[This is the first of a two-parter on the Italian Banking System. Ii looks at the causes for the current Referendum under Mario Renzi’s government]
While most of Italy celebrates post-referendum, only a small fraction of the population are aware of the massive economic debt in the order of €360bn in Italy’s fragmented banking sector.that PM Renzi has failed to contain, let alone provide solutions for.
That sum is the amount of non-performing loans (NPLs) being nursed by Italian banks.Italy has more than 500 banks with more branches than restaurants.
Banks across Europe have been shunned by investors, with an index of shares for major European banks down 22% from 2008. Comparatively Italy’s bank stock index is down 35%, with its biggest bank, Unicredit, having dropped a whopping 40%.
Revenues are under intense pressure from interest rate policies of the ECB, which in April 2016 cut rates to zero.
The troubled loans amount to 18% of all lending, three times the EU average. Unlike the crisis which hit banks hard in Spain and Ireland, this situation has not arisen from a frenzy of lending to fuel a property boom before the 2008 bust, but through years of failing to tackle poor lending practices worsened by weak economic growth.
Italy waited too long to copy Spain, which in 2012 created a “bad bank”, largely to house those troubled property loans and could be bailed out by the ECB. The new, more stringent EU state-aid rules (that were tested in Cyprus in 2013) required NPL purchases by a public entity to automatically trigger an onerous ‘bail-in’ of bank creditors.
Savers were to take 8% of any liabilities prior to an ECB bailout. This move would decimate Italy’s middle class and crush the welfare state that underscored Renzi’s power base.
Just before Christmas of 2012, and before the EU rule change, Italy took steps to avoid depositors having to take losses in four main lenders: Banca Etruria, Banca Marche, CariFerrara and CariChieti. Some bondholders were forced to take losses, sparking a furious reaction when a retired man who lost €110,000 in Banca Etrutia bonds killed himself.
Renzi has since adopted a three-pronged approach under the new ECB rules to limit bail-ins: (1) ‘Atlante’ – a €4.25bn fund as a liquidity backstop which is also intended to buy bad debts; (2) a plan to allow banks to package up NPLs into bonds with a government guarantee to try to attract buyers (a sort of bad bank); and (3) a move to speed up the time it takes to repossess properties, which can currently take up to 15 years in order to recoup mortgaged assets.
Renzi’s first test came in May 2016, when his fund was forced into control of Popolare di Vicenza, Italy’s eighth largest lender. Vicenza’s €1.5bn fundraising was shunned by investors and Atlante’s involvement meant other leveraged banks were not forced to pick up the bill.
The next test was a €1bn cash call by Veneto Banca also in May 2016. This was underwritten by a group of banks led by Intesa Sanpaolo. Following a failed stock market listing in June 2016 it was taken over by the bail-out fund, Atlante.
About this time Renzi realised his options were insufficent to deal with crises involving more banks under the EU rules.
Without an Italian Central Bank there was no room to control interest rates or devalue the currency.
To keep the banks running he needed changes to the banking sector and employment regulations that were currently protected under the Constitution.
Renzi called for a Referendum that most people saw as as an extension of the EU to take control of their country’s assets just like Greece.
On 29 July 2016 a European Union bank stress test found Monte Paschi di Siena requiring refinancing. The recapitalization efforts began late Nov 2016 and throughout Dec 2016. But investors and plans on foreign capital coming to the bank’s rescue could freeze after a “no” vote
The results on 5th Dec 2016 saw the end of his attempts to force a resolution on behalf of the banking system.
Stripped of governmental support, the path ahead for the Italian Banking System now appears to be uncertain.
https://www.theguardian.com/world/2016/may/10/battle-prop-up-italy-banks-eu-brexit-grexit-bad-loans
https://dailyreckoning.com/5-questions-answered-italy-referendum/
https://en.wikipedia.org/wiki/Banca_Monte_dei_Paschi_di_Siena
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