European Banks: The Complicated Failure Of Two Italian Lenders
A bank sickens slowly but dies fast. For several years, Veneto Banca and Banca Popolare di Vicenza, in the thriving Veneto, in north eastern part of Italy, had been greatly affected by mismanagement. The level of high crime rate has also led to the fall of these banks. For months, the Italian authorities had been debating with European authorities on how to save these financial bodies from completely crumbling.
For weeks, it had been unlikely that private investors alongside the state would invest money, as was insisted by the European Commission.
On the 23rd of June, the European Central Bank announced that banks were likely to fail or failing already. Two day later, just after a berserk weekend, the Italian authorities declared them dead: all their nice assets were disposed to Intesa Sanpaolo, the second biggest lender in Italy, for a token of $1.14, and their dud assets deposited into a “bad bank”. This whole operation may cost taxpayers 17bn Euro. On the first of June the commission approved the rescue of long-affected Monte dei Paschi di Siena (the fourth biggest bank), and this is anticipated to cost the state 6.6bn Euro.
On the 26th of June, the Veneto banks’ client had a bit of hope when various branches opened. So did the stock market: there was rise in bank shares. So did the holders of the lender’s senior bond, which will be given to Intesa In early June, they traded at below 74% on the euro. They scaled to above par.
Even with all these improvements, the bailout has led to confusion on the euro zone’s new and sparsely tested policy of handling failing financial institutions.
After the declaration by ECB, responsibility was handed to the Single Resolution Board (SRB), a distinct agency established by the commission.
Just one other case has been presented to the SRB. On the 6th of June, the ECB regarded Banco Popular, the sixth largest bank in Spain, to be in its death throe. The SRB placed Popular in “resolution” – An European system for winding financial institutions – and one morning, it was announced that it’s been sold to Santander, the biggest spender in Spain, also for 1euro. In January 2016, a rule was passed that bonds (both junior and senior), equity, and deposit above 100,000 euro must take an 8 percent loss of total liabilities before injecting public money into a bank. Junior bondholders and shareholders were wiped-out, but top creditors were spared. A single cent was not paid by taxpayers; Santander will raise 7bn euro in equity.
The Single Resolution Board handled the Italian pair in a different way. It concluded that it was “not warranted in the public interest” to resolve them. Their failure would not have any “significant adverse effect on financial stability”, due to the restricted interconnections with other financial bodies (towards the end of 2016 they were 10th and 11th biggest by asset in Italy.) Instead, the SRD decided that they should be handled under the Italian liquidation law. Junior debt holders and shareholders will suffer losses, however, retail investors who have 200m euro in junior bonds will be reimbursed for inappropriate selling; these such bonds were routinely sold to retail customers by Italian banks. Senior creditors remained untouched.
Although the resolution board saw no threat to stability, the authority sensed a risk in the economy of Veneto. Insesa will be paid 3.5bn euro to balance the effect of additional assets on its capital ratios. Also, it will get 1.3bn euro to cover cost of integration, including the shutdown of around six-hundred branches. Its market share will climb to 30 percent. Mediobanca, a big investment bank, evaluates the acquisition will rake in profits of 250m euro by 2020. Efforts from the government is still on to put up 12bn euro in guarantees against any potential losses, albeit, it anticipates to spend just a little fraction of that; and some of the senior debt of the bank was state guaranteed, so it’s likely to have stored money there. The aid was approved by the commission competition arm.
Italy’s bunch of under-performing loans are at last shrinking. But there still worries – mainly about Carige – a Genose bank. As long as the economy continues to struggle, majority of the lenders will also struggle for gain. Although there is consolidation taking place, the number of bank’s branches in Italy exceed its pizzerias; in spite of the recent reform, there is still low outcome of bad debt recovery.