Prospect China

Italy insists there's 'no banking problem' as stress tests loom large

Ignazio Visco: Only some Italian banks have problems
Need to lay out projects for remaining EU states: Moscovici

Top finance officials in Italy have moved to play down the issues the country's banking industry is facing, just days ahead of crucial stress tests by the European Central Bank (ECB).

Speaking on the outskirts of a Group of 20 (G20) finance leaders meeting in Chengdu, China, Italy's Finance Minister, Pier Carlo Padoan, told CNBC that the Italian banks "do not need [a] rescue."

"There is no banking problem in Italy, it's one particular case which is being dealt with ... I'm confident this will be successful," he said Sunday, highlighting issues at Monte dei Paschi (BMPS). That institution is thought to be the weakest link among lenders in the euro zone's third-largest economy.

'Effective restructuring plan'

Italian policymakers and EU officials have been trying to deal with its fragile banking system, bogged down by non-performing loans (NPLs) estimated to total 360 billion euros ($400.7 billion). Reports had suggested that Matteo Renzi, the Italian prime minister, is hoping to bailout the banking sector, which would contravene EU rules. Such a solution would stand in contrast to a bondholder "bail-in," as Italian households are heavily exposure to the asset class. These reports have since been denied.

These problems in Italy have roiled stock markets in the past few weeks, alongside the uncertainty following the British vote to leave the European Union. Shares of BMPS have been particularly volatile. However, Padoan told CNBC that this particular bank had put in place a "very effective restructuring plan" and said there had been a widespread misunderstanding of the whole industry.

"(Italian banks are) not more vulnerable than they used to be. They have been strengthening over time due to reforms that have been introduced by the government," he added.

Ignazio Visco, governor of the Bank of Italy and member of the ECB, told CNBC Sunday that it was "totally wrong" to fear that the whole banking system in Italy had problems.

Speaking at the same event, he added that a large portion of the NPLs would be resolved in an orderly fashion, and that some had already been written off on the balance sheets of some banks.

Stress tests due

The European Banking Authority and the European Central Bank will release the results of new stress tests on Friday. The tests differ this time round as they are looking at general health issues of euro zone lenders. Some are anticipating capital shortfalls for Italian banks.

Pierre Moscovici, European commissioner for economic affairs, told CNBC in Chengdu that the sector was much better protected "collectively" now and said he was sure the stress tests would show that.

He added that he hoped there would be a "positive outcome" for the Italian banks with regards to a rescue plan. "I'm sure that we will find solutions in our common interest and in full respect of our (EU) current rules," he told CNBC.

Alessia Pierdomenico | Bloomberg | Getty Images

Meanwhile, both Padoan and Visco were optimistic over the upcoming stress test results. Padoan said there was no systemic issue with Italian banks and was expecting the results to reveal that Italian lenders will "fare on average or even better than other European banks."

Visco didn't expect the tests to show any systemic problems, but said that it may find some problems for some banks.

"There will be solutions needed and I'm sure that with the difficulties coming out, solutions will also be found," Visco said. "At the same time, we have to understand that these stress tests are a peculiar kind of test ... they don't allow for reactions on the part of banks once the problem has come out," he said.

IMF warning on growth

Several analysts have given stern warnings over the Italian banking system in recent weeks. A report by the International Monetary Fund (IMF) said Italy is in for a slow economic recovery and might not reach pre-crisis growth levels until the mid-2020s.

David Lipton, the first deputy managing director of the IMF, told CNBC Sunday that it was very hard to know exactly the state of Italian banks. He said that the Italian authorities and the European banking authorities were looking at the subject very carefully and we should know more in time.

"I think the Italian authorities are trying very earnestly to deal with whatever problems that may come up," he told CNBC at the G20 event in China.

Lipton is not worried that there's a looming banking crisis in Italy and said there are significant provisions against some of those non-performing loans in the sector.

"I think that there are stresses and a couple of well known cases of banks that have some problems that have to be addressed," he later added.