The problems of the banks of Italy part 101

It is time to look again at a topic which is a saga of rinse and repeat. Okay I am not sure it is part 101 but it certainly feels like a never-ending story. Let us remind ourselves that the hands of the current President of the ECB ( European Central Bank) Mario Draghi are all over this situation. Why? Well let me hand you over to the ECB itself on his career so far.

1997-1998: Chair of the Committee set up to revise Italy’s corporate and financial legislation and to draft the law that governs Italian financial markets (also known as the “Draghi Law”)

It is a bit awkward to deny responsibility for the set of laws which bear you name! This happened during the period ( 1991-2001) that Mario was Director General of the Italian Treasury. After a period at the Vampire Squid ( Goldman Sachs) there was further career progression.

2006-October 2011Governor, Banca d’Italia

There were also questions about the close relationship and dealings between the Italian Treasury and the Vampire Squid over currency swaps.

But with Mario linking the Bank of Italy and the ECB via his various roles the latest spat in the banking crisis saga must be more than an embarrassment.

The inspection at Banca Popolare di Vicenza that began in 2015 was launched at the request of the Bank of Italy and was conducted by Bank of Italy personnel. Any subsequent decisions were not the responsibility of the Bank of Italy but of the European Central Bank, because in November 2014 Banca Popolare di Vicenza had become a ‘significant’ institution and was subject to the European Single Supervisory Mechanism (SSM). ( h/t @FerdiGiugliano )

So we can see that the Bank of Italy is trying to shift at least some of the blame for one of the troubled Veneto banks to the ECB. At this point Shaggy should be playing on its intercom system.

It wasn’t me…….It wasn’t me

An official denial

At the end of last month the Governor of the Bank of Italy gave us its Annual Report.

At the end of 2016 Italian banks’ non-performing loans, recorded in balance sheets net of write-downs, came to €173 billion or 9.4 per cent of total loans. The €350 billion figure often cited in the press refers to the nominal value of the exposures and does not take account of the losses already entered in balance sheets and is therefore not indicative of banks’ actual credit risk.

Indeed he went further.

Those held by intermediaries experiencing difficulties, which could find themselves obliged to offload them rapidly, amount to around €20 billion.

I suppose your view on this depends on whether you think that 20 billion Euros is a lot or a mere bagatelle. It makes you wonder why the problems at the Veneto banks and Monte Paschi seem to be taking so long to solve does it not?

Meanwhile he did indicate a route to what Taylor Swift might call “Trouble, trouble,trouble”.

At the current rate of growth, GDP would return to its 2007 level in the first half of the 2020s.

An economy performing as insipidly as that is bound to cause difficulties for its banks, but not so for the finances of its central bank.

The 2016 financial year closed with a net profit of €2.7 billion; after allocations to the ordinary reserve and dividends paid to the shareholders, €2.2 billion were allocated to the State, in addition to the €1.3 billion paid in taxes.

The QE era has seen a boom in the claimed profits for central banks and as you can see they will be very popular with politician’s as they hand them over cash to spend.

The ECB is pouring money in

The obvious problem with telling us everything is okay is that Governor Visco is part of the ECB which is pouring money into the Italian banks. From the Financial Times.

According to ECB data as of the end of April, Italian banks hold just over €250bn of the total long-term loans — almost a third of the total.

There is a counter argument that the situation where the Italian banks rely so much on the ECB has in fact simply kicked that poor battered can down the road.

“Some of them [Italian banks] are unprofitable even with the ECB’s cheap funding,” adds Christian Scarafia, co-head of Western European Banks at Fitch.

Fitch also observes that the TLTRO funding is tied up with Italy’s management of the non-performing loans that beset its banks. “The weak asset quality in Italy is certainly the big issue in the country and access to cheap ECB funding has meant that banks could continue to operate without having to address the asset quality problem in a more decisive manner,” says Mr Scarafia. (FT)

It was intriguing to note that the Spanish bank BBVA declared 36 million Euros of profits in April from the -0.2% interest-rate on its loans from the ECB. A good use of taxpayer backed money?

The Veneto Banks

For something that is apparently no big deal and according to Finance Minister Padoan has been “exaggerated” this keeps returning to the news as this from Reuters today shows.

Italian banks are considering assisting in a rescue of troubled lenders Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros (1.1 billion pounds) of private capital into the two regional banks, sources familiar with the matter said.

Good money after bad?

Italian banks, which have already pumped 3.4 billion euros into the two ailing rivals, had said until now that they would not stump up more money.

As you can see the ball keeps being batted between the banks, the state , and the Atlante fund which is a mostly private hybrid of bank money with some state support. Such confusion and obfuscation is usually for a good reason. A bail in has the problem of the retail depositors who were persuaded to invest in bank bonds.

Monte Paschi

On the 2nd of this month we were told that the problem had been solved and yet the saga like so many others continues on.


Seems odd if it has been solved don’t you think? Mind you according to the FT the European Banking Authourity may have found a way of keeping it out of the news.

