2016 has seen an outbreak of bad news for equities combined with falls in commodity and oil prices with yesterday seeing quite wild swings in both. However tucked away behind the noise generated has been a development which I have mentioned on here for several years and it concerns the Italian banking system. Just over four years ago when I was writing for Mindful Money I discussed the problems of Unicredit which was suffering back then as a result of its holdings in Italian government bonds and as a result of its lending in foreign currencies ( Euros and Swiss Francs) to mortgage and business borrowers in Eastern Europe. I summarised the latter as shown below.
And also that lending in foreign currencies to individuals and businesses in other nations, particularly in Hungary, was going wrong. I highlighted the way that the Hungarian Forint had hit a new low against the Euro and that in spite of moves by the Swiss National Bank it was heading lower against the Swiss Franc too. This means that those who borrowed in Swiss Francs and Euros but repay in Hungarian Forints have a problem which means that the lender also has a problem.
The Hungarian government has made changes in the meantime to address this issue but mostly the burden was switched to the banks in the intervening four years. However the exchange-rate issue did not go away as back then 321 Hungarian Forints bought one Euro and 314 do today so only a minor change. Those who had foreign currency mortgages in Hungary must have hoped for more from the QE and hence currency depreciation plans of European Central Bank President Mario Draghi, oh and mark that name as it will be reappearing.
There was a general issue with Italian banks and foreign currency mortgages in Eastern Europe which caused both losses and problems for the borrowers and the banks. For those who hoped that bankers might have learnt well there was a sit-in yesterday at a bank in Moscow on this very subject! That will not have been helped by a further 3% decline in the Ruble overnight.
There have also been issues created by the economic problems of Italy which has been in it sown lost decade pretty much since it joined the Euro. The October 2014 banking stress tests showed problems at 9 Italian banks which according to the Bank of Italy told us this.
The results confirm the overall resilience of the Italian banking system
Oh okay but we saw some other familiar names in the detail.
Taking account of these measures the potential shortfalls are reduced from €3.3 billion to €2.9 billion and concern two banks: Banca Carige and Banca Monte dei Paschi di Siena, which have been under scrutiny by the Bank of Italy for some time.
The name of Banca Monte dei Paschi di Siena is believed to be the world’s oldest bank and has figured a lot in the credit crunch era which if you follow the official view must be a continual and repeating surprise.
Reports that Monte Paschi is fine have invariably been followed by a requirement for yet more capital. Back in January 2013 the Governor of the Bank of Italy assured viewers on CNBC that there was “no question that the bank is stable”
We now arrive at a situation where there is increasing concern over the level of non-performing loans at Italian banks with Bloomberg calculating that 5 of them have an NPL to total loan book ratio of over 20%. This leads people to wonder how many of these are permanent. Oh and top of the list at 32.8% is our old friend Monte Paschi!
What about the new Euro area banking rules?
These are in effect bail-in rules and have been summarised by the Financial Times thus.
Crucially, those rules became tougher on January 1 when new legislation kicked in requiring 8 per cent of a bank’s liabilities to be wiped out before public money can be used.
Back on the 21st of December I discussed how Portugal made a dash ahead of these changes leading to punishment for bondholders at Novo Banco which was supposed to be a good bank! Well Italy made a not dissimilar dash which is odd when officially there was no problem isn’t it? From Reuters.
Italy saved Banca Marche, Banca Etruria, CariChieti and CariFe at the end of November, drawing 3.6 billion euros from a crisis fund financed by the country’s healthy lenders.
This posed its own questions but also had a knock-on effect as in the “dash for yield” in which we live advisers had persuaded retail investors to buy these bonds. No doubt the original plan was that it would hit only the institutional ones and to some extent be masked. Instead the backlash goes on.
Mario Draghi to the rescue
The President of the ECB pops up quite a few times in the Italian banking saga. We can start with his “everything it takes (to save the Euro)” speech in the summer of 2012 which has led on a road which includes 60 billion Euros a month of QE and interest-rates of -0.3%. This has already indirectly helped the Italian banking sector via the way that there have been considerable capital gains on their holdings of Italian government bonds. Will Mario be tempted today to further extend the QE criteria such that the ECB will shift problem assets off the backs of the banks and onto the Italian and Euro area taxpayers? The 146 billion Euro purchases of covered or mortgage bonds must have been a help to Italian banks although they are spread over the Euro banking system.
