By Arthur Guarino
Italy’s banking industry has gone through a recent rough period. But with an infusion of new funds and a call for much needed reforms, there may be a chance that there will be improvement.
Italy set the foundation for modern banking at the time of the Medici’s. But lately Italy is regarded as Europe’s sore spot with much severe consternation for its banking industry especially when it comes to the world’s oldest functioning financial institution, Banca Monte dei Paschi di Siena (BMPS). Italy and the European Union (EU) are deeply concerned for the economic and financial ramifications if BMPS fails.
Billions to Save Italian Banks
Recently the Italian government took control of BMPS in order to save it by injecting €5.4 billion along with approval of EU officials. The Italian government is now a partner in BMPS and the hope among Italian and EU policymakers is to put the institution back on solid financial ground. The cause of BMPS’s financial ills range from losses due to speculation on financial derivatives, underperforming investments, and the overpriced acquisition of Banca Antonveneta in 2007. But perhaps the worst of these numerous ills are the no-performing loans that BMPS carries. In 2016 BMPS attempted to rid itself of €28 billion in non-performing loans, accounting for 36 percent of the bank’s loan portfolio. However, in total, the European Banking Authority reported that BMPS had €45 billion in non-performing and doubtful loans in 2016. Making matters worse, BMPS has the highest proportion of non-performing loans of any bank in Italy. This has caused depositors and investors to withdraw their money from BMPS thereby causing a liquidity crisis. Bad loans are a serious financial problem for Italian banks in which they carried €360 billion in non-performing loans in 2016. But BMPS is not the only Italian bank with serious financial problems.
In Italy’s northern Veneto region, two banks reported serious losses in 2016: €1.9 billion for Popolare di Vicenza and €1.5 billion for Veneto Banca. The Italian government was warned that these banks cannot be saved since they are not regarded as systemically important enough prompting depositors and investors to withdraw funds from the institutions resulting in substantial liquidity problems. This resulted in the liquidation of these banks costing the Italian government €5.2 billion and then an additional €12 billion in state guarantees so they could be sold to Intesa Sanpaolo SpA for €1. Italian policymakers are also worried that other banks in Italy will either need huge injections of cash or be sold to stronger Italian banks for nominal amounts.
The Effect on the EU
EU policymakers are very concerned about the ramifications of the situation with BMPS. The last thing that the EU needs is problems with major European banks such as BMPS and Deutsche Bank. According to EU bank rescue regulations investors, including shareholders and bondholders, must bear the burden of any financial bailout of the institution, not taxpayers. But in the case of BMPS the European Commission, which is the executive branch of the EU, gave permission to the Italian government to rescue BMPS, Popolare di Vicenza, and Veneto Banca even if it meant using taxpayer money. The European Commission ruled that state money can be used in these cases if shareholders and junior bondholders carry the major load of the costs involved and the rescue plan does not skew industry competition in an unnecessary fashion. The European Commission and the European Central Bank are concerned that bailing out Italian banks also means that the entire EU could be paying for the rescue. Also, if Greece were in a similar situation, its banks and policymakers would demand the same type of rescue plan. Compounding the situation, EU nations not in this predicament, such as Germany, would deeply resent this plan since it would probably cost them substantial sums and hurt Chancellor Angela Merkel politically if she supported it. There has been a call for reform of the eurozone banking rules especially from German Finance Minister Wolfgang Schaeuble in which he stated, “We must have a discussion on how we can change that in the future” on the need for tougher banking regulations.
The Effect on Italy
While the cost to the Italian government will be huge, the rescue could actually be beneficial in the long run. By injecting cash into BMPS and rescuing Popolare di Vicenza and Veneto Banca, the government is doing its best to deal with the nation’s weakest banking segments. With new funds, BMPS will now have one of the largest capital cushions in European banking. This can help depositors rest assured that the Italian government will protect their interests even if it means going against the rules of the European Commission, the EU, and the European Central Bank. Italian banks are also ridding themselves of bad debt and non-performing loans which could reach into tens of billions of euros. The Italian government’s sale of the good assets of Popolare di Vicenza and Veneto Banca to Intesa Sanpaolo SpA is a reassuring move to depositors, investors and other banks in order to head off a nationwide panic. The government is also taking a positive step in dealing with the severe problem of non-performing loans through the creation of Atlante, a private fund designed to take on distressed bank recapitalization, while also purchasing non-performing loans from banks. Hopefully, this move will create more bank liquidity and less uncertainty among investors, depositors, and Italian and EU policymakers.
Movement in the Right Direction?
Italy’s banking industry is not out of danger just yet despite the government’s recent actions. While the rescue plan encourages stability, and allows the economy to move toward long-term growth, there are still necessary actions to make sure the Italian banking industry will not have more emergencies such as BMPS in the future. This includes adherence to strict lending regulations by Italian banks and a watchful eye by regulators.