It is all about the banks yet again

If there is a prime feature of the credit crunch in the financial world it is the woes and travails of the banks. That is quite an anti-achievement when you consider that if you count from the first signs of trouble at the mortgage book of Bear Stearns we are now in out second decade of this period having lost one already. Before we come to today’s main course delightfully prepared first by chefs in Italy and then finished off in Brussels I have a starter for you from the UK.

The Co-op Bank

Back on the 13th of February I gave my views on this institution being put up for sale.

So the bank is up for sale and my immediate thought is who would buy it and frankly would they pay anything? Only last week Bloomberg put out some concerning analysis……..Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, has plunged in value to as little as 45 million pounds ($56 million), according to people familiar with the matter.

Since then we have had regular reports in places like the Financial Times that a deal was just around the corner whereas I feared it might end up in the hands of the Bank of England. This morning has come news that the ill-fated sale plans have been abandoned and replaced by a doubling-down by the existing investors. From Sky News.

The beleaguered Co-operative Bank is closing in on a £700m rescue deal with US hedge funds amid ongoing talks about the separation of the vast pension scheme it shares with the Co-op Group.

Much of the issue revolves around funding the pension scheme and if I was worker at the Co-op I would be watching that like a hawk. Also the name may need some review as the shareholding of the Co-operative group falls below 5%.

We have also seen in the UK how a bailed out bank boosts the economy in return for taxpayers largesse. From Reuters.

British lender Royal Bank of Scotland (RBS.L) is planning to cut 443 jobs dealing with business loans and many of them will move to India, the bank said

The Veneto Banks

As we move from our starter to the main course we find ourselves facing a menu which has taken nearly a decade to be drawn up. The Italian response to the banking crisis was to adopt the ostrich position and ignore it for as long as possible. Indeed for a while the Italian establishment boasted that only 0.2% of GDP ( Gross Domestic Product) had been spent on bank bailouts compared to much higher numbers elsewhere. Such Schadenfreude came back to haunt them driven by one main factor which was the rise and rise of non-performing loans in the Italian banking sector which ended up with more zombies than you might expect to see in a Hammer House of Horror production. Even worse this was a drag on the already anaemic Italian rate of economic growth meaning that its economy is now pretty much the same size as when it joined the Euro.

There has been a long program of disinformation on this subject and I am sure that regular readers will recall the claims that Monte Paschi was a good investment made by then Prime Minister Matteo Renzi. There have also been the regular statements by Finance Minister Padoan along the lines of this from Politico EU in January.

Italian Finance Minister Pier Carlo Padoan has defended the way his country dealt with its banking crisis, saying the government had “only spent €3 billion” on bailouts, in an interview with Die Welt published today.

If we are being ultra polite that was especially “odd” as Monte Paschi was in state hands but of course over this weekend came more woe for Padoan. From the European Commission.

On 24 June 2017, Italy notified to the Commission its plans to grant State aid to wind-down BPVI and Veneto Banca. The measures will enable the sale of parts of the two banks’ activities to Intesa, including the transfer of employees. Italy selected Intesa Sanpaolo (Intesa) as the buyer in an open, fair and transparent sales procedure:

I will come to the issue of Intesa in a moment but let us first look at the cost to Italy from this.

In particular, the Italian State will grant the following measures:

  • Cash injections of about €4.785 billion; and
  • State guarantees of a maximum of about €12 billion, notably on Intesa’s financing of the liquidation mass. The State guarantees would be called upon notably, if the liquidation mass is insufficient to pay back Intesa for its financing of the liquidation mass.

This has opened up a rather large can of worms and as Bloomberg points out we can start with this.

Rome will effectively by-pass the EU’s “single resolution board” which is supposed to handle bank failures in an orderly way and the “Banking Recovery and Resolution Directive,” which should act as the euro zone’s single rulebook.

Why? Well as we have looked at before there was the misselling of bonds to retail investors.

The government could have taken a less expensive route, involving the “bail in” of senior bondholders. It chose not to: Many of these instruments are in the hands of retail investors, who bought them without being fully aware of the risks involved. The government wants to avoid a political backlash and the risk of contagion spreading across the system.

Privatisation of profits and socialisation of losses yet again. Also only on the June 8th we were told this.

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

Good job they said no as they would have been over 3 billion short! Oh and Padoan described the problems as “exaggerated” whereas if we return to reality this was always the real problem.

A bail in has the problem of the retail depositors who were persuaded to invest in bank bonds.


This seems to have got something of a free lunch here provided courtesy of the Italian taxpayer. From Reuters.

