The problem that is the Italian banks

The main issue of the credit crunch era has been the banks and the financial sector. This started with some collapses and continued with so many countries adopting the TBTF or Too Big To Fail strategy where the taxpayer bailed them out. However one country followed a different route and did not bail out its banks but they mostly continued none the less and this country was Italy. You see whilst Ireland was spending 31% of its Gross Domestic Product on bailing out its banking sector in 2008-14, Greece 22% and Germany 8% the Italian Treasury in total received 0.1%! Thank you to  Professor Gianfranco Di Vaio for the numbers which cover 2008-14.

So Italy had no banking problems and no bailout was required or perhaps it let them fall like Iceland? No neither was the case. Back in January 2012 I was on the business program of Sky News explaining the problems besetting Unicredit back then.

During his interview on Jeff Randall Live on Sky News yesterday, Mindful Money’s Shaun Richards highlighted two main problems facing UniCredit: “These are its holdings of Italian government bonds ( and indeed other sovereign bonds) where prices have fallen heavily (over the last year or so the benchmark Italian ten-year bond yield has risen from 4% to 6.93%). And also that lending in foreign currencies to individuals and businesses in other nations, particularly in Hungary. ( From Economics Guy).

Problems with a rights issue had led to a suspension of Unicredit’s shares something which has been an incredibly familiar event since then for quite a few of the Italian banks. Actually that may happen again today because as I type this the major Italian banks have seen their share prices fall by 4.1% pulling the Milan market some 1.6% down in response. If we look at the problems then the “sovereign doom loop” was in play because the Italian banks have consistently been large holders of Italian government bonds but the price of them was falling sharply. You may well be thinking as I am here that the relationship between the Italian banks and the government is one of you scratch my back and I will scratch yours. What is Italian for Sir Humphrey Appleby? Also the lending in foreign currencies was something which had always been a hand grenade that was primed to explode and it had.

Why did Italy not bail out its banks?

I note that Italian observers feel that there was an element of national pride here. Personally I see the issue more prosaically as Italy was already in a position where it had a relatively large national debt. This was a consequence as regular readers of my work will know of the fact that it barely managed much economic growth even in the good years. So the bad times that followed saw its national debt rise and in fact in the database quoted above from 2008-14 its national debt rose by 32% of GDP. These days it is of the order of 130% on that measure so we can see that a banking bailout would have made it look rather like Greece.

Bad Debts

These have been an ongoing and building issue for the Italian banks under the title of Non Performing Loans or NPLs. Last week Governor Visco of the Bank of Italy gave us an official denial of trouble by telling us the problems were “somewhat overstated” Trouble is he then had to provide some numbers!

First, at 18 per cent of total loans on a gross basis as of December 2015, Italian banks’ NPLs – whose value, net of provisions, is around €200bn – are certainly sizeable.

Presumably his own number is not overstated. I will leave it to readers to wonder about the valuations against this on this ” real estate collateral, in particular, amounts to approximately €160bn.” and what this means in practice “other personal guarantees (€37bn)”. After all it is apparently all covered which makes us wonder why this is an issue.

Second, the deterioration in credit quality, a legacy of the deep and prolonged recession, has been recently abating.

Oh and he does not expect the flow of more bad loans to stop but merely to slow down.

The rate of new bad loans is projected to decline further this year.

Atlante

This is the new Italian bad bank and Governor Visco describes it thus.

The fund has raised resources (more than €4bn) from Italian and foreign investors (banks, insurance companies and other institutional investors).

There is a problem here as if everything in the garden is as rosy as we are told why is it necessary? On the other side of the coin some 4.25 billion looks a bit thin when compared to 200 billion! It may not even cover this year’s increase in NPLs. As Atlante translates to Atlas you see that on that score it may have some trouble in stopping the sky from falling especially as some 1.5 billion Euros has already been spent propping up Banca Vincenza. Oh and in a reminder of a familiar issue this helped out Unicredit which was being sucked into that particular piece of quicksand.

Actually the fund is in danger of fast disappearing as Banco Popolare is in the queue and I note today that Creval wants to pass on some of its “assets” to it. Oh and Banco Popolare is in the news this morning. From Reuters.

