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All hail Europe’s Goldilocks bank rescues

By Tyler Davies
27 Jun 2017

It's been uncanny how all of Europe’s recently failing financial institutions have failed in just the right way to ensure the most favourable outcome for the competent authorities.

Much to the surprise of some market participants, Banca Popolare di Vicenza and Veneto Banca, the long struggling regional Italian lenders, were put in liquidation this weekend.

You could argue, as the Single Resolution Board (SRB) did, that neither firm met the conditions for a resolution. After all, not every bank that is “failing or likely to fail” has to be wrung out through Europe’s shiny new rulebook. 

Indeed, bypassing resolution is right there in the text of the bank recovery and resolution directive (BRRD) itself, which says that “the winding up of a failing institution through normal insolvency proceedings should always be considered before resolution tools are applied”.

But the SRB’s decision rested on the idea that Veneto and Vicenza were just too small for their failures to have any “significant adverse effect on financial stability”, and therefore resolution proceedings would not be in the “public interest”.

Funny, then, that the European Commission should determine that Veneto and Vicenza were just large enough that the Italian government should be able to use up to €17bn of public funds to smooth the sale of the good parts of the two banks to Intesa Sanpaolo and mitigate a potentially “serious impact on the real economy in the regions where they are most active”.

The result was that Italy got exactly what it wanted. Regional authorities respected all of Europe’s rules on resolutions and state aid, and nobody had to impose losses on any senior bondholders, including significant numbers of retail accounts.

We’ve been here before in a different form.

Earlier this month the SRB, working in tandem with the Spanish national resolution authority, found a buyer for Banco Popular at just the right time and at just the right price.

Banco Popular’s treatment was pretty much as clean an application of the BRRD as anybody could have hoped for, but the numbers were pretty convenient for everyone involved. It just so happened that the white knight Santander was prepared to raise €7bn of new capital and to value Popular at €1 plus all of the firm’s regulatory capital and nothing more.

The result was that Santander expanded its presence in the domestic market by taking on a profitable business, Spanish taxpayers never had to dip their hands in their pockets, and, once again, nobody had to impose losses on any senior bondholders.

Senior bank debt investors have already started interpreting recent events as a sign that conditions will always be just right and senior debt will continue to be spared from bail-in.

Just this week, the iTraxx senior financials index moved to trade inside the main index for the first time in a very long time. iTraxx's senior index still largely excludes all new forms of explicitly bail-inable senior unsecured bonds, including holding company level debt and non-preferred securities.

But with all the will in the world, the numbers are unlikely to add up forever. At that point, someone will find their porridge much too hot, and then the bears will come home.

By Tyler Davies
27 Jun 2017