This morning, a new chapter in the rescue of European banks unrolled with the Venice-based banks Banca Popolare di Vicenza and Veneto Banca indicating that not much has changed in Italy, despite the institutional and regulatory reforms imposed by the European Union.
We recall that the objective of reforms is to make sure that banks can auto-rescue, that is, by the means of “bail-ins”, rather than requiring external aid, usually provided by the state.
But, of course, each individual country has its own specific features so that the regulations decided on by a number of bureaucrats sitting in Brussels are, in essence, inapplicable and ineffectual.
In France, banks are probably too large and too systemic for a “bail-in” type resolution to go through normally, without impacting the entire economy.
We recall that during the crisis period of 2008-2012, banks in Ireland and Spain were on the point of imploding. This too was prior to the completion of the Bank Recovery and Resolution Directive (BRRD) which imposed bail-in. But, Ireland took advantage of transitory measures such as government guarantees on high amounts of bonds. The Spanish government set up a “bad bank”, the SAREB, supported by the EU, and injected 45% of the funds. The EU provided aid of €100bn to the banking sector. As a result, both these countries have made financial headway.
In Italy, the problem is the opposite of that of France. The banking system has always been fragmented because, firstly, there is no institutional or regulatory framework and, secondly, the financial crisis has exacerbated the differences between high-performance and struggling institutions and solvent small and large institutions
Also, in Italy, the authorities were unable to take advantage of the transitory measures applied in Ireland and Spain. Wading with leaden feet through the banking crisis and on the back of years of week growth, the government has been unable to carry out reforms. All it has managed to do was to establish a bank resolution fund of only about €6bn, called Atlante in order to buy up failed banks or impaired loans worth about zero. The main banks in the country, with Unicredit and Intesa SanPaolo in the lead, contributed the funds.
In 2016, Atlante acquired Banca Popolare di Vicenza for an amount of €1.8bn after the bank attempted to raise capital. But the bank is in trouble again and this time in conjunction with Veneto Banca also acquired by Atlante for €1bn. The two banks are weighed down with NPLs which have depreciated so such an extent that the banks were about to become insolvent, to the detriment of depositors, amongst others.
The authorities had attempted to rescue the two banks in 2015 but met with criticism from the press and public alike. So, the government could not assume the risk of a disorderly bankruptcy or of seeing the European Commission refuse its aid plan. We recall that in December 2015, the European Commission forced Banca Tercas to repay the state aid provided on the basis that it was considered to be anti-competive.
Another point specific to Italy’s banking system is that depositors are often creditors. The banks carry out numerous, very small-sized, private bond placements in senior or subordinated debt. So, in Italy, regulators would find it difficult to sanction retail customer bondholders. Retail customers hardly believe in the deposit guarantees (capped at €100,000) and would be even more wary if they realised that the banks place their funds in bonds in times of need. This was the case with Banca delle Marche, Caricheti, CariFerrara and Banca Etruria which professional investors almost never hold in their portfolios because the amounts issued are too small. This caused considerable controversy amongst the Italian population.
Intesa SanPaolo has offered to acquire certain assets and liabilities of Banca Popolare di Vicenza and Veneto Banca for a symbolic €1. And the government is providing state aid of €17bn to the two banks. This amount is 3 times the amount initially required for recapitalising them. It consists of: 1/ €5bn paid out immediately for the recapitalisation and 2/ €12bn which will serve to fund any new losses incurred by Intesa SanPaolo. We believe that the government has allotted these amounts keeping tax payers’ interests in mind rather than the banks’ shareholders.
Putting things into perspective, we note that in 2016 the two banks had combined employees of about 11,500. So, the state aid of €17bn amounts to about €1.5mn per employee! We rejoice that other sectors are not so demanding in terms of state aid. Italian tax payers are unlikely to appreciate the fact that this type of aid will allow the Italian economy to move out of a rut. It will not bring the system down. But the general public will still be disgruntled.