Shares in Banco Popolare fell sharply on Wednesday after the Italian bank reported last night a surprise first quarter loss due to loan writedowns.

Surprise? it is always a “surprise” to the “experts” is it not?

Other Problems

Bloomberg last month pointed out that there were other reasons to worry about the Italian banks. I have already made the point about their holdings of sovereign debt but there is also this.

Italian banks also hold more than double the euro-area average of bank bonds, a self-reinforcing risk, as the bank sector’s current troubles add to the risk of such securities.

Remember the Atlante fund is also financed by the other banks so trouble for one can easily lead to a domino effect for the next weakest and of course weakens the whole.

Quantitative Easing

This has been a type of bailout for the Italian banks and the 117.8 billion Euros the ECB (European Central Bank) has driven prices higher and yields lower giving quite a windfall to the holdings of the Italian banks. Actually they may not even sell them as officially they have a zero risk rating. ECB President Mario Draghi must have been very pleased at this side-effect of QE as on his CV is the issue that not only was he Governor of the Bank of Italy he had previously been in charge of bank supervision.

There have been suggestions that companies could take advantage of the new Corporate Bond QE to issue bonds very cheaply and then to buy an Italian bank. Lorcan Roche Kelly rather amusingly offered his Irish farm as collateral in such a deal but so far he is as far as I can gather alone.

Comment

Some things Italian are in fine fettle as for example the stock of football manager Claudio Ranieri could hardly be much higher. However the Italian banks lack a man of such charm.charisma and skill and this is a shame as returning them to health is a job on the scale of getting Leicester City to win the English football premiership. Trouble is 5000-1 odds are proven wrong not that often!

I expect the ECB and Mario Draghi in particular to find new ways of helping the Italian banks but where is any incentive for them to reform? Also in my view they are at the heart of the problem that is the lack of Italian economic growth. It is this link that is the real “doom loop” in my view where the banks do not support the economy and in return its weakness sucks them into a world of NPLs. That loop is still spinning around.

Meanwhile Banco Popolare seems to be making some noise today.

Italy’s Banco Popolare halted down -10.41% ( h/t @insidegame)

 

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21 thoughts on “The problem that is the Italian banks

  1. Will starving just Greeks be enough to save the providers of their corrupt, post-career sinecures, or are many more, absolutely faultless, ordinary people required to pay for institutional(ised) fecklessness and chicanery?

    • I’m afraid that the answer to your question is yes – many more people will suffer unless you believe that the ‘can kicking’ can go on for ever. The Greeks are being sacrificed for the good of the Euro project however behind that stands the banks and the impact that a Grexit could have on them. I do wonder if the latest round of austerity may just be a step too far as my Greek friends tell me that the mood has changed and many people who supported retaining the Euro at all costs are changing their minds. If that becomes widespread then Grexit will happen.

      • ‘If that becomes widespread then Grexit will happen.’

        For the Greek people,I hope they can take charge of their govt again.

  2. 18% non performing loans and rising – and it’s not a problem! I don’t know how they sleep at night.

    On a somewhat different issue , we have our own bank created doom loop here in the UK that has and will effect the economy. I have, over the last couple of weeks received a number of letters advising me that the interest paid on my savings is to be cut quite significantly. This inevitably means I will have to curtail discretionary spending even further. If, as we are frequently told, savers vastly outnumber borrowers and these other savers react as I do then it will certainly have a negative impact on the UK economy. Despite this I have once again read a statement by one of TPTB that low rates will encourage consumer spending! Do these folk need to decend from their ivory towers and get out more often? They clearly do not understand human psychology at all.

    • ‘This inevitably means I will have to curtail discretionary spending even further. If, as we are frequently told, savers vastly outnumber borrowers and these other savers react as I do then it will certainly have a negative impact on the UK economy. Despite this I have once again read a statement by one of TPTB that low rates will encourage consumer spending!’

      It’s breath taking isn’t it?The sheer lack of understanding TPTB have of basic economic reality.It just goes to show that Ivory Towers and public sector pensions aren’t a good thing for the Economics lecturers that raise our central bankers.

