Opinion

ECB finally addressing Italian bank woes

Italy’s banking problem has been left unaddressed for too long. Similar to Japan in the 1990s, it is best understood as a combination of structural and cyclical factors.

By: and Date: January 4, 2017 Topic: Banking and capital markets

Most of Italy’s banks, many of which are small and local, have politicized governance features that blur commercial incentives. As a consequence, they were unable to rein in their lending during the downturn of the late 2000s.

Many of these loans turned sour in subsequent years and local connections prevented the banks from working them out, so they kept supporting borrowers in a pattern of “pretend and extend.”
The system’s non-performing exposures now total hundreds of billions of euros. Many of these loans are collateralized, but repossession is not really an option given the country’s antiquated judicial system.

It gets worse — many banks sold their own shares and debt to their retail clients, often without proper disclosure of the risks and at inflated prices. Such self-dealing is prohibited in many jurisdictions, but wasn’t prevented in Italy and even received favourable tax treatment until 2011.

Bank equity and debt became even riskier once the EU introduced legislation on the resolution (or orderly liquidation) of failing banks, a shift that was signalled as early as 2009-10 and became official in mid-2012.

By then, Italian authorities should have forced the banks to buy back their risky securities from non-professional clients. That they failed to do so was a massive failure of public policy.

This context largely explains the country’s subpar growth rate — banking system fragility results in credit misallocation and a severe drag on economic activity.

Particularly in the last half-decade, weak Italian banks have been culprits, not just victims, of economic sluggishness. In a telling contrast, Spain started cleaning up its banks in 2012 and has enjoyed comparatively dynamic growth since.

The problem was diagnosed more than two years ago by the European Central Bank (ECB) during its comprehensive assessment of the euro area’s 130 largest banking groups (of which 15 are Italian), which paved the way for its assumption of supervisory authority as part of a broader reform known as banking union.

Nine Italian banks were among the 25 that failed the exam, and four of them were still undercapitalized when the results were announced in October 2014.

Remarkably, they were the same that are widely believed to be in need of fresh capital now — Monte dei Paschi di Siena (MPS), Banca Popolare di Vicenza, Veneto Banca, and Carige.

The ECB did not immediately assert itself and, earlier this year, the constitutional referendum campaign deterred any forceful action. But the ECB appears to be moving into action now.

It is forcing MPS to find fresh capital before year-end. If this fails, the “world’s oldest bank” will face nationalization and drastic restructuring (with a specific protection scheme for victims of past misselling).

Similar initiatives are expected with the other three significant problem banks, and probably follow-up moves in the first half of 2017 to identify and handle weaknesses among the country’s hundreds of smaller banks which remain supervised by the Bank of Italy.

Mercifully, favourable market reactions to recent announcements by UniCredit, another large Italian institution, show that those banks that are not critically weak can still mobilize private capital.

Assuming reasonably competent handling, the entire system might reach broadly adequate capitalization to start seriously working out its bad loans by the summer of 2017.

This would have beneficial impact on three separate levels. First, putting an end to Italy’s banking fragility will revive the country’s growth, and also mark the near-completion of a protracted process of bringing the euro area’s banking sector back to soundness, in which Italy has lagged behind most other countries.

Second, it would herald the successful inception of banking union, with the ECB being a demonstrably more forceful supervisor than the national authorities it replaced in 2014.

Third, it could unlock a new phase of reform grounded on that success, including the long-debated creation of a European deposit insurance scheme and related policy measures to deepen Europe’s still unfinished banking union.

As usual in Europe, the path of progress is belated and tortuous. But it may well be that an important corner is just being turned.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article
 

Blog Post

European governanceInclusive growth

12 Charts for 21

A selection of charts from Bruegel’s weekly newsletter, analysis of the year and what it meant for the economy in Europe and the world.

By: Hèctor Badenes, Henry Naylor, Giuseppe Porcaro and Yuyun Zhan Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: December 21, 2021
Read article
 

External Publication

European Parliament

Don't let up - The EU needs to maintain high standards for its banking sector as the European economy emerges from the COVID-19 pandemic

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Rebecca Christie and Monika Grzegorczyk Topic: Banking and capital markets, European Parliament Date: October 21, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

The Value of Money, Controversial Economic Cultures in Europe: Italy and Germany

A discussion of Italian and German macro-economic cultures and performances.

