Bank bailout Italian style

According to GLOBS Magazine, the Italian banks have so far escaped the ‘iron fist’ of Brussels, but the ever-stricter treatment may lead to exit from the EU.

The stuttering stability of the Italian banks seems to have been resolved in the short term, bringing a dynamic increase in value to the banks’ shares on the stock exchange. Banca Monte dei Paschi, which has been struggling for a long time, is being reconstructed with state funds. The state is capitalising Italy’s third largest bank based on its assets, which is also one of the world’s oldest, still active, financial institutions with a date of foundation in 1472, to the tune of EUR 5.4 billion. Two smaller regional banks have been partly acquired by the market leading, Italian Sanpaolo Intesa (alongside which a ‘bad bank’ has been created for the doubtful receivables, at a further cost of EUR 22 billion).

That is good news in the short run, as the systemic risk affecting the banking system, where the volume of non-paying loans reached EUR 360 billion, is reduced significantly. The solvency of 114 of 500 banks stuttered as they lack resources to meet their own obligations because their debtors are insolvent. In addition to the aforementioned Tuscan bank, in the case of Banca Popolare di Vicenza and Veneto Banca the ratio of ‘bad debts’ was more than double the liquid equity of the credit institutions.

Fortunately, now only smaller, less significant banks remain problematic credit institutions. It seems that the possible collapse of the Italian financial system has been solved. However, what about the issue of the regulations which should manage such and similar situations in the European Union? All banking regulations after the 2007-2008 financial crisis were adopted with the objective of making sure that credit institutions in grave situations are no longer saved using taxpayers’ money. Unfortunately exactly that happened again and what makes it particularly problematic is that it happened in a country where the national debt is extremely high (reaching 132% of GDP) and the ratio of the non-performing loans is still 15%. Thus, there is still an abundance of non-performing loans.

The management of these huge financial burdens, however, can cause further serious problems. German Finance Minister Wolfgang Schauble harshly criticised the small loophole in the regulations that allowed Brussels to give its blessing to the Italian bank bailout programme. According to the Brussels regulations applicable to EU banks, bailing out larger financial institutions is a ‘public interest’ due to their size, so they may be capitalised. However, smaller banks go bankrupt or undergo liquidation proceedings just like any average business.