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Italian chaos raises questions for regulators

The ECB can’t risk large disruptions in the European capital markets it is trying to support, nor paranoid doom spirals in the banks it supervises. So it needs care when and how it communicates with the market.

In Sunday, a European Central Bank spokesman reiterated that the regulator is putting more effort into solving Europe’s non-performing loan problem. 

On Monday, Italian bank stocks were thrashed, on the same news — that is, on no news. The ECB is the supervisor for the big Italian banks. It absolutely should be looking at non-performing loans, and encouraging banks to solve that problem post haste. But markets are jumpy, and even a reminder that many Italian banks are laden with NPLs was enough to spook them.

After a temporary ban on short selling Monte dei Pasch di Siena shares, Tuesday saw MPS, along with five others, announce at the request of Consob, the Italian securities regulator, that the ECB was asking them for information on the management, governance, and strategy for disposal of their NPL portfolios.

Impaired and non-performing loans have been increasing in Italy, but that’s well known too. Non-performing loans were high at the time of the Asset Quality Review; some have been sold, some new loans have gone bad, but nobody thinks the problem has gone away. 

That’s a rough translation, but the gist is that there’s no (new) emergency. GlobalCapital can't tell you whether the banks will be broken by their NPL problems, or whether rolling and restructuring the debt will solve the problem. But either way, the market should have formed a view a long time ago.

So why did Monday see so much selling (and shorting) of Italy's banks?

The ECB had only told the market on Sunday that it would put more effort into solving the non-performing loan problem - not that it had asked specific banks for detailed strategy updates on NPLs.

The Italian Banking Association rushed to remind the public on Tuesday that there is nothing new to report, and that the request for information is “it is an ordinary exercise of gathering information (stock taking) on which to base later works which are not… for the adoption of specific measures against some banks.” 

Perhaps the potential for a detailed information request on NPLs should have been in the price already, but it sure looked market-sensitive. So did anyone manage to sell on non-public information?

Consob, the Italian securities regulator, had already threatened to take decisive action on possible leaks. It will ask banks to disclose information fully if it suspects any market sensitive leaks associated with the new asset quality review, according to a report in September last year.

This week, too, it took swift action to force its banks to make public announcements, though after it imposed the ban on short selling. But there’s no guarantee that any given national authority will be able to take quick action next time.

It isn’t to say that there was any sort of information leak — Consob may have merely thought it probable, given what it knew about the ECB’s plans, and the wildness of Monday’s price falls. And, no doubt, the ECB or Consob have strong measures and policies in place to manage sensitive information.

But moves like Monday's don't look good, while the ECB is now also a major investor in European bank-related credit. Now would be a good time for the central bank to show off its sober supervisory credentials, to demonstrate the strength of its safeguards, and to calm markets down.

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