The government will pay 5.2 billion euros ($5.82 billion) to Intesa, and give it guarantees of up 12 billion euros, so that it will take over the remains of the banks.

So it can clear up the mess? Er not quite.

will leave the lenders’ good assets in the hands of Intesa,

So it is being paid to take the good bits. Heads it wins if things turns out okay and tails the Italian taxpayer loses if they do not as it will use the guarantees. Also as you can see it seems to have thought of everything.

You think Santander made a killing with Pop until you realise will even make the state pay for the redundancy package of V&V staff ( @jeuasommenulle )

It may even be able to gain from some Deferred Tax Assets but chasing down that thread is only in very technical Italian.


There is much to consider here so let me open with the two main issues. The European Banking Union has just been torpedoed by the Italian financial navy. The promised bail in has become a bailout. Next comes the issue of how much all the dilatory dithering has cost the Italian taxpayer? As in the end the cost is way above the sums that Financial Minister Padoan was calling “exaggerated”. I note that BBC Breakfast called the cost 5 billion Euros this morning ignoring the 12 billion Euros of guarantees which no doubt Italy in a by now familiar attempted swerve will try to keep it out of the national debt numbers. Although to be fair Eurostat has mostly shot down such efforts.

Over the next few days we will no doubt be assailed with promises that the money will come back. For some it already has. From the FT.

Intesa Sanpaolo, the country’s strongest lender that will take over the failed banks’ good assets, was the second biggest riser on the eurozone-wide Stoxx 600 index. Shares in the bank were up 3.6 per cent at publication time, to €2.71.







26 thoughts on “It is all about the banks yet again

  1. Hi Shaun
    A lost decade for Europe and a second+ for Japan.
    Whatever discussions have taken place in the bowels of the Italian
    elite, we all know who will pay, the Italian public.Until
    2008 nationalizing any business involved sensible
    “sink or swim” analysis but not now
    I am now going to walk my dog beside Breydon water and
    contemplate why I will see many white swans but not a
    single black one!


    • Hi JRH

      On we go with barely a question about how we got here or what we could have done to make things better. Unless there are some real nasties hidden away Intesa has done well out of the Italian taxpayer today.

  2. Shaun, Am I the saddest? I rely on Smile (Coop Bank) as my daily current account and on a recent holiday in Italy I checked out the oldest still existing bank in the world MPS, its origin and flagship branch in Siena, great place by the way.

    I dont think it matters much which bank or country of origin, the banks are leeches either of retail or business customers and when that blood dries they will
    leach off the state and general population at large.

    Leeches are not the answer to our economic health, they need to be burnt off and kept in glass jars rs to be ridiculed.

    Paul C.

    • Hi Paul C

      Most things have a time and a place as whilst back in time the practice of blood letting using leeches was dangerous for people who were ill, they do have uses now for some types of surgery. However banking leeches have no uses at all but seem extremely resistant to anything applied by our establishment. I second your method.

  3. Hi Shaun.

    As you have so kindly given us the starter and main course allow me to offer a little light-hearted dessert.

    The price for the DUP’s votes seems to have settled at £1 billion and Twitter is immediately asking questions as to how this should be classified. One bright spark has suggested “MayDUP Money” but the first prize must surely go to “Money Tree Union”.

    Who’s bringing the wine? 🙂

  4. I like to live by three hard and fast rules. 1. There is no such thing as taxpayers money, there is only the public purse, aka The Magic Money Tree. 2. Only the state can bail out a bank, the private resources simply don’t exist and 3. The BBC is unfit to report on anything financial or economics.

    Italy is an interesting case because it is a currency user, it can’t print it’s own money, so £5 says that bail out money will ultimately come from the ECB, which can print Euros. Italy knows full well that the EU cannot allow the Italian banking system to fail hence acts with impunity.

    That’s why the EU works for countries like Italy unlike the UK’s turgid adherence to rules.

    With permission may I just have a plug for my two part blog on an interview with David Malone? I’m sure you will have been a reader Shaun as well as many who read you.

  5. Hello Shaun,

    Its always the Banks isnt it ? Because nobody is fixing the issue , just can kicking .

    I wonder when the Bundesbank will realize or have enough of , the ECB giving away cash like its confetti ?

    Even the tax payer cant afford this but as Bill points out , are they really funding it ? Seems if the
    printing presses were real and not electronic, then the thunder of them running would wake the residents of Sydney (aus) ………


    PS : when are the new euro notes due ? Lire by any other name?

    • Hi Forbin

      There was a time when news like today’s would send Italian bond yields flying. But for a start they need to sell more than the ECB is buying and the ten year yield actually dipped today to 1.9%. Another false market of course but that is where we are.

