One of the longest running themes of this site has been the ostrich like behaviour of Italy about its banks. The official view has been that a corner is just about to be turned on what keeps turning out to be a straight road. I still recall Prime Minster Renzi assuring investors that shares in the trouble Monte Paschi di Siena were a good purchase. Here is an example of this from him in Il Sole from January 2016 via Google Translate and the emphasis is mine.
“The recent turbulence around some Italian banks indicates that our credit system – solid and strong thanks to the extraordinarily high savings of Italian families – still needs consolidation, so that there are fewer but stronger banks (…) Today the bank it is healed, and investing is a bargain. On Mps has been knocked down speculation but it is a good deal, has gone through crazy vicissitudes but today is healed, it is a nice brand. Perhaps in this process that will last a few months must find partners because it must be with others “.
Since then the bank has seen the Italian state take a majority stake and the share price is a bit less than forty times lower than when Renzi made his statement. This has been a familiar theme of the crisis where investors have been encouraged to stump up more money for troubled banks with promises of a brighter future. But it kept turning out that the future was ever more troubled rather than bright as good money followed bad in being lost.
Even worse the whole sector was weakened by the way that other types of bailout were provided by the banking sector itself. For example via the Atlante or Atlas fund which saw banks investing to recapitalise other banks and to buy bad loans. Regular readers will recall that the establishment view was that the purchase of bad loans by this and other vehicles was something of a new dawn for the sector. The reality was that as things got worse there was Atlante 2 before the whole idea got forgotten. It is rude to point out that the subject of today Bank Carige was considered strong enough to put 20 million Euros into the first version of Atlante.
A deeper perspective can be provided by the fact that the Italian banking laws are called the “Draghi Laws” after the President of the European Central Bank Mario Draghi. In his new role he has undertaken three policies which have helped the Italian banks. They have been particularly large beneficiaries of his liquidity operations called TLTROs which have provided cheap ( the deposit rate is -0.4%) for banks. Then the QE programme boosted the price of Italian government bonds benefiting the Italian banks large holdings. Then more opaquely at least in terms of media analysis it bought covered bonds ( mortgage bonds) in three phases and still holds around 271 billion Euros of them.
The catch of this from Mario’s point of view is that liquidity is only a short-term solution and soon falls short when the real questions are about solvency. Even worse the way this umbrella shielded the banks from the rain meant that the promised reforms never happened and the path was made worse rather than better. Also if we think of this from the point of Italy and its economy we see that we have part of the reason for its ongoing economic lost decade style troubles. The banks have helped suck it lower. Also and hat tip to Merryn Somerset Webb for this a letter to the FT today has on another topic covered the issue really rather well.
ECB can’t solve problems because to attempt to do so would be to admit that problems exist.
Carige
If we go back to 2017 we see that as well as a worrying departure of board directors and the beginning of an attempted asset sale which was to include bad loans there was this in December.
Italy’s Banca Carige said on Friday it had raised 544.4 million euros ($645 million) following its recently concluded new share issue, topping minimum regulatory demands. ( Reuters)
There were various features to this of which the first is that existing shareholders took a right caning or as the Italian regulator put it.
The Banca Carige capital increase has characteristics of hyperdilution.
In return there was the implication that the ECB had approved this and a corner had been turned. Less than a year later this all went sour as the ECB decided that Bank Carige needed yet another rights issue in yet another example of the themes described above. This time in spite of statements to the contrary no-one seemed silly enough to believe the official promises and this rumbled on until the New Year when the ECB decided that the first business day of 2019 was an opportune moment to do this.
The mass resignation of Carige directors that followed has given the ECB an opportunity to be creative. The central bank has used its powers of early intervention to step in to stabilise the bank’s governance. It has appointed three special administrators, including Innocenzi, tasked with restoring capital requirements. ( Reuters)
If you want some gallows humour this was described as “temporary” when it was pretty much certain to be anything but as a major shareholder ( Malaclaza) decided it had lost enough. It was hardly likely to believe the ECB again.
The Italian Government
This found itself in between a rock and a hard place as the Five-Star movement has consistently opposed both bailouts and bail-ins. Yet the government of which it is a member took I am told only 8 minutes to decide this last night.
The decree, signed off on Monday after a surprise cabinet meeting, will allow the bank to benefit from state-backed guarantees for new bond issues and funding from the Bank of Italy.
The lender, which last year failed to secure shareholder backing for a capital increase, will also be able to request access to state-backed precautionary recapitalization, if needed.
So yet again in a choice between the interests of the people and the interests of “the precious” we see that the same old status quo continues to play.
Whatever you want
Whatever you like
Whatever you say
You pay your money
You take your choice
Whatever you need
Whatever you use
Whatever you win
Whatever you lose
One of my longest-running themes of this website gets another tick in the box and we even get some Italian style humour.
EU rules permit such a scheme only if the bank is solvent.
So solvent in fact that they can no longer find anyone willing to put their own money into it. Also seeing as Bank Carige cannot even see its own nose I doubt this will be a barrier for long.
