Blog Post

Italian banks: not quiet on the eastern front

Italian banks are back in the spotlight. After MPS failed to raise enough capital from private investors earlier this year, Banco Popolare di Vicenza (BPVI) and Veneto Banca take centre stage. The story of these two banks epitomises the strategy of delayed reform that has been so characteristic of the Italian banking crisis.

By: Date: March 31, 2017 Topic: Finance & Financial Regulation

Italian banks are back in the spotlight. After MPS failed to raise enough capital from private investors earlier this year, the centre stage has moved from Tuscany to the region of Veneto, in the Italian north-east. We have met the main characters previously: Banco Popolare di Vicenza (BPVI) and Veneto Banca were among the Italian banks that failed the ECB’s comprehensive assessment in 2014. They were also in the spotlight last year, when the bank-funded Atlante fund was created, mostly to become the underwriter of last resort in their (otherwise unlikely) capital raise.

If we look at the data, things are definitely not looking good. BPVI published its 2016 accounts this week, closing with a € 1.9 billion loss. Veneto Banca postponed the publication of its account, but it is expected to report a loss of about € 1 billion. Earlier this month, both banks asked access to precautionary recapitalisation, like the one currently discussed for Monte dei Paschi di Siena.

Gross NPLs for BPVI were € 9.8 billion in 2016, up 9.3% from last year. € 5.1 billion of these NPLs are classified as bad debts, up 17% year-on-year. BPVI says in its press release that it has received a draft communication from the ECB, following up on a previous inspection and requiring actions to address identified shortcomings. BPVI says this will entail a conservative revision of its credit risk policy, which will presumably determine further negative impact on its 2017 financial position. The current CET1 ratio stands at 8.21% – above the minimum requirement but below the SREP target of 10.25%.

What is more worrying is the bank’s liquidity position. The bank’s direct funding was down 14.4% with respect to last year, with BPVI attributing the drop to “reputational issues” and “fear of bail-in”. The bank resorted to ECB liquidity – for a total that currently stands at € 6.4 billion – and to the emission of government-guaranteed securities worth € 3 billion. The liquidity outflow has been hemorrhagic: BPVI’s liquidity coverage ratio at the end of December 2016 was 37.9%, down from 113% in June. Without the emission of the government-guaranteed securities mentioned above, the liquidity ratio would have been below the 90% minimum requirement for 2017.

This precarious liquidity situation could complicate the discussion on precautionary recap – which first needs to be authorised by the European Commission. If the precautionary recap were to be granted, it would most likely entail the bail-in of junior debt, which reportedly amounts to € 547 million for BPVI and € 750 million for Veneto. If the experience of MPS is of any guidance, we should expect this issue to become very controversial soon. Meanwhile, the two banks are also under pressure from legal actions of the shareholders that have been diluted, and they have been trying to limit the damage by offering to reimburse part of the share value in exchange for the beneficiaries to renounce legal actions.

To know more about the future of the two Veneto banks, we will have to wait for the decision by the European Commission, but some things can be said already. The story of these two banks epitomises the strategy of delayed reform that has been so characteristic of the Italian banking crisis, where actions that should have been taken earlier are now becoming unavoidable, in a regulatory context that has grown more demanding in the meantime, especially when it comes to using public money.

It also shows how delusional the great expectations placed on the Atlante fund were. When the fund was launched last year, it was largely depicted as a private backstop mechanism intended to shore up confidence in the Italian banking system. As I discussed at the time, the initiative stemmed from fears of systemic implications if BPVI and Veneto failed to raise enough capital, and it was expected to reduce systemic risk by avoiding fears of a domino effect due to difficulties of individual banks. However, the structure of the fund suggested otherwise. The fund was mostly financed by Italian banks: by acting as an underwriter of last resort for the two banks that were too weak to raise capital on the market, the fund effectively prevented bank resolution in the short run, but it did so by spreading the risk onto the balance sheets of the rest of the banking system.

After it became the majority shareholder (with a share of around 90%) of two regional banks, which now see precautionary recapitalisation with public funds as the “most realistic” recap option, this expectation seems overly optimistic. Giuseppe Guzzetti, one of the minds behind Atlante, said at the end of last year that he regretted participating in the venture. Perhaps more importantly, the fact that participating banks have been making significant write-down to the values of their investment in Atlante signals a lack of trust in the success of the operation.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event More on this topic

Past Event

Past Event

Financial Stability Conference 2017

EU at Crossroads: How to respond to Misalignments in Bank Regulation and achieve a consistent financial Framework?

Topic: Finance & Financial Regulation Location: Berlin, Germany Date: October 15, 2017
Read article More on this topic More by this author

Blog Post

Catalonia and the Spanish banking system

As tensions rise around Catalonia's independence movement, there are worries about the impact on the Spanish banking sector. Banks based in Catalonia account for around 14% of total assets. Some major institutions are already moving their headquarters to other parts of Spain. However, most Spanish banks have significant exposure to the Catalan market, and all could be caught up in the turmoil.