      I often rant on here about the velocity of money and how TPTB have destroyed it with ZIRP.Yet they repeat the mistake(now onto negative rates) in the vain hope that the outcome will change if you make the same mistake again.

      Paul Hodges wrote a great piece on how cutting rates destroyed discretionary spending.

      • “Paul Hodges wrote a great piece on how cutting rates destroyed discretionary spending.”
        ____________________________________
        I wrote a crap sentence in a comment on here, to the same effect, but the point is; if it’s so blindingly obvious to a person with no economics-based education, it must be at least the same to TPTB, and so is, in my view, a great hint at the real situation with the banks, rather than that proclaimed, as, obviously, the lower interest rates are, the fewer non-performing loans we’d expect.

        • It is almost at though they expect people to blow all their savings now and rely on the taxpayer to look after them if it all goes wrong and they run out of money. What kind of cynical operator would behave like that ?
          It also possible they need more individuals to move their money into real estate so that the banks et al can move out at the current prices ahead of the much-needed correction.

        • ‘so is, in my view, a great hint at the real situation with the banks, rather than that proclaimed, as, obviously, the lower interest rates are, the fewer non-performing loans we’d expect.’

          An excellent point.I hadn’t got that far,I’ll freely admit.

          But when you look at it,it’s a distinct possibility that by driving IR’s down,they drive discretionary spending and (using Shedlocks law on unintended consequences) drive NPLs higher!!!!

          Ultimately,as you allude,QE/ZIRP boosts assets and keeps GDP up but all the time,underneath the surface,the duck’s feet are paddling faster and faster just to stay still against the current.

          At some point,the duck will get knackered and float down river.

        • ‘It also possible they need more individuals to move their money into real estate so that the banks et al can move out at the current prices ahead of the much-needed correction.’

          In many ways,the post 2008 bust has featured the rise and rise of the BTLer who takes mortgages out in his/her own name,using their salary or family home to guarantee their debts.

          I think banks have been hedging their real estate exposure in a most ingenious way since.

        • “if it’s so blindingly obvious to a person with no economics-based education, it must be at least the same to TPTB”

          No, not really. Shaun is one of the few who have studied economics to a high level and retained a sense of reality. As you study economics further it becomes more and more formula’s known collectively as econometrics. The trouble is that all these formulae assume “perfect markets” with all actors having “perfect knowledge” and that they will always act logically in order to maximise utility.

          These assumptions take no account of psychology both of the individual and the group with all their fears and biases coming into play.

          Most who possess high level economics qualifications have lost touch with this real world as they continue analysing events and developing their models based on the flawed assumptions above as they treat humans as logical emotionless machines/computers. Some people are like that, particularly ones who’ve studied economics to a high level and enjoy high pay in a secure job. These same people assume all others are identical to them. When faced with a reality that contradicts their economics text books and theories, confirmation bias comes to their rescue as they cling desperately to the few pieces of data that confirm their theory whilst ignoring the overwhelming plethora of evidence demonstrating their theory to be false.

          If they reach a stage where they can no longer deny the contrary evidence they dismiss events as a one off, saying what is needed is to double down on the erroneous action they are taking to make it work, either that or they begin speechifying about “counterfactual” evidence.

          As Shaun would say, think of a dog chasing it’s own tail or someone repeatedly banging their head against a brick wall……

  3. ‘First, at 18 per cent of total loans on a gross basis as of December 2015, Italian banks’ NPLs – whose value, net of provisions, is around €200bn – are certainly sizeable.’

    Just come off nights Shaun and you nearly made me choke on my porridge.That’s a troubling number by any measure,even in these QE drug addled times.

    ‘Italian banks also hold more than double the euro-area average of bank bonds, a self-reinforcing risk’
    Sometimes you’ve just got to go all in on a crap hand.That’s poker.

    Thanks for the breadth of your work covering countries I wouldn’t study to deeply on my own.

    • Hi Dutch

      Thanks and the Italian banking system has been quite thorough too. Have lots of NPLs and let them rise, invest in each others bonds and the sovereign and tie each other in via a bad bank. Well there is in fact more as this interview from the FT earlier revealed.

