Italian finance minister eyes ‘bad bank’ to clean up risky loans

Pier Carlo Padoan [UK in Italy/flickr]

Italy is considering setting up a state-backed “bad bank” to help clean up its banking sector, Pier Carlo Padoan said in a newspaper interview on Sunday.

Bad loans force lenders to set aside money to cover expected losses. They have become the main problem for Italian banks, which fared the worst in a Europe-wide health check of the sector last year.

Italian banks’ gross “sofferenze” — or loans least likely ever to be repaid — rose to 181 billion euros ($202.83 billion) in November, more than double their level in 2010.

Asked by La Repubblica if the government intended to tackle the problem, Padoan replied: “Yes, we are thinking about it, we are considering introducing instruments that go under the generic name of a bad bank, but can take various forms.”

He did not give further details but said whatever solution was adopted would have to take account of European Union rules limiting state aid to business. Bad banks generally take over risky assets from troubled financial institutions, isolating them from that risk.

>>Read: ECB fails 25 banks in health check, 9 in Italy

Padoan also said the government would probably raise its 0.6 percent forecast for this year’s economic growth, to take account of the recent fall in oil prices and the depreciation of the euro, which helps exports.

The government’s current forecast is already higher than those of the International Monetary Fund and the Bank of Italy, which both forecast 0.4 percent growth, and the Organisation for Economic Cooperation and Development, which sees a 0.2 percent expansion.

>>Read: Italy relaxes rules to channel ECB cash to small business

Padoan welcomed the European Central Bank’s new bond-buying programme to pump hundreds of billions of euros into the euro zone economy, but he criticised the fact that 80 percent of the risks would be shouldered by national central banks.

“We have to move towards a sharing of the risks, otherwise the definitive and permanent nature of monetary union will always be questioned,” he said, in comments which echoed those expressed by Bank of Italy Governor Ignazio Visco.

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