The problems of the Italian banks continue

The subject of today is a long-running saga with many twists and turns and has become a theme of this website. If we step back we see that a fundamental cause of this has been the performance of the Italian economy where the numbers below are considered to be relatively good. From Italian Statistics.

In the third quarter of 2016 the seasonally and calendar adjusted, chained volume measure of Gross Domestic Product (GDP) increased by 0.3 per cent with respect to the second quarter of 2016 and by 0.9 per cent in comparison with the third quarter of 2015.

If we look at the forecasts from the same body we see this.

In 2016 GDP is expected to increase by 0.8 percent in real terms……..In 2017 GDP is estimated to increase by 0.9 percent in real terms driven by the contribution of domestic demand (1.1 percentage points).

This adds to another of my themes which is that even in the “good times” the Italian economy struggles to grow at a rate faster than 1% per annum. If we look at the lower oil price, highly expansionary monetary policy from the ECB (European Central Bank) and a Euro which has begun to slip again ( below 1.06 versus the US Dollar) you might think it should be doing well right now. This is the road where the Italian national debt to GDP (Gross Domestic Product) ratio has exceeded 130%.

However GDP per capita is an even grimmer situation and when I calculated it a while back it showed a fall of 7% in the Euro era. As the Italian economy has grown a little since then it may now be a fall of 6%. But this is the background to the struggles of the Italian banks where their behaviour and the weakness of the underlying economy have sucked each other downwards.

Veneto Region

The Financial Times has looked at the issue and let me establish the area we are looking at.

It would be difficult to overstate the impact on the Veneto region, still one of Europe’s richest.

This reminds me of the times I pointed out how different the two parts of Italy are and how a country of two halves if you will forgive the football analogy could split. But look at what has happened to this region.

Italian industry lobby Unioncamere del Veneto estimates at least a 3.4 per cent fall in regional gross domestic product for 2016.

The driving force in this has been something which we have looked at before.

More than 100,000 retail investors in the two mutual banks have had at least €5bn wiped out this year.

The individual stories quoted make me wonder exactly what the Italian banking regulators have been doing?

Like tens of thousands of other investors in the two unlisted banks, Mr de Bortoli has not just lost money as a shareholder. He had also taken out loans that were secured by shares in the bank — a scheme known as “self placement” whereby financial products are sold to customers that the lenders themselves had issued to meet tougher supervisory regulations. They now threaten to set off a cascade of defaults.

The simple basic principle of not having too much risk in one place was not only broken it was busted into tiny pieces here. You get a clear idea what will have happened to these products from what has happened to the share prices of the banks involved here.

But Veneto Banca has failed — at least in the eyes of its thousands of shareholders like Mr de Bortoli, who have seen the value of their shares plunge from €40.75 in 2014 to 10 cents…………At Banca Popolare di Vicenza, the share price crashed from €62.50 in 2014 to 10 cents.

Imagine how you would feel if this was you.

Dino de Longhi, owner of a water treatment company, says he went to Veneto Banca in 2010 for a €200,000 home loan. The bank offered €260,000 at 5 per cent on the basis that €60,000 was used to buy bank shares.

That has to be a type of financial crime, you know the sort of crime that people like Kenneth Rogoff seem to overlook. Actually the rot goes deeper because in the period from 2005 vto 2011 one Mario Draghi was Governor of the Bank of Italy leading us to mull some latin.

Quis custodiet ipsos custodes?

Who watches the watchmen?

Monte Paschi

What is the opposite of its hard to keep a good bank down? Anyway Monte Paschi is right now debating yet another cash call. From Reuters.

Nov 22 Banca Monte dei Paschi di Siena has reached the quorum needed to validly call a shareholder meeting on Thursday to approve a vital 5 billion euro ($5.3 billion) share issue, a source with knowledge of the matter said.

Is there an Italian version of “We’re on a road to nowhere” by Talking Heads to play as you look at the share price chart below?

No doubt we will be told later that whatever decision is taken is a triumph. Some of these triumphs have lasted for at least 24 hours. Should it work the main gain will be that 28 billion of soured loans are removed. Perhaps the most revealing numbers are that only 22% of shareholders voted and that the world’s oldest bank is a penny stock.

Some of the numbers being revealed seem rather a lot for a bank which starts the days with its shares only valued at 700 million Euros. From @livesquawk

Monte Dei Paschi: Estimated EUR 13 Bln In Liabilities That Could Be Hit Under Bail In Rules – RTRS


This is the bailout vehicle in Italy and we are already on version two as the funds in the first effort lasted only briefly. How is the second effort or version two going? From Reuters on Tuesday.

Atlante is expected to buy up to 2.5 billion euros (2.17 billion pounds) in problem loans held by Banca Etruria, Banca Marche and CariChieti, paving the way for UBI Banca , Italy’s fifth-largest lender, to make an offer for the three banks……….the head of Atlante said on Tuesday, rejecting concerns that it had run out of money.

As ever you cannot keep Monte Paschi out of the news.

Atlante II has already pledged to spend 1.6 billion euros on buying up Banca Monte dei Paschi’s  bad loans, which are being sold as part of a rescue plan aimed at keeping Italy’s third-largest bank in business.

How much money does Atlante 2 have left?

He declined to say how much money Atlante II had.

We do have some numbers though.

A spin-off fund – Atlante II – was set up specifically to buy up bad bank debts with the goal of raising up to a further 3.5 billion euros from investors.

But sources say Atlante II has only managed to raise 750 million euros so far, prompting the original Atlante fund to transfer another 900 million euros.

Top lenders UniCredit  and Intesa Sanpaolo  have together committed to provide an extra 300 million euros but have not paid that money in yet.