The EBA said it would be up to supervisors to decide whether to include any bank in restructuring within the stress tests, and European Central Bank supervisors have decided not to include Monte dei Paschi, people briefed on the matter said.

So bottom place is available again.


This has certainly been more of a marathon than a sprint and in fact maybe like a 100 or 200 mile race. The Italian establishment used to boast that only 0.2% of GDP was used to bailout Italian banks but of course it is now absolutely clear that this effort to stop its national debt rising even higher allowed the banking sector to carry on in the same not very merry way. This week the environment has changed somewhat with Santander buying Banco Popular for one Euro. Although of course the capital raising of 7 billion Euros needs to be factored into the equation. I guess Unicredit has troubles enough of its own and could not reasonably go for yet another rights issue!

Me on TipTV Finance


The British and Irish Lions

I have been somewhat remiss in not wishing our players well on what is the hardest rugby tour of all which is a trip into the heart of the All Blacks. I am thoroughly enjoying it although of course we need to raise our game after a narrow win and a loss. Here’s hoping!





16 thoughts on “The problems of the banks of Italy part 101

    • Hi Bez

      There has been a common theme in Spain that the stronger banks have taken over the weaker ones. We saw that in the caja saga. My late father used to say that takeovers of this sort messed up the accounts for 18/24 months and thereby gave a breathing space. So we may need some of Forbin’s popcorn…..

  1. I amy have miscounted but I’m pretty sure this is blog 10,001 on the Italian banks and nobody is any further forward than the first. The European banks are not suffering from a liquidity crisis, they are insolvent and have been since 2008.

    The solution I agree with is from |Prof Richard Werner. The ECB buys up all the bad debt at face value. Even if the bank only makes a one Euro profit it’s quids in. If it makes a loss, no problem, the ECB has an infinite amount of Euros it can issue.

    The most important bit is what the UK and US didn’t do. That those responsible are held accountable for their actions. I won’t hold my breath.

    • Hi bill40

      The big issue here is that it has taken so long for this to be addressed by the Italian establishment. They found a fly half with a very big boot to kick their can into the future. After all it was ten years ago this month that a couple of hedge funds at Bear Stearns got into trouble and began the credit crunch era.

    • “European banks are not suffering from a liquidity crisis, they are insolvent and have been since 2008” ?? Lack of liquidity precedes insolvency, the fact the ECB is introducing so much liquidity, not forgetting the Fed’s unlimited swaps arrangement with the ECB demonstrates beyond the shadow of a doubt that there is an immense liguidity crisis within European banks which then gives rise to insolvency. That’s how business finances work, you can’t be insolvent until you already have severe cash flow problems which can be called a liquidity crisis if you like…… .

      • OK I’ll rephrase that, the European banks are past the point of illiquidity and are insolvent. God knows how much bad debt is in the system, it must be flushed out.

  2. Hi Shaun,

    I would suggest that there’s more chance of the Lions coming back unbeaten than there is of a happy outcome to the Italian banking fiasco, and I say that fully aware that the Lions have already lost once.

  3. Shaun, I am in Tuscany today and I actually saw a Monte de Paschi street branch, my jaw dropped, I assumed it was a fake business with nominal HQ in Siena where they piled up the bad loans in the cellar ancien.

    Anyway its hot here and I avoided the GE. Surf was fabulous at Livorno this morning. The Italians seem to spend all day at the beach. the young, middle aged and old, all of them burnt and wrinkly. I guess theres no need to work when its this hot and there is gelati.

    Ill peer into some Italian Bank windows for you.

    Paul C.

    • Shaun, I took a look at the MPS branch in Castiglioncello. It was a throw back to the 1970’s imagine beige furniture, coffee coloured metal filing cabinets, one formica counter and brown clothed visitor chair, legal papers pinned to the wall, no internet of LED display, a plastic land line phone. Opening hours 10-12 3 days a week. Indeed the bank is a fake, with joke representation on the street.
      Paul C.

  4. Hi Shaun,

    The Lions might not be winners on this tour however their supporters are. I look forward to a quite evening at my local tonight on the eve of the Crusaders game. Apparently a number of Lions supporters are going to be present.
    Has the Lions/ England considered performing a Morris dance before each game to negate the Haka? I might suggest this this evening.

    • Hi Bones

      Thanks for your two messages. I had not spotted your previous one when I added the Lions tour postscript today so great minds think alike and all that. You can be assured that the Lions are still popular up here and in some ways because rather than in spite of the fact. they are an anachronism in the modern era. Whereas the Barbarians sadly have lost their mojo.

      Your boys look very strong on the evidence of the 2 games so far and to my mind Gatland has yet to prove he can bring the 4 nations together and be better than either England or Ireland. I hope he can because I think we have improved up here and can mount a challenge but we have to play mostly our way and not yours. You are better at that. But anyway enough analysis as I am meeting a friend tomorrow and we will be doing plenty of that. Enjoy your beer and drink one for me!

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