Wednesday, December 28, 2016

World View: Bank Run Worsens Italy’s Banking Crisis


Bank run worsens Italy’s banking crisis

A horse-drawn carriage passes a branch of Banca Monte dei Paschi bank in Rome.
A horse-drawn carriage passes a branch of Banca Monte dei Paschi bank in Rome.
A week after Italy’s government announced that it would bail out the failing the Banco Monte dei Paschi di Siena (MPS) bank, with a “bail-in” that would put the life savings of tens of thousands of depositors at risk, the European Central Bank said on Tuesday that MPS’s financial situation is deteriorating far more rapidly than expected.
MPS has €55.2 billion in bad loans. Three weeks ago, MPS said that it had enough funds to stay afloat for 11 months. Then last week, MPS said that it would run out of money within four months.
According to one financial analyst:
“It’s a national tragedy. Monte Paschi survived the Inquisition, the unification of Italy, fascism and two world wars. But it couldn’t survive the mismanagement and corruption of bankers and politicians in the 21st century.”
The government of Italy announced last week that the size of the bailout would be €5 billion, the amount needed to allow MPS to meet its immediate obligations and avoid bankruptcy. However, the ECB said that MPS’s financial position has suffered a “rapid deterioration” during the period from November 30 to December 21, now the €5 billion figure is too small. €8.8 billion will be required to get past the immediate emergency.
It’s believed that the “rapid deterioration” is being caused by run on the bank. It’s known that from June to September of this year, customers removed deposits of €6.7 billion, and it’s believed that this run on deposits is continuing, or even accelerating and spiraling out of control.
ECB rules require that if any government bails out the country’s banks, then a percentage of the bailout must come from the assets of investors who had invested in the shares and bonds issued by the bank. In most countries, that would “bail in” sophisticated investors, who would then “take a haircut.” But Italy has a special problem that many ordinary savers have invested their life savings in bonds, so that would put their life savings at risk. This situation has been the subject of intense public debate in Italy at least since June, and that would explain why depositors have been rushing to move their funds out of the bank.
Italy’s government is looking for a way under ECB rules to avoid having to “bail in” bond holders. Since MPS is still technically solvent, the plan is to take advantage of a loophole in the ECB rules by calling the cash injection a “precautionary recapitalization” rather than a bailout. However, this path limits the amount of money that the government can inject into the bank, so it’s far from clear that it will work.
Jens Weidmann, the president of Deutsche Bundesbank, Germany’s central bank, says that Italy’s bailout plan requires careful scrutiny:
“For the measures planned by the Italian government [to work], the bank must be economically healthy at its core. The money cannot be used to cover losses [that are] already expected. All this must be carefully examined. …
These [rules] aim to protect taxpayers in particular and keep responsibility on investors. Government bailout is only meant to be a last resort, that’s why the bar is high.”
Italy’s rescue plan requires approval by both the EU and the ECB.
Banco Monte dei Paschi di Siena (MPS) was founded in 1472, and is the world’s oldest operating bank. Seeking Alpha and MarketWatch and Financial Post

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