Italy will pay up to €17 billion to break up two insolvent Venetian banks, which have posed a threat to the country’s banking system, the government announced Sunday (25 June).
Both face bankruptcy and European authorities had urged Italy to devise a rescue framework, selling off the good assets of the stricken Banca Popolare di Vicenza and Veneto Banca and transferring their toxic assets to a “bad bank,” essentially financed by Rome.
The Italian government will stage the rescue with support from the country’s biggest retail bank, Intesa Sanpaolo, which will take up the good assets to protect the two Venetian banks’ customers and to minimise staff lay-offs.
And an information chart for banks with capital shortfall. Veneto & Vicenza banks solution is the middle one (wind down under national law) pic.twitter.com/y6BADuDdup
— Ricardo Cardoso (@RCardosoEU) June 25, 2017
The European Commission in a statement said it “has approved, under EU rules, Italian measures to facilitate the liquidation of BPVI and Veneto Banca under national insolvency law”.
EU Competition Commissioner Margrethe Vestager said that Italy considers state aid necessary “to avoid an economic disturbance in the Veneto region”.
She added that “Italy will support the sale and integration of some activities and the transfer of employees to Intesa Sanpaolo”.
We have approved aid to facilitate market exit of Vicenza & Veneto banks under Italian insolvency law. Depositors will be fully protected.
— Margrethe Vestager (@vestager) June 25, 2017
A symbolic euro
Finance Minister Pier Carlo Padoan said €4.78 billion would be set aside immediately to “maintain capitalisation” of Intesa Sanpaolo, which has made that a condition of any cooperation.
For its part Intesa has put one symbolic euro on the table and attached a further string to the deal by insisting its share dividend policy remain unaffected.
“The total resources mobilised could reach a maximum of €17 billion euros – but the immediate cost to the state is a little more than five billion,” said Padoan.
“This decree allows the stabilisation of the Venetian economy and safeguarding of the economic activity of the Venetian banks,” the minister added.
Italian Prime Minister Paolo Gentiloni portrayed the move as necessary to shore up the situation of current account holders and ordinary savers as well as of bank workers, in order to bolster “the good health of our banking system.”
The 19-member eurozone has expressed concern at the perilous state of some Italian banks as Rome tries to address piles of risky loans sitting on the books of some of them.
In a statement released Friday night, the Italian finance ministry said Rome would “adopt necessary measures to ensure banking activity is fully operational, with protection for all current account holders, deposits and senior shares.”
Media reports suggested the bill to the Italian taxpayer from the “bad bank” would be around €10 billion.
There is also the issue of some 3,500 to 4,000 bank employees set to lose their jobs as well as associated early retirement costs, La Repubblica reported on Saturday (24 June).
Earlier this month, the EU anti-trust authority approved Italy’s massive rescue of another troubled bank, its third-largest and oldest, Monte dei Paschi di Siena (BMPS).
Founded in Siena in 1472, BMPS has been in deep trouble since the worst of the eurozone debt crisis.
Rome is set to take a majority stake on a provisional basis to prevent bankruptcy and inject capital in line with EU rules, while limiting the burden for Italian taxpayers after the lender failed to raise funds on the market last year.
In exchange, Rome must accept a drastic EU-approved restructuring plan for BMPS expected to involve mass layoffs.
The European Central Bank said in December that BMPS was short of a staggering €8.8 billion in capital.
The Italian government is anxious to ease concerns about its banking system, which is groaning under the weight of €360 billion in bad loans, a third of the eurozone total, and has fared badly in EU-wide stress tests.
Italian financial institutions have agreed in April 2016 to set up a fund to shore up weaker banks, in a state-orchestrated plan to avoid a crisis in the eurozone’s fourth-biggest banking sector. One of the new fund’s first actions was to intervene in the recapitalisation of the Banca Popolare di Vicenza to the tune of €1.75 billion in April 2016, ahead of a similar intervention in the Veneto Banca in June.
Rome has been keen to portray the fund as an industry initiative to ensure it does not fall foul of European rules against unfair state aid.
Italy and the European Union reached agreement on 26 January 2016 to help Italian banks sell bad loans, averting a major banking crisis which had been brewing for over a year.
However, new EU rules, which came into effect on 1 January impose losses upon shareholders and large depositors before recourse is given to public money, scaring off potential investors.
Rome had spend more than a year thrashing out a solution with Brussels, having to drop the idea of a “bad bank” in the process which would have contravened EU rules on state aid.