Last November four small Italian banks had to be placed in resolution, at a €3.6bn cost to the banks that made contributions to the country’s Resolution Fund.
A pensioner who held subordinated debt in one of the affected banks committed suicide in the immediate aftermath, and the dust is yet to settle on the bail-in.
Confidence has faded from the Italian financial sector, despite progress from the government on its banking reforms, leaving Italian bank shares down by nearly 40% in the last six months.
That backdrop is hampering the progress of the recently established bank rescue fund, Fondo Atlante, which was expressly set up to avoid a repeat of the November resolutions.
Atlante was supposed to provide a back-stop for Banca Popolare di Vicenza’s IPO, but the fund ended up underwriting all of the bank’s €1.5bn capital raise, after lack of interest from private investors. Veneto Banca’s capital raise could be set to go the same way.
If Vicenza or Veneto Banca were unable to raise the money at all they would have been forced into resolution, which the fund’s creators believed would have triggered a systemic crisis in Italy.
In short, people are worried the very tool regulators proposed to prevent crises may actually end up causing one.
Part of the problem is that governments are no longer able to support faltering financial institutions, regardless of the circumstances surrounding their weakness or the possible repercussions of their failure.
In particular, under the Bank Recovery and Resolution Directive, any action that constitutes State Aid under the EU’s new laws automatically triggers a situation whereby the bank must be placed in resolution and bonds must start to be written down.
“The directive acknowledges that, in exceptional circumstances, it may be necessary and indeed beneficial to bring in public money, notably in the form of bank recapitalisations,” says the European Parliament. “However the scope for such interventions is tightly framed.”
Post-crisis banking legislation has wrestled with two main, thorny issues.
On the one hand regulators want to maintain financial stability by supporting banks responsibly, while on the other hand they do not want bankers to be so assured of a safety net they start pursuing riskier behaviour.
But regulators need to allow more flexibility in applying the rules. Government intervention is not inherently bad, especially when the country in question faces serious economic risks.
Atlante is looking to recapitalise Italy’s weakest financial institutions with only €4.25bn of contributions from other financial institutions, many of which have their own problems to deal with. The fund also seeks to use what is left to tackle the country’s enormous €360bn non-performing loan problem, something it simply cannot do alone.
But market participants pored over Atlante’s details to make sure Cassa Depositi e Prestiti’s minuscule contributions did not constitute state aid, while also bemoaning the fund’s lack of firepower and that it was dragging the country’s healthier institutions further into the mire.
“In Europe, almost every government, apart from France and Italy, stepped in with bank recapitalisation during the crisis to the tune of 10% of GDP or more, which we all ought to appreciate,” says Erik Nielsen, chief economist for UniCredit research.
“A guarantee of less than 5% of Italian GDP would practically eliminate the Italian banks’ non-performing loans.”
Atlante shows that institutions can pull together to create a short term private sector salve for the banking sector. But it also shows that a private solution simply may not be enough to resolve very public problems.