From bad to worse
Prime culprit in this regard is, of course, Italy. Since the failure of Monte dei Paschi di Sienna’s private sector recapitalization at the end of last year and the resultant hasty proposal of a €20 billion bank rescue fund in December, things have gone from bad to worse. The new fund was approved on February 16 and will facilitate state-funded emergency liquidity guarantees and capital injections for the banks.
government has put in
place an emergency
state-backed bank liquidity
fund for Italy's banks
After the predictable failure of MPS’s huge rights issue last year, the ECB subsequently declared that the amount of capital that it needed to raise had increased from €5 billion to €8.8 billion. The exact cause of this increase is unclear, but the extra €3.8 billion figure bears a striking resemblance to the €3.6 billion shortfall in the securitization recapitalization plan maths that was identified in Euromoney’s September issue.
In early February, it also emerged that the Italian government is believed to be considering a €5 billion recapitalization of Veneto Banca and Banca Popolare di Vicenza: two banks that were rescued less than a year ago by Italy’s dedicated recapitalization fund, Atlante. Alternatively, the Italian government may take temporary stakes in the two striken lenders. In January, these banks proposed a settlement with shareholders who bought stock during the last decade whereby they would be reimbursed 15% of investment losses in return for agreeing not to pursue legal action against the lenders.
This doesn’t sound like much compensation for the 200,000 small investors who were wiped out by the rescue of the banks last year. But that state aid may now be sought to prop up banks so that they can to deal with the hit to investors that resulted from a rescue that took place less than a year ago shows just how fast the situation in Italy is deteriorating.
While a bad bank is fast becoming the go-to solution for the European authorities, national governments seem far more focused on another two-word option: precautionary recapitalization. This route enables banks to receive injections of state aid that comply with BRRD regulations if they can prove that the move is temporary and required to preserve financial stability and that the bank is still solvent. It is triggered by the failure of a stress test. MPS certainly failed its stress test – with a common equity tier-1 ratio of minus 2.23% in an adverse scenario – but to deem a bank with €23.5 billion bad loans as solvent is a stretch. If Veneto Banca and Banca Popolare di Vicenza are now going to go down the precautionary recapitalization route, they also need to fail a stress test, something the EBA is not planning to undertake until 2018. Perhaps most importantly, however, EU rules prohibit using a precautionary recapitalization to offset losses already incurred or likely to be incurred in the near future, which looks like something of a dealbreaker.
Italy’s new €20 billion bank rescue fund isn’t going to last long if just three banks are going to tap it for €13.8 billion within weeks of its establishment. A fourth bank, Banca Carige, is also on the critical list with €7.1 billion gross bad lending. It has been slated to attempt an NPL securitization under the Italian government’s GACS guarantee scheme by the end of March.
There is no getting away from the fact that Europe’s NPL problem is Italy’s NPL problem.
The country accounts for 26% of all bad lending in Europe. Some €276 billion of its €1.68 trillion gross loans outstanding are bad – by far the largest quantum from a single jurisdiction. France and Spain combined account for barely more: 27.2%. Proposals for a pan-regional bad bank are a positive sign that the magnitude of this problem is at last being recognised. However, the speed with which the situation in Italy is deteriorating means that these proposals have simply come too late.
A €20 billion rescue fund isn’t going to sort out Italy’s €300 billion bad debt problem. Arguably nothing will before the country’s sclerotic insolvency regime is comprehensively tackled. But, in the meantime, the European authorities should focus their attention on setting up a bad bank, or asset management company, for Italy as a priority. Getting these assets off the banks’ books and pooling them could give the GACS scheme a chance to gain momentum and give the banks themselves some respite from soaring capital requirements. Much as the BRRD regulations are designed to ensure that the opposite is the case, any pretence that this problem can be dealt with by investor bail-in and private capital alone has long since been abandoned.