May 17, 2021

The endless hole of Italian banking | Economy

The endless hole of Italian banking | Economy

Italian banks have started the year with turbulence. Last week, Monte dei Paschi di Siena (MPS), rescued by the State in 2017, acknowledged that it had received a notice from the European Central Bank (ECB) for a deficit capital situation. At this juncture, the difficulties of Banca Carige are added, intervened by the ECB itself, and that has become the last stone in the shoe of the already convulsive local banking system, which manages to keep up with not a few efforts and that in recent years has dragged endemic problems of fragmentation , overcapacity and unproductive assets. In Italy, delinquent loans were around 10% in the first half of 2018 compared to the European average of 3.5%, according to data from the European Banking Authority. The situation does not become alarming at the moment, but it is far from being an oil raft, as all the analysts consulted point out.

The supervisor chaired by the Italian Mario Draghi, sent a letter to the entity of Siena in which he reflected his doubts about the ability of the bank to maintain the levels of profitability and capital required. He also questioned whether he could comply with his restructuring plan, given his inability to sell bonds – he did not manage to complete a debt placement at the end of 2018-, due to the "impact of the increase in the Italian risk premium, especially considering the significant exposure to the public debt of the country we have. " The ECB has urged the bank to significantly increase its provisions over the next seven years in order to cope with unproductive loans.

For the Monte dei Paschi di Siena bank, the oldest bank in the world, founded in 1472 and rescued in 2017 by the Italian State, it rains on wet, and that is why the ECB letter has not been received with particular surprise, although it certainly has suspicion, especially for the doubt of whether the warning can be extended to the rest of Italian banks. According to specialized media and several analysts consulted, the supervisor will apply similar requests to each European bank "case by case", with different requirements and time limits for each, so the situation of the Italian entity can not be considered as exceptional .

Stefano Caselli, an expert in finance at the Bocconi University, believes that the request from Frankfurt has two faces: "On the one hand, it is reasonable, since it is a bank with difficulties, although progressively it is restructuring and following its path of consolidation, but On the other hand, it raises doubts, since it is not clear if it refers to a particular case or to all banks. " "Something more clarity would be healthy because the market has interpreted that the warning is valid for all," he adds. The truth is that the initial uncertainty when the letter was published, on January 14, caused a storm in the market that resulted in initial losses of 10% for MPS and around 3% for the rest of the financial sector in the Milanese stock market, value that they have managed to recover in recent days.

Interior Minister Matteo Salvini has been one of the most critical figures with the alert in Frankfurt and came to accuse the ECB of having "a prevaricating behavior" that causes "instability in the Italian banking system". The Italian state, which controls 68% of the bank, must leave the shareholding before 2021, according to the initial rescue plan agreed with the EU. The problem is that before the deadline is met you must communicate how you intend to carry out the departure and this spring you will have to submit a plan to Brussels. It remains to be seen if the ECB's notice may affect the integration options with other banks managed by the Executive.

Turby waters

The letter from Frankfurt arrived at a time of troubled waters. A few weeks ago, another case, although completely different from the one in Siena, ignited the alarms. Banca Carige, a former Genoese savings bank, considered the tenth bank in the country, began the year with an intervention by the ECB and the appointment of three temporary administrators after the resignation of the board of directors following the failure of a capital increase. A few days later, the government approved a decree for a possible rescue in the event that it is necessary, although he opted for a "private solution" for the bank. It is the third bank slip – after the rescue of Monte dei Paschi di Siena and of the Venetian banks in 2017 – in the three years that the common European regulations for the resolution of banking crises have been in force. "The intervention of the Government in Carige has confirmed the fears that so many customers had," says Nicola Borri, an expert analyst at Luiss University, who points out that "the strong banks that have cleared their balance sheets are able to face this new phase of contraction of the economy, but those who were already weak, are now in extreme difficulty. "

An inspection of the ECB revealed that Carige registered in the third quarter of 2018 losses for the granting of loans of 250 million euros. "These losses have now emerged, but those credits were there for a long time. The fact that there are still banks that have to make such important adjustments raises the suspicion that maybe it's not just a Carige problem, "says banker Marco Mazzucchelli.

The European Commission gave the green light last week for the Italian State to grant a guarantee for the issuance of bonds to the bank, considering that it respects the community rules of public aid to the bank. The plans of Rome to assure the liquidity of the intervened entity go through the concession of an endorsement for the emission of a series of bonds by a total nominal value of 3,000 million Euros, in exchange for the payment of a rate of the bank to the State .

The analysts point out that, in addition to the precautionary recapitalization, the Government also shuffles other possible scenarios for the bank, such as a purchase or merger or even an orderly liquidation, as it happened in 2017 with the so-called Venetian banks, Banca Popolare di Vicenza and Veneto Banking, whose healthy parts were bought by the giant Intesa Sanpaolo at the symbolic price of one euro. "The bank Carige is in a position to make temporary administrators [antiguos directivos de la entidad] can work to reach an agreement; there is no problem of customer flight and banking is capitalized; In addition, it has the State guarantee. The conditions for a marriage can be reached, "says Caselli.

Forecasts for the future depend, among other things, on the course of Italian debt, as analysts point out. One of the main problems of the Italian banks is the eternal dilemma of the doom loop, the vicious circle that generates its high exposure to the sovereign debt of the country. The transalpine banks are the main holders of Italian Treasury bonds, hold around 20% of the huge public debt, which exceeds 2.3 trillion euros, 133% of GDP. Currently the risk premium is around 260 basis points and has managed to remain stable after the agreement between Italy and the European Union for the general budgets of 2019, but in the weeks of greatest tension, after the rejection of the Commission to the Italian accounts, shot up to over 300 points, something that had not happened since 2013. If the premium goes back to shoot, it will be a lethal stab for the Italian banks.


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