By: Francesco Papadia Topic: Macroeconomic policy Date: June 10, 2021
Read article Download PDF More by this author
 

External Publication

European Parliament

What Are the Effects of the ECB’s Negative Interest Rate Policy?

This paper explores the potential effects (and side effects) of negative rates in theory and examines the evidence to determine what these effects have been in practice in the euro area.

By: Grégory Claeys Topic: Banking and capital markets, European Parliament, Testimonies Date: June 9, 2021
Read article
 

Blog Post

European governance

Urgent reform of the EU resolution framework is needed

In this blog, the authors argue that two aspects of the European resolution framework are particularly in need of reform – the bail-in regime and the resolution mechanism for cross-border banks – and propose a reform of both.

By: Mathias Dewatripont, Lucrezia Reichlin and André Sapir Topic: Banking and capital markets, European governance, Macroeconomic policy Date: April 16, 2021
Read article More on this topic
 

Blog Post

The impact of COVID-19 on artificial intelligence in banking

COVID-19 has not dampened the appetite of European banks for machine learning and data science, but may in the short term have limited their artificial-intelligence investment capacity.

By: Julia Anderson, David Bholat, Mohammed Gharbawi and Oliver Thew Topic: Banking and capital markets Date: April 15, 2021
Read about event More on this topic
 

Past Event

Past Event

An alpine divide? Comparing economic cultures in Germany and Italy

A discussion of Italian and German macro-economic cultures and performances.

Speakers: Thomas Mayer, Patricia Mosser, Marianne Nessén, Hiroshi Nakaso, Francesco Papadia, André Sapir and Jean-Claude Trichet Topic: Macroeconomic policy Date: April 13, 2021
Read about event More on this topic
 

Past Event

Past Event

Think green act local: the role of the G20 in sustainable infrastructure

In this workshop, invited guests will discuss priorities and proposals for the Italian G20 Presidency for a green local infrastructure agenda.

Speakers: Amar Bhattacharya, Marco Bucci, Adriana Calderon, Maria Demertzis, Matthias Helble, Elly Schlein, Niclas Poitiers and Gelsomina Vigliotti Topic: Green economy Date: March 15, 2021
Read about event More on this topic
 

Past Event

Past Event

Presentation of the Euro Yearbook 2021

Join us for the launch of the eighth edition of the 'Euro Yearbook'

Speakers: Maria Demertzis, Fernando Fernández, Fiona Maharg-Bravo, Antonio Roldán and Jorge Yzaguirre Topic: Macroeconomic policy Date: March 12, 2021
Read article Download PDF More on this topic
 

Working Paper

COVID-19 credit-support programmes in Europe’s five largest economies

This paper assesses COVID-19 credit-support programmes in five of the largest European economies, and examines how countries have dealt with trade-offs raised by the programmes.

By: Julia Anderson, Francesco Papadia and Nicolas Véron Topic: Macroeconomic policy Date: February 24, 2021
Read about event More on this topic
 

Past Event

Past Event

How could regulators address financial firms’ dependency on cloud and other critical IT services providers?

At this closed-door event Dirk Clausmeier, Head of IT security at the German Ministry of Finance will discuss financial institutions use of cloud service providers.

Speakers: Dirk Clausmeier and Nicolas Véron Topic: Banking and capital markets Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 28, 2021
Read article More on this topic More by this author
 

Blog Post

Memo to the European Commissioner for Financial Services Policy

The Commissioner for Financial Services Policy should define and promote a vision for a sustainable global financial regulatory and supervisory order, based on the lessons from the previous major international financial crisis in 2007-09 and its aftermath. As a member of President Ursula von der Leyen’s “geopolitical Commission,” the Commissioner should lead in setting the international agenda and build global credibility by driving the corresponding “domestic” (ie EU) reforms at home. This memo focuses on the international aspects.

By: Nicolas Véron Topic: Global economy and trade Date: January 20, 2021
Load more posts