Italy is rushing to cobble together an industry-led rescue to address mounting concerns over the solidity of a banking sector whose woes pose a risk to the wider eurozone economy.
Finance minister Pier Carlo Padoan has called a meeting in Rome on Monday with executives from Italy’s largest financial institutions to agree final details of a “last resort” bailout plan.
Yet on the eve of that gathering, concerns remain as to whether the plan will be sufficient to ringfence the weakest of Italy’s large banks, Monte dei Paschi di Siena, from contagion, according to people involved in the talks.
Italian bank shares have lost almost half their value so far this year amid investor worries over a €360bn pile of non-performing loans — equivalent to about a fifth of GDP. Lenders’ profitability has been hit by a crippling three-year recession.
The plan being worked on, which could be officially announced as soon as Monday evening, recalls the Sareb bad bank created in 2012 by the Spanish government to deal with financial crisis in its smaller cajas banks, say people involved.
Although the details remain under discussion, it foresees the establishment of a private vehicle that will include upwards of €5bn in equity contributions — mostly from Italy’s banks, insurers and asset managers — and then a larger debt component. The fund will then mop up shares in distressed lenders. A second vehicle will seek to buy non-performing loans at market prices.
“It is a backstop fund,” said one person involved in the talks.
The Italian government can provide only limited financial backing because of EU state aid rules and because it is already struggling under a public debt load that amounts to 132.5 per cent of GDP.
The bailout marks the latest and most wide-reaching attempt by Italy to shore up confidence having already sponsored the rescue of four small banks last year and passed a law intended to speed up the sale of bad loans. Both earlier measures failed to eradicate market concerns.
Mr Padoan argued that the industry had the wherewithal to address its problem. “The Italian banks are able to resolve their critical issues themselves,” he told reporters at an industry meeting in northern Italy on Saturday.
But people involved in the talks question whether the plan would have the financial scope to provide a buffer of last resort for Monte dei Paschi di Siena. Italy’s third-largest bank was the worst performer in the 2014 European stress tests, with about €170bn in assets and about €50bn in bad loans. It is considered by many bankers to be the major risk to Italian financial stability and regarded as too big to fail.
“Monte Paschi is the elephant in the room,” says one of Italy’s top bankers.
Monte Paschi is already trading at zero compared with its tangible equity value if its bad debt disposal is taken into account at current prices, says Johan De Mulder of Bernstein Research. By comparison, when Lehman Brothers collapsed in 2008 it was trading at about 20 per cent of its tangible equity.
In pushing for the plan, Matteo Renzi, Italy’s premier, is responding to mounting worries that the country’s banking sector, which suffers from overcapacity, weak profitable and poor governance, could pose a risk to wider European banking stability.
Berenberg analyst Eion Mullany argued that the “Italian banking sector is at a pivotal moment in its history”.
“We worry that a bail-in of an Italian bank may cause a chain reaction with ripple effects felt across the European banking system,” Mr Mullany added, referring to the possibility of bondholders and depositors in Italian banks being forced to participate in a rescue.
While concerns about Italian banks have been widespread for years, what has triggered the rush for a systemic solution is a €2bn capital call by regional bank Banca Popolare di Vicenza which is due to begin on April 18 and is wholly underwritten by UniCredit, Italy’s biggest bank by assets and its only globally significant financial institution.
ECB banking supervisors have demanded that Popolare di Vicenza raise €1.75bn to plug a hole uncovered by European regulators related to a financial mis-selling scandal.
The capital call is expected to price at a discount of more than 90 per cent to the unlisted bank’s theoretical price, according to people familiar with the matter.
Nonetheless, amid weak market demand, UniCredit looks set to be left holding some of the shares. This, in turn, could prompt UniCredit, which had core capital ratio of 10.6 per cent at the end of 2015, being forced to undertake a cash call itself, turning a local issue into a more systemic one.