Liquidation of Italian banks shows limits of banking resolution rules

The European Commission’s approval of a €17 billion aid package for an orderly wind-down of Italy’s Veneto Banca and Banca Popolare di Vicenza, has sparked doubts about the strict application of banking resolution rules.

The Banking Recovery and Resolution Directive, the new framework to deal with failing banks in Europe, spread the losses to shareholders, and junior and senior bondholders before public money could be injected.

But on Sunday (25 June), the Commission accepted a cash injection of €4.8 billion and state guarantees of a maximum of €12 billion, to support the acquisition of the two banks by Intesa, an Italian lender.

Despite the massive state aid package, EU officials argued that banking union principles were not breached.

The operation escaped the direct intervention of the Single Resolution Board, as it did not believe the public interest was at stake.

The board ruled out that the financial stability in Europe would be affected by the collapse of these two banks that jointly hold €55 billion in assets.

The liquidation was handled by the Italian authorities, who decided to inject public money in order to avoid a major shock in the Veneto region where the two banks play an important role.

The Commission approved the scheme under its state aid rules, amended after the financial crisis. These rules are less severe than the BRRD in terms of creditor involvement in winding down a bank.

As part of the liquidation process, all shareholders and junior bondholder assets were wound down but senior creditors were saved. The Commission accepted Italy’s argument that extending further the losses could affect the financial stability and the regional economy of the Northern region.

Without public support, EU officials argued that the shock would have been more significant, as all branches would be closed on Monday, all jobs lost and credit lines frozen.

As part of the deal, the two banks will materially disappear- although part of their structure will remain. Around 60% of the branches will be closed and 40% of the staff fired.

Not all the same

The use of public money contrasted with the recent restructuring of Banco Popular, the first resolution led by SRB on 7 June.

In that case, the Board decided to transfer all the assets to Santander for a nominal €1, but the buyer had to raise €7 billion in capital to cover potential needs and no public guarantees were extended.

This is the second time this month the Commission authorised the use of public money to save Italian banks. The executive allowed a state-backed rescue to bail-out Monte dei Paschi di Siena. In this case, it was argued that MdP was a solvent entity that only required a precautionary recapitalisation.

While the case of Popular was hailed as a “successful” application of banking resolution rules, the Italian cases proved how member states still enjoy some leeway to resolve their banks according to their national interests and their political agenda.

Italy was wary of the social consequences of a full-fledged resolution that could spread further the losses among protected bondholders. Many of them retail investors who were victims of misselling.

EU officials explained that “there is not a one-size-fits all solution” in the banking union and they insisted that the decision was “well-grounded” on EU banking resolution and state aid rules.

It was an “useful” step forward, the officials insisted, highlighting that the two latest decisions on Italian banks served to clean €46 billion in bad assets (non-performing loans) and helped to consolidate the financial sector in Italy as Brussels requested in numerous occasions.

But legislators and experts questioned the arguments used and the integrity of the new rules.

Silvia Merler, affiliate fellow at Bruegel, recalled that the Italian government tried last year to use precautionary recapitalisation, arguing that the banks were systemic, as it is required for this option.

Had these banks been systemic, this would have triggered the intervention of the SRB this time around, and the involvement of the senior bondholders.

In her view, this case proves that harmonising bank insolvency law in Europe to complement the BRRD is “indispensable”. Otherwise, national insolvency schemes would be used to escape from EU-led resolutions.

Green German MEP Sven Giegold pointed out that the case represents “an outrageous circumvention” of the banking union, affecting the credibility of the new framework.

He criticised that the state aid rules amended after the financial crisis were used despite those exceptional circumstances having now lapsed.

“The fear of the political consequences of the bail-in of creditors in Italy overran economic rationality,” he added.