Italy banking: The ever-recurring nightmare of bailout

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Published on:

It is time European regulators proposed a BRRD that is fit for purpose.

Want the clearest evidence yet that Italian banking has few if any options left? Then just look at the name of the latest senior appointee in the sector.

Yes, it is none other than former Monte dei Paschi di Siena chief Fabrizio Viola. He stepped down after stricken MPS failed its 2016 EBA stress test.

Now, in a sign of just how bad Italian banking really is, Viola has been picked to be chairman of Veneto Banca’s strategic committee overseeing its merger with Banca Popolare di Vicenza. Veneto was virtually forced into a merger deal by rescue fund Atlante after the bank’s failed IPO in June

MPS, meanwhile, has been through four rights issues in eight years (before December’s attempt, uncompleted at the time of writing), burned through billions of euros of fresh capital and failed two stress tests. It is still the weakest large bank in Europe and, as the year closed, it was still unclear if any rescue plan would come to fruition.

The problem of course is that EU rules are getting in the way. Not for the first time, regulations with good intentions in Brussels are having a hugely negative effect. The Bank Recovery and Resolution Directive is the epitome of this.

Playing the game

It has often been said that money, like water around rocks, will always find its way around regulation. But the focus of that statement has usually been on the practices of private market participants. Over the last year, however, the state has also been pretty good at playing that game. BRRD has only been in place for one year and already it has been necessary for statesmen to employ financial and linguistic gymnastics to find ways of saving an already weak banking system in Europe without falling foul of the rules. 

It is clear that the pace and nature of reforms like BRRD are not fit for purpose. If Deutsche Bank, for example, began to fail, could Europe afford not to step in? If it did, what would be the political reaction across the continent? 

The resultant peril of such a strict rule is that Europeans not only lose faith in their financial sector (again), they also lose faith in the integrity of the rules put in place to protect them from another great recession.

Euromoney has long suggested that the capital problems at Italian banks in general – and MPS in particular – cannot be fixed without state aid. The sustainability of banking in much of Europe has been in question for some time and will almost certainly be in question for years to come. 

It might be time, then, to take a new look at BRRD, just as regulators plan to do with other post-crisis regimes like Mifid II or Solvency 2, to make it fit for the banking system Europe actually has: one that is still far too fragile to bar state involvement entirely without putting the whole economy at risk.