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The Italian banking sector problems: a political rather than a financial issue
As the financial markets reaction to Brexit unfolds, Italian banks have rapidly become the focal points of market participants. This is not surprising, given that the Italian banking sector has been under severe pressure since late 2015, due to mounting concerns about high NPLs, weak profitability and insufficient capital buffers in the event of a deterioration of the macro/financial environment. Earlier policy measures (in particular the Atlante fund and broad improvements to the lengthy judiciary procedures underlying collateral repossession) have not been sufficient to dispel market concerns.
Italian gross NPls amount to about €200 billion, or 12% of total loans (see here for a macro analysis that emphasises the links between macro variables and NPLs). While the NPLs growth rate has fallen remarkably in recent months (to 3.5%oya in April versus 15% one year earlier), it is the size of the exposures that attracts lots of attention. Out of the total, about 80-85€ billion are net NPLs, i.e. un-provisioned exposures that would trigger a capital shortfall in the event of a write-off.
But, assumptions about recovery ratios in line with the recent historical experience (see here for a study from the Bank of Italy) show that the true amount of the problem is smaller. Figures variously quoted in the press show that a full recap of the banking sector would require up to €40 billion (less than 2.5% of GDP). This figure – which is probably a conservative upper bound – would be manageable, in our view, given the current Italian fiscal position and sovereign cost of funding. Actually, the amount of NPLs is not evenly distributed across the banking system, and there are individual banks that account for a more than proportional share of the lot. In recognition of this skewed distribution, several analysts believe that the required capital needed to shore up the Italian banking system would be much smaller (with figures as low as a handful of billions needed to recap the most vulnerable bank, MPS).
However, the new banking regulation (the BRRD) in place in the region since 2015 rules out what circumstances would suggest as the most reasonable and painless approach, i.e. a government sponsored systemic solution (either a bad bank along the lines of NAMA and SAREB in Ireland and Spain or a fully fledged bank recap). According to the new rules, any government funding is conditional on pre-emptive burden sharing, which amounts to wiping out/haircutting private investors’ stakes in the banks’ capital (equity, subordinated and senior debt). In our view, such an approach would be extremely risky and ill advised, and the likely burden sharing of retail-held bonds would send shock waves across the domestic depositor base.
If dealt according to the rules, the problems of the Italian banking sector could easily morph into a domestic banking crisis, with a reversal of the solid improvement in the banking channel observed since mid 2014. In turn, that would have a negative impact on growth, possible disruptive repercussions on domestic political stability (in light of the weakening position of PM Renzi and the upcoming constitutional referendum) and a potential to unleash a broader Euro area banking crisis through contagion.
A flexible approach by the European authorities is needed to stave off unpredictable consequences
This is why the problem needs a timely and comprehensive solution able to restore investors’ trust rapidly.
This is what we expect to happen. The Euro area avoided an existential crisis last year, when a new €86 billion rescue program was approved for Greece. The Italian banking problems involve much smaller figures (possibly very limited under the selective intervention scenarios), which could be easily committed by the Italian government without any participation from other European sovereigns.
At this stage, there seem to be sufficient wriggle room within the existing rules to avoid a full blown bail-in approach. Article 32 of the BRRD explicitly foresees some exception to the bail-in rules in the case of systemic risk. It is hard to argue that the Italian case does not raise systemic risk, in our view. Furthermore, the high NPLs burden is a legacy rather than a recent problem, and we expect that this would receive further recognition by the relevant authorities (the European Commission and the ECB) in due time.
Ultimately, an adequate solution to the Italian banking woes only involves manageable financial commitments, in our view. A solution is rather a matter of political will, which in turn revolves around the German stance on the policy response to the Brexit shock. So far, Germany has shown an intransigent position, but we believe that rising fears about the systemic implications of a self-inflicted Italian banking crisis will trigger a rethink. As discussed, the details on the treatment of retail investors are important, and collateral damage should be avoided.
On a broader level, this is a crucial moment for the Euro area. The first response of the European powers to Brexit has been to commit to a new approach that will ensure prosperity in the region. Now, this commitment requires actions that give credibility to vague statements of intent. We expect that an analysis of the balances of risks will induce the European authorities to pursue a pragmatic and flexible response. A timely fix to the Italian banking sector would be the best way to show that the Europeans are ready to do what it takes to minimise the Brexit repercussions on the region’s economic and political outlook. A failure to do so would arguably reignite existential worries about the future of the region, at a time when the central banks' toolbox is fairly limited.
Uno dei pochi articoli/report che ho letto di recente che condivido. Una curiosità, qual'è la fonte?
Nel mentre, cercando in rete, si trova roba come questa
Bad Debt Piled in Italian Banks Looms as Next Crisis
