It’s turning out to be a very expensive endeavor: The Italian government will spend up to €17 billion ($19 billion) to gently phase out the two troubled lenders Veneto Banca and Banca Popolare di Vicenza, which monitors at the European Central Bank (ECB) have rated as no longer capable of survival. The many billions are necessary in order to protect creditors and customers of the two financial institutions. Now taxpayers are having to pay the price, despite the EU having rules for the liquidation of ailing banks in place for over a year in order to prevent precisely this from happening.
The whole undertaking is not only a disappointing fallback to the era of the financial crisis. The Italian-style rescue is also a severe blow to the idea of a European banking union. The events of the weekend have made it clear once again that Europe’s financial system is caught in a predicament it currently can’t escape. Strong rules can apply only to strong banks. But many banks in the monetary union are so weak that monitors and politicians have no other choice than to bend regulations to the breaking point unless they want to give rise to the danger of a new banking crisis. Yet even if this reality is acknowledged, the way the Italians want to solve their bank problem leaves an extremely bad taste in the mouth.
EU regulations actually require all owners, all creditors and – in an extreme case – also the customers to share liability when a bank gets into trouble. Only afterwards is the state permitted to intervene. In the case of the two beleaguered banks, Italy wants to avoid this cascade of liability. Its motivation is entirely understandable. If the small investors among the creditors or even the holders of savings deposits were to lose their money, that not only would create a crisis of confidence in the Italian banking system, but would also cause a political earthquake. Faced with new elections perhaps already this year, neither Italy nor the rest of the EU wants to take that risk.
Politicians are engaging in shenanigans
But to reach their goal, the politicians are engaging in shenanigans: Without further ado, the EU authority responsible for liquidation classified the two banks as irrelevant to the stability of the financial system, thereby allowing Italy to liquidate them up according to its own insolvency laws.
But this finding is quite implausible. The first question is: Why is the highly-indebted government in Rome willing to spend up to €17 billion if the two banks aren’t relevant to the stability of the financial system? This is the most expensive bank rescue in Italy to date. And both Veneto Banca and Banca Popolare di Vicenza were monitored by the ECB, which examines only the largest banks in the euro zone: in other words, the systemically important institutions.
But not only the foundations of the Italian construction are on unstable ground. Even more questionable is the way the rescue is being carried out. The largest private-customer bank in the country, Intesa Sanpaolo, is not only being permitted to take over the healthy parts of both banks for a symbolic price, but is also receiving state subsidies and being awarded a taxpayer-financed risk umbrella. So Intesa can buttress its market power at the expense of the state. The Italian state bears 100 percent of the risk, while Intesa can collect 100 percent of the profits – not exactly what the EU had in mind when it developed its liquidation rules that were supposed to prevent states from being vulnerable to blackmail by banks.
This isn’t the first time that Italy has taken advantage of a loophole to prevent the winding up of a failed bank according to the new rules. Already with Monte dei Paschi di Siena, which had been on wobbly legs for years, the government in Rome made use of an exceptional provision allowing a bank to be rescued through a so-called precautionary recapitalization. The new rules have been strictly applied only once: in the case of the Banco Popular in Spain. It was sold to its rival Santander for €1, but with no state subsidy. Santander must finance the takeover through an increase in capital stock running into the billions.
The way things look, winding up banks in Europe seems to have degenerated into a game of chance. This has grave consequences for one of the fundamental integration projects of the euro zone: the banking union. That project rests on three pillars: uniform monitoring of the large banks by the ECB; rules for liquidation; and a common deposit guarantee. The first part works, the second is drifting into chaos, and that means there is no reason for Germany to abandon its blockade of the third part. As a consequence, the banking union might never be completed – a possible fate shared by many undertakings in Europe at the moment.
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