If we look further back in time we see that the law covering Italian financial markets is often called the Draghi Law and we note that around the turn of the century he was Director General of the Italian Treasury. Then he went to Goldman Sachs which was busy designing derivatives for Italy and Monte Paschi as well as Greece before returning to head the Bank of Italy. So if there is a crime his fingerprints are all over it.
Share prices
So far we have seen many share prices fall but there is plenty of food for thought in this below from Macrocredit.
MontePaschi: Total capital raised since 2008: €14bn Market value today: €1.5bn
A very new style of stability! It fell some 22% yesterday but it has rallied today such that it is now only down 48% so far this year. If we look wider we see that there is speculation of a bailout with the Italian Prime Minister on the wires saying the share price is “incredible”. The Financial Times puts the state of play thus.
One senior Italian official familiar with the negotiations told the FT that a deal on the so-called “bad bank” plan, which involves guaranteeing hundreds of billions of euros of bad loans weighing down banks’ balance sheets, must be concluded in the coming days or weeks otherwise the whole initiative will collapse.
Comment
The situation over the past few years has been littered with official denials about the problems that the banking sector of Italy faces, and we know what that means. Such things come to the forefront at times like this especially as we note rumours of deposit withdrawals. Will Mario Draghi try a technical change to ECB rules later today to help or will the Italian government finally formalise its plans for a bad bank? Either way the bullish case is for a socialisation of bad private-sector assets which should worry both Italian and Euro area taxpayers.
As things develop I would like to remind you of my thirteen point plan which covers banking bailouts and how they develop.
1. The Board issues a statement accusing bloggers of spreading both irresponsible and factually incorrect rumours as the bank is sound and has no need of new capital.
2. The Bank issues a statement of confidence in its management.
3. The Bank tries to raise more private capital in spite of it having no need for it.
4. If this does not work the relevant government(s) express(es) complete confidence in the bank and tell us that it has a sound management structure and business model. Indeed the bank had only recently been giving the government advice as to how to run the public-sector more efficiently.
5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.
6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.
7.Part-nationalisation of the bank is announced and taxpayers are told that a profit will result from this sound and wise investment.
8. Full nationalisation is announced to the sound of teeth being pulled without any anaesthetic.
9. Debt costs of the relevant sovereign nation or nations rise.
10. Consequently that nation finds that its credit rating is downgraded.
11. It is announced that due to difficult financial times public spending needs to be trimmed and taxes such as Value Added Tax need to be raised. It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.
12. Some members of the press inform us that bank directors were both “able and skilled” and that none of the blame can possibly be put down to them as they get a new highly paid job elsewhere.
13. Former bank directors often leave the new job due to “unforseen difficulties”.
Notayesmanseconomics's Blog 
Ah yes, our old friend the Thirteen Point Banking Plan, welcome back! Sorry but I had forgotten all about you, probably because of the recent “stability” created by Mario.
Funny you didn’t pop up when the Portugese Good Bank transmogrified hyrda-like into a second Portugese bad bank; presumably the original Portugese bad bank is now known as the Portugese Really Egregiously Bad Bank?
Hi Andy Z
I am not sure what category we should now apply to the rump of BES! However the bond bail in seems to have hit trouble.
“A Portuguese bank-industry fund may pay partial compensation to senior bondholders who face losses due to the transfer of notes from Novo Banco SA, according to Jornal de Negocios.
The Resolution Fund payment would ensure that investors were no worse off than if Novo Banco’s forerunner had been liquidated rather than resolved in August 2014, the Portuguese newspaper reported, without saying where it got the information from. ……..Bondholders may have recovered about 47 percent of notes’ face value if Banco Espirito Santo had been liquidated in 2014, according to an estimate from JPMorgan Chase & Co. analysts led by Roberto Henriques.”
Expensive so where will the money come from now?
You have missed out one crucial element in the thirteen-point banking plan. In fact, as far as I can see, it drives everything else and is the rock on which the financial system is built. I refer, of course, to the payment of enormous and continuing bonuses to everyone in the bank “to ensure that the talent does not go elsewhere”.
