The Italian job

Euromoney’s alternative award for speaking too soon will be a shoo-in this year. On June 7, after the overnight takeover of Spain’s Banco Popular by Santander, Elke König, Chair of the Single Resolution Board (SRB) declared that: “This shows that the tools given to resolution authorities after the crisis are effective to protect taxpayers’ money from bailing out banks.” 

Just two weeks and two days later on June 23 König’s SRB threw in the towel on two other European banks under its jurisdiction, Italian lenders Veneto Banca and Banca Popolare di Vicenza, and concluded that the conditions for a resolution action had not been met. “The banks will be wound up under Italian insolvency procedures,” it stated. 

The cost to the Italian taxpayer, for this bailout? Up to €17 billion. The two Italian banks have dodged the long arm of the BRRD because the SRB decided that their failure would not have an adverse impact on financial stability in Italy. That’s quite a claim and not one many Italian bankers would agree with.

So, to declare the BRRD as effective in protecting taxpayers’ money from bailing out banks is, in reality, a bit of a stretch. It is only protecting against taxpayer rescues for really big banks. The problem is that Europe still has a lot of struggling small, regional lenders. And some that are not so small.

In December 2016, the two lenders had combined total assets of €63 billion and they had passed the EBA stress tests last year. Their combined NPL ratio was a staggering 37%, however, amounting to €18 billion in soured lending.

Their fate is similar to that of Banco Popular in that equity and subordinated bondholders have been wiped out and the banks sold to a larger national lender for a token €1. It is also similar in that the €11.8 billion senior bondholders exposed to the two banks and their €25.8 billion depositors have been protected, but unlike the Spanish rescue it is Italian taxpayers that have been hit instead. 

There is €1.2 billion subordinated debt outstanding, €200 million of which was sold to retail investors. Intesa is understood to have allocated €60 million towards compensating retail holders of these subordinated bonds that have been wiped out – a politically explosive issue in Italy. 

Crucially, however, the sale does not include that mountain of bad assets of the two banks. It looks like a great deal for Intesa, which analysts at CreditSights estimate will be taking on around €28 billion of RWAs. The government is paying Intesa €5.2 billion to take on the good assets – €3.5 billion to protect its own capital ratios and €1.5 billion protection against claims on the banks. There are also €12 billion of state guarantees to cover the wind down of the bad banks and the impact of the acquisition – this is where the potential €17 billion cost to the taxpayers comes from. 

It is pretty clear that the likelihood of any institution getting out from under a 37% NPL ratio by any other means than resolution is very slim. This rescue should be a red warning light for investors in many other smaller Italian banks with similar problems. 

When Banco Popular was rescued by Santander there was a lot of crowing in Brussels about the triumph of post-crisis regulation that this represented. No-one should take any credit for the wind down of Veneto Banca and Banca Popolare di Vicenza. 

Discussions over what to do with them have been going on for years. Economy Minister Pier Carlo Padoan sounded utterly defeated when he announced the deal: “Those who criticize us should say what a better alternative would have been. I can’t see it,” he said. Spinning the rotten assets out into a bad bank two years ago springs to mind.

Far more upbeat was Intesa Sanpaolo CEO Carlo Messina, who declared that “Without Intesa Sanpaolo’s offer – the only significant one submitted at the auction held by the government – the crisis of the two banks would have had a serious impact on the whole Italian banking system.” 

That’s a particularly illuminating observation given that the SRB had deemed the banks not to be of sufficient scale to have impacted financial stability. Does Messina know something that König doesn’t?

The two banks lost 44% of their deposit base between June 2015 and March 2017, not so much a run on the banks as a prolonged stroll. They had already been rescued once: their failed listings had necessitated the establishment of the €4.25 billion Atlante rescue fund in April 2016 – a fund in which Intesa Sanpaolo was the largest shareholder with a €845 million stake. Even at the time it was clear that the problems of these and many other Italian banks were such that Atlante was merely sticking a finger in the dyke. 

When Euromoney examined the Italian NPL crisis in depth last August market experts were already suggesting that this is the country where the BRRD would come unstuck. “Look at the consequences of ignoring state aid rules: in situations of emergency there is not much of a stick that the EU can deploy,” Etay Katz, partner at Allen & Overy told us at the time. “The sanctions are not strong and the alternative is calamity.” 

This bank rescue sticks to the letter of the new regulation, but deeming these banks not to be a threat to financial stability is just a fudge to burden the Italian taxpayer with the cost of their rescue – something that the market has long expected but that, under BRRD, should never have happened.