BP Vicenza and Veneto Banca Request State Aid and Bail-in for Subordinated Bondholders
Last Friday, Banca Popolare di Vicenza S.p.A. (BP Vicenza, unrated) and Veneto Banca S.p.A. (Veneto Banca, unrated) requested an undetermined capital injection from the Italian government ahead of the banks’ planned merger this year. The banks said that a government bailout should not trigger losses on senior bondholders and depositors because their case meets the exemption criteria defined in the European Bank Recovery and Resolution Directive (BRRD). The exemption requires approval from the European Commission (EC), and a rejection by the EC means that that the banks’ senior bondholders could suffer losses before government intervention. Regardless of the EC’s approval, subordinate bondholders of BP Vicenza and Veneto Banca must bear losses, in line with European state-aid rules. The BRRD requires that shareholders and creditors bear losses of at least 8% of a bank’s assets before the provision of government capital. The request from BP Vicenza and Veneto Banca suggests that the banks will report losses leading to equity and junior debt below 8% of assets. Without the exception, a full resolution would lead to losses for senior bondholders before the government is allowed to inject funds. Nevertheless, the two banks claim that they meet the criteria for an exception to the 8% rule, in line with a proposal made in December 2016 for Banca Monte dei Paschi di Siena S.p.A. (B2/B3 review direction uncertain, ca review for upgrade1 ). According to article 32 (4) (d) of the BRRD, governments can inject equity without triggering full resolution if the banks are solvent, and public funds “address capital shortfall established in…stress tests, asset quality reviews or equivalent exercises.” Additionally, the exception requires that a public capital injection seeks to remedy a serious disturbance in the economy of a European Union member state and preserve financial stability. We are doubtful that BP Vicenza and Veneto Banca meet the criteria for an exception under a strict interpretation of the BRRD for three reasons. First, the European Central Bank (ECB) considers a bank to be solvent, for the purposes of a precautionary recapitalisation, if it fulfils its minimum Pillar 1 capital requirements and does not have a shortfall under the baseline scenario of the relevant stress test. As the exhibit below shows, BP Vicenza’s and Veneto Banca’s latest financials show capital ratios above these minimums, and capital injections made by the main shareholder of the two banks in January 2017 will provide additional benefit. However, the banks’ expectation of large losses suggest that they may not meet Pillar 1 requirements as of 31 December 2016 (that is, before their public fund requests).
Last Friday, Banca Popolare di Vicenza S.p.A. (BP Vicenza, unrated) and Veneto Banca S.p.A. (Veneto Banca, unrated) requested an undetermined capital injection from the Italian government ahead of the banks’ planned merger this year. The banks said that a government bailout should not trigger losses on senior bondholders and depositors because their case meets the exemption criteria defined in the European Bank Recovery and Resolution Directive (BRRD). The exemption requires approval from the European Commission (EC), and a rejection by the EC means that that the banks’ senior bondholders could suffer losses before government intervention. Regardless of the EC’s approval, subordinate bondholders of BP Vicenza and Veneto Banca must bear losses, in line with European state-aid rules. The BRRD requires that shareholders and creditors bear losses of at least 8% of a bank’s assets before the provision of government capital. The request from BP Vicenza and Veneto Banca suggests that the banks will report losses leading to equity and junior debt below 8% of assets. Without the exception, a full resolution would lead to losses for senior bondholders before the government is allowed to inject funds. Nevertheless, the two banks claim that they meet the criteria for an exception to the 8% rule, in line with a proposal made in December 2016 for Banca Monte dei Paschi di Siena S.p.A. (B2/B3 review direction uncertain, ca review for upgrade1 ). According to article 32 (4) (d) of the BRRD, governments can inject equity without triggering full resolution if the banks are solvent, and public funds “address capital shortfall established in…stress tests, asset quality reviews or equivalent exercises.” Additionally, the exception requires that a public capital injection seeks to remedy a serious disturbance in the economy of a European Union member state and preserve financial stability. We are doubtful that BP Vicenza and Veneto Banca meet the criteria for an exception under a strict interpretation of the BRRD for three reasons. First, the European Central Bank (ECB) considers a bank to be solvent, for the purposes of a precautionary recapitalisation, if it fulfils its minimum Pillar 1 capital requirements and does not have a shortfall under the baseline scenario of the relevant stress test. As the exhibit below shows, BP Vicenza’s and Veneto Banca’s latest financials show capital ratios above these minimums, and capital injections made by the main shareholder of the two banks in January 2017 will provide additional benefit. However, the banks’ expectation of large losses suggest that they may not meet Pillar 1 requirements as of 31 December 2016 (that is, before their public fund requests).
