It appears that Italian authorities really mean it this time when as they prepare to clean up their house with an announcement imminent on a restructuring of the Italian banking system. When other southern European countries were finalising their EU led banking system bailout (in Spain, Ireland and elsewhere), the Italian banking system carried on while keeping a weary eye on growing NPL rates, which the World Bank and others peg among the highest in Europe as noted below. However unlike 2011-12, the door for European wide bailouts closed this January 1st with the passage of the EU Bank Recovery and Resolution Directive ("EU BRRD"), which requires losses to accrue to equity, debtholders and even depositors.
So today, we have the London Times and others predicting a rescue fund for Italian banks around the corner with EU sovereign valuations backing up on the back of the expectations of a bailout. The Times notes weaker lenders will be forced to raise E2.5bio in equity and a rescue fund will be launched to deal with E200 billion in problem assets. So failure to manage this black hole would surely mean application of the EU BRRD rules forcing write downs on equity and debt holdings across the country.
David Stockman's blog recently wrote about Italy's Most Bizarre Bailout Yet (his title) with major holdings of central bank's stakes now being monetised via a sale back to the central bank. Could such maneuvers might be an effective means to build up capital in the bigger and better capitalised banks? If so, this doesn't really help smaller lenders however. Perhaps the authorities want to draw the wagons around the bigger lenders while seeking a solution for the more challenged smaller entities?
David Stockman's blog recently wrote about Italy's Most Bizarre Bailout Yet (his title) with major holdings of central bank's stakes now being monetised via a sale back to the central bank. Could such maneuvers might be an effective means to build up capital in the bigger and better capitalised banks? If so, this doesn't really help smaller lenders however. Perhaps the authorities want to draw the wagons around the bigger lenders while seeking a solution for the more challenged smaller entities?
All of this underscores the growing trend toward greater risk transfer to bank capital market investors (equity, subordinated debt AT1/cocos, senior debt and even depositors) following the introduction of the new EU rules. Euromoney recently wrote of the drive to force European financials to issue loss absorbing instruments while only marginally hiking their true equity cushions. It does appear that the yield sought by investors on their capital notes are well deserved. Let's see how this plays out....
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