There is the fundamental issue here of other banks backing weak banks as the whole sector can get dragged down by this sort of action. This is far from uniquely Italian as the Spanish cajas and the UK’s building societies played a very similar game.


The fundamental issue here is how the Italian economy and banks have maintained such a close grasp on each other as weakness in both sucks the other down. It is like they are stuck in quicksand. The new banking regulator is the ECB which has plenty of fine words. From the Wall Street Journal.

Over a thousand staff were hired by the ECB, and hundreds of supervisors fanned out across Europe to ensure rules are enforced evenly across the continent. But old problems persist.

Also the new head Danielle Nouy is praised.

Cleaning up crony boards has become a priority and she is reluctant to sign off on mergers between struggling lenders.

The ECB does not seem quite so clear itself.

as investors’ fears of ever-tighter bank regulation have been receding

Anyway, the official view is that banks are showing “resilience” and presumably would be doing so should the event below happen. From @lemasabachthani


Of course there is another referendum to get through first.

Happy Thanksgiving to you all.

Share Radio

I was interviewed by Simon Rose yesterday evening and below is a link to the Podcast.




20 thoughts on “The problems of the Italian banks continue

  1. I think the point here Shaun is that the fact the money has gone

    vamoooshed , zippo , nada , ziltch

    So with RBS and other TBTF Banks they keep poking a few billion here and there but in the end they are still toast and they’re wasting tax payers money tying to keep some old tin rust buckets afloat….

    Or maybe not

    after all whats the alternative given this “movie” needs a hero and a good ending where all are happy …..

    just keep spinning those plates , boys!


    • Hi Forbin

      In the banking crises of the credit crunch era an early casualty was the truth. We are lied to and it goes beyond the old profit warnings rule of thumb (don’t buy until the third). Until we get the truth it will go on and on and on with inflation in false dawns.

  2. Great article as ever Shaun.

    Doesn’t the mafia steal roughly 10% of GDP? Does this get included in the GDp stats under the black economy section 😉

    • Hi Anteos and thanks

      Actually there was an update just over a month ago but only in Italian so I will let Il Sole 24 Ore take up the story.

      “In 2014, Italy’s underground economy, including illegal activity, was worth 211 billion euros, according to ISTAT, or a total of 13% of GDP. The statistical agency said illegal activity accounted for €17 billion, or 1% of GDP, while the rest of the hidden economy was worth €194.4 billion or 12% of GDP.
      Between 2011 and 2014, the total impact of the shadow and illegal economy rose from 12.4% to 13%.

  3. It never fails to astonish me how bankers reconcile themselves to practices that, for anyone with an ounce of common sense, are bound to end in tears, such as:
    1. 100+% mortgages;
    2. No credit checks on income for loans;
    3. Clearing banks getting involved in investment banking;
    4. Using a balance sheet to trade derivatives; and, now, the worst idea of all
    5. Forcing loans on to customers to buy the bank’s own shares.
    I was in the USA last week and saw an ad which combined 1 and 2 above.
    The only explanation for any of the absurdities is that:
    1. The bank staff get paid ludicrous amounts of money based on short-term profits;
    2. They hope to get out before the plates stop spinning.
    I am afraid that the idea that EU regulators are going to stop this are fanciful. Regulating this sector, unless we entirely divorce investment banking from lending, is like trying to push water uphill.

    • The answer to preventing reckless lending in this respect, credit cards, overdrafts, payday loans is a one line act of Parliament:- “Reckless lending is unrecoverable,”

      • That answer was already here in the UK until it was repealed in the early 80’s. It was that part of the Consumer Credit Act 1974 which provided a formula to ensure the loan applicant could afford repayments. If the ratio was exceeded the courts would not hear any case in the event of default.

        It worked extremely well which is probably why Thatcher repealed it. I said at the time this would lead to a credit bubble and crash. It took 25 years to happen – about the time required for “Thatchers children” to fenagle themselves into senior banking positions where they could then exploit the lack of regulation destroying the banks they headed whilst simultaneously enriching themselves.

    • If your product is debt and your objective is to create as much debt as possible which of the five conditions above would you not implement?

      • You are, of course, spot on. It is still shocking IMHO that formerly really solid lenders such as Northern Rock and the CO-OP bank so completely lost the plot of what they were there for. I can sort of understand the clearing banks wanting to get in on the casino aka investment banking, but the building societies and the CO-OP?
        The Nationwide is about the last man standing, I think, which is a pretty sad reflection on things.

  4. Shaun, I am frankly shocked. If this is the result of ECB oversight then Europe really hasn’t got long in it. I cannot believe that shareholders who are risk return investors think it is appropriate to be loan taking customers of the same bank (surely when their equity is wiped out they feel less inclined to repay the loan?), that story about a loan premium to buy shares, most likely with controĺled redemption rights is plain criminal. Send the bankers and complicit recipient straight to jail!

    Really if this is acceptable banking business practice then god help us all.

    • And, may I ask, where were the auditors in all this? As a chartered accountant who once audited Barclays bank many years ago, I am afraid to say that the profession has proved itself worse than useless at standing up to these banks, probably to save their future fees.
      I could weep at the mess.

  5. Hi Shaun,

    That nice Mr Draghi seems to be under a little pressure, no? I’ve been following ex Unicredit Risk Manager Jonathon Sugarman’s case for some years now and have watched the poor sod be sidelined by broadcasters, politicians and inquiries alike. The Irish MEP Luke Flanagan has now taken up the cudgels on his behalf and has pressed M. Draghi in parliament.

    One awaits M. Draghi’s written response with interest (and considerable cynicism).

    • Hi Jim M

      I was reminded of this case today as it flicked up on some of the social media. It is chilling the way he has been ignored and sidelined isn’t it? Mind you the Bank of England and FSA have been the same with whistle blowers over here. All such episodes are simply shameful.

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