How the banking union fell into an Italian abyss


Dominic O’Neill
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Despite the latest attempts to stymie them, Eurosceptic populists remain the most powerful political force in Italy – largely thanks to anger at a banking crisis, often fanned by the ECB. Now their approach to power is killing the last chance of fixing the banking union, and possibly the euro.


European bank CEOs at the Institute of International Finance’s (IIF) meetings in Brussels last week expressed lofty ideas about how financial integration can fill the power gap with US capitalism.

It is wishful thinking. The near formation of a government by rival Italian populists Luigi Di Maio and Matteo Salvini is the elephant in the room at the meetings.

Brexit, it seems, has not ended European fragmentation. Consensus is in ever shorter supply, even on the fundamentals of currency union. As a result, the best that European and especially Italian banks can realistically hope for is market complacency on political risk, and perhaps less-stringent regulatory demands.

This might not be a return to the 2011 crisis, yet. Italian president Sergio Mattarella’s refusal of the populists’ choice of finance minister means fresh elections, more instability and possibly another card for the populists to play.

But the populists’ approach to power is making it far less likely that the currency union will complete its banking union. Indeed, their force relies not just on a desire to do away with European budgetary rules but also with bail-in rules, a foundation of banking union.

Italy’s political storm comes just as a better economy, and the afterglow of Europhile president Emmanuel Macron’s election in France, was a chance to strengthen the eurozone.

This year, the European Parliament will do well just to pass banking risk-reduction packages. Even the quantitative detail of bail-in buffers has triggered arguments between the Mediterranean countries and the supposedly more cautious north, causing delays.

Lame duck

Now the European Parliament will soon be a lame duck, as early 2019 European elections approach. Events in Italy suggest Eurosceptics could hold more sway in the next parliament, despite the absence of the British.

There is certainly no admission at the IIF, for example, by German savings banks’ association the DSGV, that this is the time for compromise on risk sharing: including a fiscal back-stop for the Single Resolution Fund and a European Deposit Insurance Scheme (EDIS).

For them, even if the north gets its way on bail-in buffers, recent Italian politics will be even more reason to wait until non-performing loan (NPL) ratios are much lower than they are today – and ideally take EDIS off the table, or at least heavily water it down.

A strong eurozone-wide system of deposit insurance is nevertheless crucial to stabilizing the euro by breaking the bank-sovereign loop.

Roberto Gualtieri, chair of the European Parliament’s economic and monetary affairs committee, is from the Italian centre left. He recognizes the scheme must come gradually, even if he thinks northern European fears are unfounded.

The subordination of existing national deposit insurance schemes to losses is “a strong argument against the moral hazard” of EDIS, he tells Euromoney. “I want a consensual effort to find a solution that gives the necessary guarantees.”

When there is no risk-sharing warmth to the cold implementation of standards, it is no wonder that the EU is running out of political capital 

However, the banking union, even the euro, is dangerously predicated on the establishment’s possibly vain hope that populist governments in Italy and elsewhere will stay out of power, or rapidly collapse under the weight of their promises including on fiscal austerity.

For the likes of the DSGV – Germany’s most powerful banking lobby – EDIS would be another way in which the Mediterranean countries endanger Germany’s stability. For them, it would mean risk contagion, rather than protection through pooling. Queues outside German banks would be more likely, not less.

Even if Italian banks are safer than before, this might be a particularly worrying thought for the German savings banks, given the questionable sustainability of their own business models.

There is one policy on which the DSGV and Gualtieri have recently been on the same side. That is on the European Central Bank’s (ECB) proposed guidance late last year for NPLs to have fully provisioned set-time periods.

The idea was always going to cause a wobble for some banks, particularly in Italy. Gualtieri, meanwhile, also objected to the institutional overreach into the legislature’s regulatory prerogative.

Speaking at the IIF, ECB board member Ignazio Angeloni boasts that the eurozone’s rising capital ratios, and falling NPL ratios, is partly thanks to the Single Supervisory Mechanism’s distance from local interests, both political and private, since its creation in 2014.


Given the Bank of Italy’s previous sluggishness to deal with NPLs, he has a point. On the other hand, the European Parliament’s questionable ability to hold the ECB to account – and the vast power the ECB has assumed, so obvious in the arrogance of its NPL overstep – is a problem.

Italy’s predicament is another reminder of the dangers of EU technocratic aloofness. It was on the eve of the implementation of the new bail-in rules, two years ago, that the European Commission competition authority insisted that subordinated bondholders – including retail – should be wiped out in the rescue of four small banks in central Italy.

The populists would probably not have won the last election had it not been for that decision, according to Gualtieri.

The likes of Di Maio and Salvini are just as angry at taxpayer-funded bailouts as they are to bail-ins which hurt retail investors. This is why it is so important to give the banking union financial backing. When there is no risk-sharing warmth to the cold implementation of standards, it is no wonder that the EU is running out of political capital.

Alas, as wild pronouncements from Italy confirm northern Europe’s worst fears, it might be too late.