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10/12/2016

JPMorgan Chase planned to buy Italy’s troubled Monte Paschi

Euro & Finance

JPMorgan Chase planned to buy Italy’s troubled Monte Paschi

Italy's Minister for Economy Pier Carlo Padoan said BMPS did not pose a risk to other banking systems.

[Lisbon Council/Flickr]

JPMorgan Chase wanted to buy troubled Italian rival BMPS but abandoned the plan over fears it would be vetoed by US regulators and opposed in Italy, people close to the deal told AFP on Wednesday (3 July).

Jamie Dimon, chief executive of the largest US bank by assets, and Daniel Pinto, the London-based head of JPMorgan’s investment and finance department, are behind the plan to bail out the Banca Monte Paschi di Siena unveiled last Friday (29 July), according to the sources, who asked to remain anonymous.

Their first idea, the sources said, was the outright purchase of the heavily indebted BMPS, which the European Central Bank last week cited as the financial institution most susceptible to bankruptcy according to EU bank stress tests.

EU readies contingency plan for possible Monte Paschi wind down

European Union authorities are making contingency plans for the possible winding down of Banca Monte dei Paschi if the Italian lender has a poor reading in stress tests this week and no private or public support is available, an EU official said.

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Italy’s Minister for Economy Pier Carlo Padoan said on Wednesday the country’s banks are not in systemic crisis and pose no threat to other banking systems.

“The Italian banking system is not in systemic crisis nor is it a source of vulnerability for other banking systems,” Padoan said.

Contacted by AFP, JPMorgan declined to comment.

Unfavourable climate for megabanks

JPMorgan has deep pockets – last year the firm made a net profit of $24.44 billion. In contrast, BMPS is in a stock plunge. The Italian bank was valued at a little more than $800 million on the market on Wednesday.

The problem is that the current environment is hostile to megabanks, one of the sources indicated, adding that JPMorgan hesitated to pursue a bid, fearing US authorities would take an unfavourable view of a US bank rescuing a European firm.

US regulators want to force large financial institutions considered a potential systemic threat to the financial system to reduce their size. In the aftermath of the 2008 financial crisis, they have imposed significant increases in capital requirements of banks deemed “too big to fail” and tightened their oversight.

JPMorgan also feared a backlash to the acquisition in Italy and in Europe where big banks are not favourably viewed in the press, the other source explained.

The US bank now believes the best solution would be an injection of funds, the support of the government and improved governance, the two sources stated. According to its calculations, €5-6bn would be sufficient to stabilise BMPS.

Italy averts banking crisis with EU deal on bad loans

Italy and the European Union reached agreement on Tuesday (26 January) to help Italian banks sell bad loans, averting a major banking crisis which had been brewing for over a year.

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Dimon discussed this with Italian Prime Minister Matteo Renzi while he was in Italy in early July for the 100th anniversary of JPMorgan’s presence in the country, the sources said. He also discussed it with the BMPS management team.

JPMorgan’s rescue plan for BMPS is twofold.

The first part entails the resolution of bad debts estimated at €27.7bn at the end of March, which would be put in a specific financial instrument.

The second part is a capital injection of €5bn, to which Goldman Sachs and Citigroup have already agreed, according to one source.

Banco Santander, Credit Suisse, Deutsche Bank and Bank of America Merrill Lynch also were expected to participate, according to the Financial Times.

The rescue is aimed at restoring confidence in and stabilising BMPS through the end of the year, preparing it for a merger with a stronger banking group, the other source close to the situation explained to AFP.

Background

Italy and Spain test EU’s 'intelligent' use of economic rules

The European Commission is expected to fine Spain on Wednesday (26 July), but it will give two extra years to Madrid to adjust its budget - while the commissioners pledge a solution for Italian banks that will protect small investors.

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