World Economy

Italy is testing the limits of the EU's bank-bailout system

Neil Unmack
A Veneto Banca branch in Venice, Italy.
Alessandro Bianchi | Reuters

Italy is testing the limits of Europe's bank bail-in regime. Regulators are threatening to block Rome's plan to rescue two small lenders. A scheme to save Monte dei Paschi has also run into trouble. The government may yet have to help in any solution.

The European Commission allows governments to inject money into ailing lenders, but only if they are viable and private investors contribute. That's proving a tricky hurdle for Italy to clear.

Banca Monte dei Paschi di Siena's rescue has already received the green light from Brussels, but it needs to find investors to shift 26 billion euros of bad debt off its books. Two of the mooted backers, Fortress Investment Group and Elliott Advisers, have just walked away, Reuters reported on June 16. A solution might still be found if Atlante, a bad loan investment vehicle funded by other Italian banks, takes more of the burden.

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Rescuing two small Venetian banks – Banca Popolare di Vicenza and Veneto Banca – is proving even harder. The Commission wants at least 1.2 billion euros of the total 6.4 billion euro rescue package to come from the private sector. So far, other Italian banks have refused to help, making EU approval unlikely, La Stampa reported on June 18.

Another option is to follow Banco Santander's recent takeover of Banco Popular in Spain. European regulators placed the country's sixth-largest lender in resolution, wrote down its equity and subordinated debt, and sold the remainder for 1 euro.

A similar cleanup in Italy would see the Venetian banks sold to a bigger rival like Intesa Sanpaolo. Yet that still looks hard. Writing off combined equity and subordinated debt of 4.4 billion euros might just cover the cost of increasing provisions for bad and doubtful debts, Deutsche Bank reckons. But that would leave little margin for further losses – likely given the banks' history of chequered lending – and potential litigation risks. Steeper losses would mean imposing haircuts on senior creditors, which could also harm depositors.

Another option is for the banks to be broken up, the good bits sold, and the bad debts left behind. The government would probably have to put up the capital for a bad bank. But regulators may see such a solution as preferable to bailing out a live institution. The outcome will depend on Europe's willingness to be flexible with its rules.

Commentary by Neil Unmack, a London-based columnist at Breakingviews. Follow him on Twitter @Unmack1.

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