According to a financial source close to the matter, Carige would only consider a request for precautionary recapitalization if new and unforeseen problems arose.
Comment
The issue here is that on a generic basis the events described above are so familiar now that even the use of phrases like groundhog day does not do the situation justice. There are always going to be problems because regulators invariably end up being captured by the industry they regulate and banking is perhaps the worst example of this. But changes were promised so long ago and yet the Italian taxpayer will find him/herself on the hook in addition to the 320 million Euro hybrid bond that the deposit protection fund bought late last year. Even worse they may end up backing this enough for someone else to be willing to take it over and profit from. Oh and so much for hybrid!
Meanwhile in a land far, far, away I see that the Financial Times has interviewed the head of the Euro area banking resolution body.
Speaking to the FT to mark three years since the SRB became fully operational at the start of 2016, Ms König said a page had been turned in how the bloc handled bank failures — not least after its first intervention, at Spain’s Banco Popular in 2017 — but that the system remained a work in progress.
There is no mention of Italy at all which is really rather breathtaking, although there may be an implied hint.
Making sure that bank crises could be contained without resorting to taxpayer help was “an ongoing challenge”, she said.
Some claim the lack of contagion is progress, but you see there is a clear flaw in that as the problems here were evident as long ago as 2014 so what is called the “smart money” will have gone long ago. In some ways this makes things worse because in another shocking failure of regulation Italian retail depositors were encouraged to buy bank bonds.
Notayesmanseconomics's Blog 
Shaun, an exercise in can kicking if ever there was one. I dont see capitalism anywhere , just George Orwell’s communism where shared resources are used to prop up the assets and power of the minority. Govts buy shares and own businesses along with supporting banks in the name of the people.
The media has been coerced to paper over any truths and your blog does a great job in highlighting the facts but few want listen or really hear.
Paul C.
That’s a fantastic post that sums up more eloquently than I can say ,about how I feel.
This blog is indeed a rare spot of sanity.
Hello Shaun,
Ms König shows what the actual problem is – the Banks are not allowed to fail like other companies. Why have a deposit protection scheme if no Bank can go bust?
“Making sure that bank crises could be contained without resorting to taxpayer help was “an ongoing challenge”, she said”
no it’s not, you let them go …….
Forbin
Individual banks are allowed to fail sometimes but you can’t let an entire national system to collapse, tempting thought it is!
my point is that apart from Lehmans and a few others , they can be allowed to fail and not take the entire caboose with them.
if the entire structure is under threat then back in 2007/8 our illustrious leaders should have been planning
I think they put their collective hands in their pockets and started whistling quietly past the sleeping lion ….
Forbin
Deposit protection schemes protect banks, not customers – by thwarting a bank run.
Why queue for your money? The scheme will pay.
There really is no penalty for failure anymore: nothing for the board members or executives who drove the bank into the ground, nothing for the fund managers who stumped up £544M a year ago, nothing for the politicians who tell fibs about what’s going on and nothing for the regulators who happily spend the cash of taxpayers, most of whom are much poorer than they are, and despite laws put designed to stop public bail outs. How do I join this elite club?
there’s a que
🙂
its a great big club – and you ain’t in it – George C
Would that be the same FT that just awarded George Soros “Man of The Year”????
So much for the Five Star movement that were going to put a stop to things like this, just like Tsipras in Greece, they talk the talk but when it comes to telling banks where to go, I’m afraid they all follow orders from the same people.
And as for our fine banking elite, just wait for the inevitable re-capitalisations of RBS and BARC, and who do you think will pay??? Bank of England buying RBS and BARC bonds with the next form of QE???
Talking of Barclays, I don’t give Amanda Stavely’s attmept to sue them for £1.5bn over the Qatari investment in 2008 that allowed them to avoid a taxpayer funded bailout much hope. The High Court has just blocked the re-instatement of the charges recently thrown out by Southark Crown Court against Barclays, however four directors will still face charges later this month.
Stavely’s trial has now been postphoned to October next year.
So yet again, after a ludicrous delay of ten years another court case brough tby the regulator collapses.
Hi Kevin
Your comment about Five Star reminds me of this line from a marine to Private Joker in the film Full Metal Jacket. “You can talk the talk but can you walk the walk?”
The delays in the Qatari and Barclays case are straight out of Yes Prime Minister in that they are hoping that everyone will have lost the will to live by the time any decision is made. These things can be really shameful as in the issue around the Equitable Life cases where as many of the claimants were pension annuitants delays were always going to cut the cost via the work of the grim reaper. Also Barclays are in the news concerning Italy. From Reuters.
“Italy’s Guber and Barclays buy 150 million euros in bad loans from Banca Valsabbina “
@Kevin “So much for the Five Star movement that were going to put a stop to things like this, just like Tsipras in Greece, they talk the talk but when it comes to telling banks where to go, I’m afraid they all follow orders from the same people.”
