxpayer at risk.

The Awbury Team

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