      “Italy’s finance minister has pledged to pursue banks that have mis-sold investments to their customers, in the country’s latest attempt to restore confidence in its tarnished banking sector………Across Italy and Spain it has long been common practice for banks to sell their own bonds to retail clients. This has not only allowed customers to avoid certain taxes but has helped banks shore up their capital and funding.”

      Not so hot in a new era of bail-ins….

  4. Hi Shaun,
    Great blog as usual.
    The whole Eurozone seems to me to be a set of spinning plates. Just when we thought Greece could not get any worse, it does, with a further bail-out seemingly on the cards. Then Portugal seems to be in a spot of bother. And now, Italy, which is a little too big to be brushed under the carpet.
    Luckily, we have Claude Van Juncker and Christian Lagarde and Mario Draghi on the case. Since they are united in their belief that the one thing that cannot be changed is the infallibility and permanence of the Euro, they will never be able to grip this sensibly.
    Perhaps they believe that the whole thing can be rescued by allowing the Balkan states plus Turkey to join the EU…

    • And let UK vote to leave the EU, without really trying to address their concerns and give them a few worthless promises.

  5. arbee wrote

    “It is almost at though they expect people to blow all their savings now and rely on the taxpayer to look after them if it all goes wrong and they run out of money.

    What kind of cynical operator would behave like that ?”

    erm, the BANKS ? esp the bit about taxpayers……..

    forbin

      • Hi Forbin

        Perhaps Donald Trump will mint a trillion dollar coin as he has had a wide range of economic suggestions so far! I am not sure Mario could get a trillion Euro coin past the Bundesbank….

        Oh as to blowing savings let us not forget that back in September 2010 Deputy Governor of the Bank of England Charlie Bean suggested that UK savers blow their savings to help the recovery in return for better days being ahead. Of course Bank Rate if still 0.5% so his Forward Guidance was as bad as what we have seen since. Savers may be more cheered by the view of the newest Monetary Policy Committee member to be Michael Saunders saying on Brexit Bank Rate might go to 3.5%.

        Don’t worry about Charlie Bean himself as he retired with a pension pot worth circa £4 million index-linked of course to the RPI.

  6. Hello Shuan,

    so how much QE do we need now ?

    and shall we have -2% interest rates soon ? on savings of course , no one can lend me a million with even just -0.1%

    hang on – someone mention that to the ECB / BoE , what could go wrong ?

    Forbin

  7. Subsidy sucking lame duck banks, immunity from bank fraud, there just has to be a better way….

    The BNZ claims to have made 1439 million NZD gross profit for the year ending Jume 2015, with 401 million NZD income tax expense. That gives a net profit attributable to share holders of 1038 million NZD. Tax paid toward schools and hospitals. Numbers taken from BNZ’s corporate governance webpage.

    Even Bulgaria is trying to extradite Tsvetan Vasilev (majority owner of the failed Corporate Commercial Bank) from Serbia to face the courts.

    • Hi Expat

      Good luck with that extradition….

      Your comment made me look at the latest BNB Economic Review where I spotted this.

      “which entered into force on 4 January
      2016.15 The new ordinance introduces a definition
      of bank excess reserves and applies a
      negative interest rate on excess reserves where
      the ECB deposit facility rate is negative and a
      zero interest rate where the ECB deposit facility rate is positive or zero. ”

      Has there been much of an impact on Bulgarian savings rates which in the past have been relatively high?

      • Sorry, I don’t know – I don’t have data on savings, though I may look sometime. Mortgages are rare and outright ownership is about 90% – in 1990 families were given the apartment/house they lived in. Given emigration & demographic change most property is very cheap. The coast is more – though the Russian holiday apartment buyers are now more interested in selling. Sofia is expensive (by BG standards) which co-relates to employment opportunities.

        I do see quite a few late model German cars around Sofia – maybe better a new car than keep your cash in the next KCB.

        Also note Unicredit BG are known to refuse loans to creditworthy customers – a little warning that it isn’t healthy, so I put my cash elsewhere.

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