Many start off with some integrity and then are “bought/bribed” by the system or they simply absorb by osmosis what is expected of them and join the club (so to speak). It’s all very subtle and designed to pull people in gradually so they don’t really notice, starting in school. This is why the whole of the way western society operates is doomed IMHO. People make themselves ill trying to fit in.
Jan,
You forgot blackmail.
The whole of Italy’s banking system is bankrupt and has been since at least 2011 when, as I recall, Italy needed some 1.2 Trillon Euros to fix the mess of the crash. Too big to bail and too big to fail as the expression went.
The only way to bail out insolvent banks is an injection of new money which can only be created by the sovereign state but Italy is no longer sovereign hence this ludicrous can kicking exercise. As the gorgeous Suzi Quatro almost put it…
So make a stand for your bank, honey
Try to kick the can
Put your bank in the can, honey
Save it while you can
Kick the can
Can the can
” The only way to bail out insolvent banks is an injection of new money which can only be created by the sovereign state…”
but this will help the EU plan to create a “Frankenstein’s monster” of a European State.
presumably with it’s own Stazi .
Forbin
( listed for the Gulag)
Oh good oh maybe we can share a cell 🙂
Notwithstanding the EU bail in rules I would think that bank failures will continue to be dealt with via bail outs by the taxpayer until the nettle is really grasped. The reason is that it may a lot easier and cheaper to bail out (usually by injecting new equity) rather than in. If, in a bail in, ordinary (uninsured) depositors and small businesses take a hit then that will undermine the whole system and could lead to a general bank run; a bail out can be done under the radar. I don’t think this is right at all and the banks need far more regulation but it’s question of relative trade offs and the least worse option.
Looking at the putative merger of DB and Commerzbank illustrates another point. It’s not so much that two bad banks don’t make a good one; it’s more that creating a much larger bank increases the fragility of the whole system; in the case of failure the collateral effects would most likely be spread right around the World due to the inter connectedness.
Hi Bob J
The process by which you “solve” the issue of too big to fail by making Deutsche Bank even bigger by adding Commerzbank to it is simply madness. The merger reminds me of something which my late father used to tell me which was that many mergers are because the accounts will be messed up and impossible to make much of for a couple of years or so. Or another version of kicking the can down the road.
As to bail ins you make a good point as so far there has been a marked lack of enthusiasm for treating the various hybrid bonds and Co-Cos as the equity they are supposed to become in a crisis.
So it seems that the ECB will continue to need to keep breaking the treaties by illegally supporting each nations bonds.
This is an interesting read:
https://www.imf.org/en/News/Articles/2018/11/13/ms111318-italy-staff-concluding-statement-of-the-2018-article-iv-consultation
if it’s illegal to whom are they answerable to and who can enforce the law?
Forbin
A substantial number of Euro Banks have major problems and for the time being a wafer thin monetary la la blanket has been used to project an image of solvency. Having been side-tracked by the supposed problems of the Backstop the WA and its financial clauses will suck the UK into commitments that nobody is aware of – certainly not the voters.
Can you expand upon that?
tks
Hello Shaun,
“Second death in London’s Canary Wharf in 24 hours”
I do hope this is not because they know something about the up coming Great Banking Crisis …
Forbin
( my sympathies to the relatives of these unfortunate people)
Fishy, last week it was supposedly a construction worker, where accidents will happen. Current death is a 50 year old, mpre a banker age than a construction worker age I agree. Sympathies
Hi Guys
These things do happen for no apparent reason. Back in the day my father did some work on the BSB Building near Battersea Power Station which then became the building for QVC the shopping channel. That had several deaths during its construction and was considered an unlucky place to work. Of course sometimes these things do happen for a reason…
Shaun, if you combine the two points:
“ECB can’t solve problems because to attempt to do so would be to admit that problems exist.”
with
“Meanwhile in a land far, far, away I see that the Financial Times has interviewed the head of the Euro area banking resolution body.” (who fails to mention the problems in Italy)
You can see the problem with the Remain-dominated media (particularly broadcast). They too can’t possibly criticise anything European and have not done so for a good 3 years now. I note no mention of the beating up of a so called ‘right wing’ MP to an inch of his life in Germany but apparently some rough looking working class people with brutish manners outside Parliament are ‘nazis subverting democracy’.
I never gave Europe and our membership a second thought until asked to do so. However, I am increasingly angry at attempts to not implement the mandate and the role of the mainstream media. The broader economic management from unfettered and unbalanced globalised trade to wide open borders, the bailing out of banks and speculators (the rich) with zero interest rates and QE has resulted in an unbelievable flow of wealth to the upper echelons over the last 4 decades. If one believes in our Demos and a Welfare State that looks after ALL its Citizens, this downward spiral needs to be changed. The fissures are showing on the streets and the voting booths but not with much thought – more an instinct that something is wrong and anger that could well end up being misdirected.
We really need to implement balanced international trade, control of borders and massive taxes on the rich akin to those post second world war, in order to force an asset re-set and re-distribution in order to restore the health of the Demos and common purpose. Otherwise, I fear for the future – either through violent revolution or perhaps even more worrying – insidious repression.