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It had to be EU: no roads lead to Rome for Italian banks


Whatever the Italian politicians who form the next government say or do, it is in Brussels and Frankfurt where the fate of Banca Carige and its ilk lies.

Italy’s populist Five Star Movement has positioned itself against Europe’s bail-in regime for banks, whereby bondholders take the losses when a bank is in trouble. Party officials have called it wicked and diabolical.

With the party potentially heading up the next administration, could the fundamentals of investing in Italian banks change? If the next Italian government wants to better protect bondholders, does that make a risky high coupon product like Carige’s upcoming tier two more attractive?  

Or should the likely unpredictability and euroscepticism of the next government put investors off?

The answer to both questions is no, because Italian lawmakers are paper tigers when it comes to banking regulation.

It’s the European authorities which decide whether a reasonably sized struggling Italian bank should be recapitalised with public money (like Monte dei Paschi di Siena), put into resolution, or wound down under national law (like the two Venetian banks).

When it comes to the sector more generally, the EU is shaping the future. The European Commission and the European Central Bank are looking to tighten up how banks provision for non-performing loans — seen as the biggest obstacle facing the Italian lenders.

And as for setting targets for banks’ minimum requirement for own funds and eligible liabilities (MREL), the Single Resolution Board’s chairwoman Elke König made a bid for more power on Tuesday, when she proposed that her organisation be able to go directly to banks rather than through national regulators.

If you’re a FIG investor, ignore the political noise in Rome and focus on the Eurocrats. 

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