Four Italian banks (Banca Marche, Cassa di risparmio di Ferrara, Popolare Etruria e CariChieti) that have been under special administration for quite some time, are now finally being resolved. The four banks are very small, accounting for about 1% of total Italian deposits altogether. So the issue may look tiny, but as a matter of fact, the implications from the way this operations is being carried out are not.
After “creatively” implementing bank bail-in for the first time during summer (as discussed previously here), Italy is now looking again for imaginative solutions to its banking sector’s problems. A note published by the Italian Central Bank (in its capacity as resolution authority) and a press release from the Commission give details on the scheme.
After absorbing part of the losses with equity and subordinated debt - the minimum bail-in required by the currently applicable State Aid framework that covers the transition to the full implementation of the Bank Recovery and Resolution Directive (BRRD) in 2016 - the four banks will be split into a “good” bridge bank and a bad bank.
The capital of the bridge banks has been replenished to 9% from the Italian Resolution Fund, which will also provide a guarantee to the Asset Management Vehicle (the bad bank). The total contribution of the Resolution Fund amounts to about 3.6 billion: “1.7bn to absorb losses in the original banks, 1.8bn to recapitalize the good banks and 140 million to inject the minimum capital in the bad bank” according to the note published by Banca d’Italia.
Now here is when it gets interesting. The Resolution Fund is financed by contributions from the Italian banking sector, so it is not public money. But the Fund does not currently have 3.6 billion needed for this operation so, in order for bail-in to be kept to the current regulatory minimum (which requires completing the operation by end-year) and for the State to remain formally out of the picture, the money has been kindly “advanced” by three large Italian banks (Unicredit, Intesa and UBI).
The main Italian economic newspaper suggests that this advance actually takes the form of two distinct credit lines: a long-term one for 1.6 billion (which should ideally be reimbursed by selling the bridge banks and the Non-Performing Loans in the bad bank) and a short-term one of 2 billion (which should be repaid by year-end).
Assuming that the four bridge banks will be of interest to some buyers, the long term credit line will be repaid, but it is legitimate to wonder how likely it is that the NPL in the bad bank will be liquidated (and at what price) and how is the short-term credit line supposed to be repaid by the end of this year. The plan is reportedly to ask all the other Italian banks to advance this year an amount equivalent to potentially three times their expected yearly contributions to the Resolution Fund. It goes without saying that this would not be a negligible amount for the banks. Il Sole 24 Ore reports that in order for the rescue to succeed without putting all the other banks in trouble, the government is considering a “fiscal intervention”, but there is no detail on this yet.
So, while this story is still in its very early phases and it will be interesting to see whether these scattered pieces of information are confirmed, it is already possible to make a couple of (perhaps obvious) points. First, the plan to avoid more extensive bail-in in these four banks by de facto commit three years of resolution funds contributions to their rescue appears - to say the least - risky. It significantly reduces the room for manoeuvre in case any other banks were to get in trouble next year. Second, if things were not to smoothly work as planned and the short term credit line could not be repaid by means of banks’ contribution, what would the government do?
A press release published today by Banca Intesa explicitly says that in that case, the shortfall would be covered by Cassa Depositi e Prestiti, the Italian equivalent to the German KfW, in which the Italian Ministry of Economy and Finance owns 80% of share capital. Perhaps the resolution authority’s claim that no taxpayer money will be involved is a bit premature. Third, as discussed previously, one underlying motive for the Italian government’s “creative” approach to bank resolution is that Italian households are relatively exposed to bank debt. This obviously exposes potentially unaware depositors to the risk of bail-in, and it has a social cost. At the same time, however, rushing to save these four banks before 2016 making up these kinds of circuitous schemes do nothing but getting around the real problem and delaying its solution. From a broader European perspective, operations like this one will probably become much more difficult if not impossible once the BRRD bail-in kicks in in 2016, but it nevertheless suggests that ensuring a consistent and effective application of the bank recovery and resolution framework may be more challenging than expected.