By: Yana Myachenkova Topic: European Macroeconomics & Governance Date: October 6, 2017
Read article Download PDF More on this topic

Policy Contribution

A European perspective on overindebtedness

The sequence of crisis and policy responses after mid-2007 was a gradual recognition of the unsustainability of the euro-area policy framework. The bank-sovereign vicious circle was first observed in 2009 and became widely acknowledged in the course of 2011 and early 2012. The most impactful initiative has been the initiation of a banking union in mid-2012, but this remains incomplete and needs strengthening.

By: Nicolas Véron and Jeromin Zettelmeyer Topic: European Macroeconomics & Governance Date: September 28, 2017
Read article More on this topic More by this author

Blog Post

Chinese banks: An endless cat and mouse game benefitting large players

As deleveraging moves up in the scale of objectives of the Chinese leadership, banks now face more restrictions from regulators. As a result, banks have been very creative in playing the cat and mouse game in front of evolving regulations.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 26, 2017
Read article

Blog Post

How has banking union changed mergers and acquistions?

The aim of the banking union was to break the toxic link between banks and states. One way of achieving this is by increasing cross border banking through mergers and acquisitions. This blog shows that little has changed in M&A activity since the banking union was launched. In fact, we seem to be witnessing a slight re-nationalisiation of banking consolidation.

By: Inês Goncalves Raposo and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: September 13, 2017
Read article More by this author

Blog Post

Nordea’s move to the Banking Union is no surprise

Scandinavian banking giant is moving to Finland. This is not just a flight from increasing taxes and tighter regulation in its current home, Sweden. Nordea is also moving inside the banking union to find a fiscal backstop large enough to see it through any future crisis. Will this vote of confidence encourage Sweden and Denmark to join the banking union?

By: Dirk Schoenmaker Topic: Finance & Financial Regulation Date: September 12, 2017
Read article More on this topic

Opinion

Europe must seize this moment of opportunity

As the EU enjoys a period of growth and relative stability, there is finally room to undertake long-needed reforms. But it is vital to act soon, and priorities must be set. There are three pillars of reform for the coming months: completing a robust euro area; building a coherent EU foreign policy; and harnessing the single market’s potential to deliver strong and inclusive growth.

By: Agnès Bénassy-Quéré, Michael Hüther, Philippe Martin and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: August 12, 2017
Read article More on this topic More by this author

Blog Post

Italian economic growth and the Euro

While the Euro has frequently been blamed for the poor growth performance of Italy over the years, a long-term analysis shows deteriorating growth before the introduction of the Euro. Additionally, Italy has shown worse performance than other euro-periphery countries, such as Spain, implying deeper structural reasons for Italy’s economic malaise.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: July 26, 2017
Read article Download PDF More on this topic More by this author

Policy Contribution

Precautionary recapitalisation: time for a review?

While precautionary recapitalisation is a legitimate instrument for bank crisis management, the conditions set for it by BRRD (Bank Recovery and Resolution Directive) are restrictive and have so far been effective to prevent its inappropriate use on insolvent banks. Nevertheless, the European Stability Mechanism should be empowered to participate in future precautionary recapitalisations.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: July 13, 2017
Read article Download PDF More by this author

External Publication

European Parliament

Precautionary recapitalisations: time for a review

Precautionary recapitalisation, a tool for public intervention in the banking sector defined in the Bank Recovery and Resolution Directive (BRRD), is a legitimate instrument for bank crisis management. The conditions set for it by BRRD are restrictive and have so far been effective to prevent its inappropriate use on insolvent banks. Outside of the scope of BRRD, the co-legislators should consider a reform of the EU audit framework to improve audit quality, and the European Stability Mechanism should be empowered to participate in future precautionary recapitalisations.

By: Nicolas Véron Topic: European Parliament, Finance & Financial Regulation Date: July 12, 2017
Read article Download PDF More on this topic More by this author

Policy Contribution

A macro approach to international bank resolution

As regulators rush to strengthen banking supervision and implement bank resolution regimes, a macro approach to resolution is needed that considers both the contagion effects of bail-in and the continuing need for a fiscal backstop to the financial system. This can be facilitated through the completion of a banking union in which the European Stability Mechanism (ESM) becomes the fiscal backstop to the euro-area banking system.

By: Dirk Schoenmaker Topic: Finance & Financial Regulation Date: July 10, 2017
Read about event

Past Event

Past Event

Is there a way out of non-performing loans in Europe?

At this event we looked at the issue of non-performing loans in Europe. The event also saw the launch of the latest issue of "European Economy – Banks, Regulation and the Real Sector."

Speakers: Emilios Avgouleas, Giorgio Barba Navaretti, Giacomo Calzolari, Maria Demertzis, Martin Hellwig, Helen Louri and Laura von Daniels Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 6, 2017
Load more posts