The Italian banks and how they have contributed to a possible end to deposit protection



by Shaun Richards

A regular feature of recent years has been the Italian banking saga where we are continually reassured that banks are fine and then it turns out that they are not. Many of the misrepresentations have come from Finance Minister Padoan who was in fine form in January according to Politico.

Italian Finance Minister Pier Carlo Padoan has defended the way his country dealt with its banking crisis, saying the government had “only spent €3 billion” on bailouts, in an interview with Die Welt published today.

“We are the EU country that has paid the least to save its banks,” Padoan said. Out of 600 banks, only eight “have problems,” he noted, saying the “system as a whole is not in crisis,” having “withstood the financial crisis.”

Apparently this is a mere bagatelle or the Italian equivalent.

Italy’s banking system is groaning under €360 billion in bad loans,

Such is his loose association with the truth he claimed this.

“I assure you, we have no interest in state intervention,” Padoan said

whilst doing this.

The government has set aside a €20-billion fund to save banks, and is expected to provide roughly €6.7 billion of that to prop up ailing Tuscan lender Monte dei Paschi di Siena.

Oh and he had one last go at what in modern parlance is called “misspeaking”.

Everything has been done “according to European guidelines,” the finance minister added, defending the use of bail-ins, whereby creditors and depositors take a loss on their holdings to help rescue a failing bank.

Actually what was about to come drove a Challenger tank through the rules and in my opinion has contributed to potentially ominous developments for bank depositors in the Euro area. At the moment deposits up to 100,000 Euros are covered unequivocally but on the 8th of this month the European Central Bank published an opinion piece including this and the emphasis is mine.

The general exception for covered deposits and claims
under investor compensation schemes should be replaced by limited discretionary exemptions to
be granted by the competent authority in order to retain a degree of flexibility. Under that approach,
the competent authority could, for example, allow depositors to withdraw a limited amount of
deposits on a daily basis consistent with the level of protection established under the Deposit
Guarantee Schemes Directive (DGSD)34,

That has echoes of the demonetisation shambles that took place in India a year or so ago with queues around the corner for the banks. Now let us take care as the deposit protection scheme still exists as I have seen plenty of places on social media claiming it does not but there are questions about it in the future as you can see. One of my themes is in play here as we note that the ECB is much more concerned about “the precious” than the rights and maybe losses of depositors.

The ECB cautions that prolonged periods during which depositors have no access to their deposits undermine confidence in the banking system and might ultimately create risks to financial stability.

You don’t say!

Monte Paschi

Top of the list as ever is the world’s oldest bank and in terms of the terminator it’s back. From Reuters on the 25th of October.

Shares in the bank opened on Wednesday at 4.10 euros, which became the reference price for the session, and then rose to as much as 5.26 euros, up 28 percent.

That price translates to a paper loss of 1.3 billion euros for Italian taxpayers, who are set to hold 68 percent of the Tuscan bank, which was central to public and private finances in Siena and the surrounding region.

Italy’s government paid 6.49 euros a share in August, when it pumped 3.85 billion euros into Monte dei Paschi, and is spending another 1.5 billion euros to shield some of the bank’s junior bondholders, whose debt was converted into equity.

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Actually since then shareholders have had a rather familiar sinking feeling as the price as I type this is 3.95 Euros as I type this. Perhaps the former Prime Minister has suggested the shares are a good buy again as of course last time in an unfortunate mistranslation that actually meant good-bye. As I pointed out last week troubles are brewing around this issue. From Reuters.

A group of bondholders challenged Italy’s rescue of ailing bank Monte dei Paschi di Siena (MI:BMPS), suing the lender over the cancellation of their investments and calling for the bonds to be reinstated.

The Italian banking enquiry looked at the state of play yesterday and there are allegations of wrong doing pretty much everywhere as losses were hidden. Indeed Germany’s banking supervisor got dragged in as there are claims it kept back information on the derivatives contracts with Deutsche Bank.

Banca Carige

Next on the list there is this from Reuters this morning.

 Italy’s Banca Carige warned that its working capital is not sufficient to satisfy its own needs for the next 12 months, the lender said in he prospectus for its imminent capital increase.

Carige also said it had not yet received the final SREP assessment by the European Central Bank, adding it could not rule out a request by the authority for additional capital strengthening measures.

The bank secured backing from core shareholders and underwriters for a vital 560 million euro cash call in a last-minute agreement signed on Friday.

Creval

Here is IlSole from Sunday via Google Translate on this subject.

A 70% collapse in less than two weeks had not been taken into account by anyone in Sondrio. Yet that is what is happening in the title of Credito Valtellinese. The Lombard bank has seen its capitalization deflating from 280 million to 95 million in a dozen sessions. And triggering sales was the announcement of the same bank to raise a 700 million capital increase.

There are obvious issues in wanting an extra 700 million Euros when your value is 280 million let alone 95 million! Anyway the share price has seen better days as it has fallen by just under 6% to 1.38 Euros as I type this.

Banca Popolare di Bari.

In a former life I used to deal with quite a few Italian banks on behalf of Deutsche Bank and am straining my memory to recall if my trip to Bari included this one. Anyway times were seemingly much better than now if this letter quoted in i due punti in September is any guide.

An important letter sent by Federconsumatori Italia to the Minister of the Economy, to the Governor of Banca d’Italia and to the President of Consob ….
It reads on the Republic signing of Antonello Cassano ” The bank has ruined our lives, we want to go back our savings. ” It is a climate of anger and despair that one breathes in the headquarters of the Banca Popolare di Bari shareholder protection committee………Investigations by the Bari Public Prosecutor’s Office describe years of irregular management, loss accounts and abnormal loans. Heavy offenses challenged at the top of Bpb, by the association for delinquency and fraud until false statements in the prospectus.

Comment

There is much to consider here as this is happening at the wrong stage in the cycle as the Italian economy has improved ( 0.5% GDP growth in the third quarter) which should be supporting the banks. Some of the non performing loans will be improving. However contrary to the boasting of Finance Minister Padoan the low bailout figure for Italy was a form of denial as problems were hidden and then ignored meaning that they got worse. A factor in this has been Italy’s problem with the size of its national debt and an aversion to adding to it.So now we find ongoing troubles instead of improvement.

Also the ongoing crisis and subversion of Euro area rules has in my view contributed to the way that the ECB is now considering changes to deposit protection. There is an irony here as its President has a past deeply entwined with all this as not only was he Governor of the Bank of Italy but there is a clue in the way that the banking regulations are called the “Draghi Laws”! Here is how he sums up the current state of play.

The other trend is the growing resilience of the financial sector.

Just for clarity in officialese banks are always resilient up to the day they collapse. But Mario is bright enough to cover himself.

Clearly this trend hides some variation among banks, which is largely driven by differences in their business models.

Can anybody think of who he might mean?

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