EU readies contingency plan for possible Monte Paschi wind down

Monte dei Paschi is Italy's third-biggest bank by assets. [giuliaduepuntozero/Flickr]

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.

The official, who is familiar with the preparations, told Reuters that EU authorities were putting the plans in place in case the latest round of European bank tests shows that Monte dei Paschi has insufficient capital to withstand an economic downturn.

The European Banking Authority, an EU agency, will announce on Friday results of the tests conducted on leading lenders across the bloc.

The official said that at the moment a winding down or “resolution” of Monte dei Paschi – which would be the first of any bank under new EU rules – was only a theoretical scenario.

Monte dei Paschi and the Bank of Italy did not immediately respond to Reuters’ requests for comment.

The Tuscan bank, which has one of the heaviest bad loan burdens in Italy, is hoping for approval from the European Central Bank before Friday for a plan it has submitted to sell off its bad debt.

A senior Italian government official dismissed any suggestion of the bank being wound down. “The possibility of Monte dei Paschi going into resolution is out of the question,” the official told Reuters.

Another source said that Monte dei Paschi, Italy’s third-biggest bank by assets, is working on a €5 billion capital increase as part of plans to fix its balance sheet. The lender is seeking to pull together a banking consortium to guarantee the cash call by Friday, the source with knowledge of the matter told Reuters.

Italy launches €5 billion fund to help weaker banks

Italian financial institutions have agreed to set up a €5 billion fund to shore up weaker banks, in a state-orchestrated plan to avoid a crisis in the eurozone’s fourth-biggest banking sector.

Offloading its bad loans would make it easier for Monte dei Paschi to raise capital, with the Italian government hoping to find enough private investors to avoid a state-backed bailout which under EU law is permitted only in exceptional circumstances and with strict conditions attached.

Government officials say they are confident of achieving a privately-funded solution and even if not, there is still the option of state intervention if they can reach an agreement with the EU.

“The goal, which we think is achievable, is for a market solution which in the first phase involves a reduction of non-performing loans, and then after that a recapitalisation,” Italian government adviser Yoram Gutgeld said on Tuesday (26 July).

However, the EU official said European institutions are ensuring the systems they have set up to co-ordinate the winding-down of a bank are in place for Monte dei Paschi, should they be needed.

“We fear the impact of a possible negative test result, especially for Monte Paschi” the official said. “As a precaution, we are getting ready for the possible first winding down of a bank under the Single Resolution Board.”

The SRB is an EU body created in response to the 2008 financial crisis to deal with banks that run into trouble.

EU staff were preparing to be ready for the possible use of a secure electronic communications platform set up to exchange information and documents between EU institutions in case the SRB triggers a resolution procedure, the official added.

An SRB spokeswoman declined to comment on any specific case, but said: “We are in any case ready for any resolution action to be taken, in any member state.” In line with its mandate, the SRB has been preparing resolution plans for the main European lenders since last year, to face possible emergencies.

A winding-down of a bank is triggered by the SRB after the ECB has assessed its capital needs, as revealed by the stress tests and other supervisory checks. Such an assessment might not come the weekend following the stress tests but could be done shortly afterwards to prevent market turmoil.

Under EU rules, once the procedure is triggered, the winding down process should take place over a weekend when financial markets are closed.

Working on a solution

The Italian government is working on a private recapitalisation of Monte dei Paschi to plug the possible shortfall revealed by the stress tests.

If private support proves insufficient, the government is also considering a state-led rescue plan, which would probably involve losses for holders of the bank’s bonds under the “bail-in” rules. This is a politically-sensitive issue in Italy where many bank bonds are held by retail investors.

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.

EU rules allow in exceptional circumstances for state aid without triggering losses for all bondholders but the European Commission, which oversees the application of EU rules, has so far shown little appetite to grant Rome a full waiver from the bail-in rules.

Brussels has hinted that the bank’s senior bondholders and depositors could be spared, and would not oppose the setting up of a compensation fund for smaller investors who were missold risky financial products.

However, a state-led bailout is likely to hit junior debt holders, a category including a significant number of Italian savers, a few months before the government of Prime Minister Matteo Renzi faces a referendum on constitutional changes.

Talks between the EU Commission and the Italian authorities are still continuing.

“If the European Commission does not concede full leeway, and if the Italian government refuses any form of bail-in, the alternative would be a winding down or the full liquidation,” a second EU official told Reuters.

The SRB has had the powers to wind down banks since the beginning of this year but has so far never used them. Under these rules the SRB prescribes losses for shareholders, senior and junior bondholders and, if necessary, even savers with deposits above €100,000.

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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