I believe that you have also missed the public-sector equivalent of these bonuses, namely the knighthoods dished out to those intrepid regulators who did so much to prevent all this. Arise, Sir Hector Sants!
hehe
“to ensure that the talent does not go elsewhere”
that line always makes me laff
go where ? only to another cushy job with big salary and no responsibilities no doubt…..
again with no responsibilities you could stick on them …..
Ruled by the Banks for the Banks
Forbin
Ps: as with any crime ,Shaun, follow the money ….
‘MontePaschi: Total capital raised since 2008: €14bn Market value today: €1.5bn’
‘One senior Italian official familiar with the negotiations told the FT that a deal on the so-called “bad bank” plan, which involves guaranteeing hundreds of billions of euros of bad loans weighing down banks’ balance sheets, must be concluded in the coming days or weeks otherwise the whole initiative will collapse.’
Sounds like a plan.Run up the losses on bad loans and then hand it to the taxpayer.
‘Crucially, those rules became tougher on January 1 when new legislation kicked in requiring 8 per cent of a bank’s liabilities to be wiped out before public money can be used.’
Why do we not have hordes of academic economists taking time out from debating whether we should target 2% or 4.42244% inflation to debate whether we should make it 50% losses before they get taxpayer help?
I’m serious,where are they?eating tofu while Rome burns.
seem with these Bankers Dilbert gets in first
http://dilbert.com/strip/2010-03-24
http://dilbert.com/strip/2009-10-10
http://dilbert.com/strip/2015-02-08
Shaggy – “it wasn’t me”
Forbin
James,you’re a cynic,you only have to look at a tremendously successful bank like RBS to see that huge bonuses are a necessary evil to save us all from cheaper house prices.
Following your logic,you can see Mario getting a prinicipality somewhere for all his work helping bankers who’ve fallen on hard times.
I am a cynic because I worked in an investment bank (even becoming a director) many years ago. The justification for paying out large bonuses went along the following lines:
1. Everyone else is getting them;
2. They come in mighty handy for school fees;
3. They come in mighty handy when house-hunting;
4. They come in mighty handy when selecting holiday destinations;
5. Don’t insult me by giving me less than anyone else.
That was about it in terms of justification.
No-one ever seemed to mention the fact that:
1. The job was very secure and had a very good base salary anyway;
2. Risk versus entrepreneurs etc was minimal;
3. The only way that the enormous fees could be earned was by leveraging a huge balance sheet which was not theirs to leverage;
4. The social benefit of the job was zero.
The sad thing is that:
1. The City is full of bright people educated at top universities etc;
2. They simply live in a bubble existence where everyone earns ludicrous amounts, so simply don’t get why everyone else resents it so much
Rant over.
Good post James.
Nice to see a former insider say it as it is.
I’ve seen the advice of some of the brokers over the years,all the way through the dot com boom,the housing bubble and the mining bubble.A lot of it’s utter garbage ,particularly around market tops,and they will have you buying the dips all the way down.
You then have the regulatory set up which forces many savers to deposit money into pensions that run on fees of 1.5% p.a.And if they’re struggling for fees,they just churn some stock.Seriously,how are you going to compound growth when 50% of the incremental growth via divi’s is pent on fees?
An example
Had a friend who put money with a large banks private client division.They lost 50% of it over two years and charged him 5% of it in fees alone.They’d buy blocks of stock that incurred the minimum fixed fee.They’d buy and sell them without consultation and without reason eg they bought him some Colgate shares,so he took a forex fee on top of his fixed stocks fee,they sold half three months later and the other half a month later-obviously maxing out the fees on exit.He lost a good 40% on that deal,mainly in fees.
I would suggest that Draghi’s history is precisely why he is where he is today.
Hi therrawbuzzin
In many ways there is a similarity with the appointment of Mark Carney at the Bank of England. The difference might be that either Draghi wanted the top job because he could cover up past mistakes or part of him getting it was others saying you help create it now go and solve it! At a past employer of mine the compliance director was appointed on the latter grounds as in you broke it now go and fix it.
For the lexicon. Stable means the bank is in a deep hole and unlikely to improve for a long time.
Hi ExpatInBG
Yes on the ocean bed where it can fall no further. Don’t get out for a breath of air though….
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