  6. I am not sure we were told at the time that only systemically important banks had to do a bail-in any other bank can be bailed out by the tax payer. I am not sure who decides which category a bank fits into but I bet there is a discretionary element!
    I bet Brussels is not happy about these bail outs coming so soon after Bank Popular did a bail-in as it shows the system up for what it is.

    • They’ll stay quiet because if they make a fuss and these banks fall prey to the EZ Banking Recovery and Resolution rules. bail ins will definitely follow which will provide fuel for populist political movements whom want out of the EZ, as they point out the cost of remaining in the EZ at a time of impending German and Italian elections

  7. The EU bail in rules are in my view not generally pragmatic and this Veneto settlement is making the best of a bad job, although it yet again drags the taxpayer in to foot the bill in direct contravention of EU rules.

    The bail in rules sound great and avoiding a taxpayer bail out is what we all want. But if the bail in works at some stage retail deposits (not depositors as bondholders ) will be at risk and, if this happens, the risk of uncontrolled, and potentially catastrophic, contagion is high throughout the banking system, not just that part where the problems exist.

    Furthermore, there will be many businesses and individuals who will not receive compensation under EU deposit insurance rules and may be subject to substantial losses at the end of the day. This would be catastrophic for the banking system as a whole as no one would have confidence in banks any longer.

    As there is a lender of last resort (the ECB) you may say this doesn’t matter but it does; at the very least there will be a huge disruption to the payments system as folk shift their money around and a potential blow to confidence in the longer term as the WSJ recognizes.

    There is still a reluctance after all these years to face up to the fact that these are issues of solvency and not liquidity and avoiding these problems is due to a reluctance to restructure banking along sustainable lines which is probably the only way of avoiding major crises. The bail in rules may seem like a good solution but they are just a way of avoiding the main issues and will bring a train of problems of their own.

    • “This would be catastrophic for the banking system as a whole as no one would have confidence in banks any longer.”

      if we had an MSM that was honset (!) and reported the news, and not some modified version of it , that would certainly be the case

      When this broken in 2007/8 it was the fact the Banks did not *trust * each other apparently

      Frankly I still don’t trust them as nothing has change in regulation, Glass Steagall act would be
      a good idea, along with prosecutions too.

      And the “Issues of Insolvency” you’re irght BobJ not even talked about. and in 10 year time ,
      assuming no deprepression or war , we’ll still be bailing out the Banks

      Because its not Billions but Trillions needed , and the figure gets bigger each day


      • Strangely,I was talking about Glass Steagall the other day with someone who remarked that it was brought in to stop another great depression,then they repealed it and we had another great depression.,

    • The CB’s and Governments have been fully aware this is a solvency issue for the banks for some years, hence QE, FLS, HTB in the UK and HARP in the US etc.

  8. The banking system seems to have morphed into a giant black hole, where the only thing strong enough to escape the disaster are the bonuses paid to staff to stop the “talent” walking.
    I challenge anyone to go to the City or Canary Wharf and not be amazed at the wealth, every single penny of which is effectively a tax on the rest of us.
    I am off to lie down in sympathy with the poor old Italian taxpayer at this latest example of public loss to the bankers.

    • I was going to quote the first para,then I realised I really liked the second para too.
      Quite how people don’t realise that all this paper churning wealth is quite often just a tax on depositors or pensioners I just don’t know

  9. I wonder if many of us would not be a lot happier if there was a secure system for holding and transferring money – at a cost – and that borrowing and lending money was a completely separate system where you had to take your chances. After all the retail depositor has got used to not earning anything on deposits as they seem to be able to magic it up from elsewhere.

    • Hi Peter

      Of course so much of what you describe is down to the central banks. They are unlikely to be very keen on the sort of system you mention as they would be due a substantial down size. That may well mean you are on the road to a good idea!

    • Probably because a lot of them are pension funds whom already have enough problems matching assets to liabilities without this to add to their woes. If the populace see enough pensions disappearing into smoke there will be much trouble with existing pollies not getting returned for further terms of office – the pollies understand that much…

    • Hi Dutch

      So many bonds were ( miss) sold to retail depositors ( you money is safe this sort of thing) that the area of Veneto would have been hit hard if the bonds had been wiped out to help with the bailout. Here is Reuters in this subject last December.

      “Imposing losses on retail investors could undermine the popularity of the European project at a febrile time. But the political impact might be overstated. Over 85 percent of Italian bail-in instruments are held by the wealthiest 10 percent of domestic households, according to the Centre for European Policy Studies. If bonds were mis-sold, compensation could be added as needed – as happened in the case of Spanish lender Bankia.”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.