Italy: Banking woes makes a comeback - BBH

Two of Italy's banks become the second and third banks in the EMU, following Spain's fifth largest bank (Banco Popular), to be subject to the supervisory authority of the ECB (granted in 2014), notes the analysis team at BBH.  

Key Quotes

“Allowing banks to fail is relatively new for Europe.  These are still the early days, and the processes and practices are still developing.  Italian assets are performing well in light of the bank rescue.  Note also that local elections this weekend saw Berlusconi and the far-right do well (second round).”

“Italy has tried all kinds of ways in recent weeks to avoid this outcome, which speaks to the resistance that is still present.  Italy appears to be maneuvering around the strongest features of the Bank Recovery and Resolution Directive (BRRD).  Unlike Spain, the bank taking over the troubled bank assets will not have to take on the bad assets as well.  The ultimate cost of "bad bank" (perhaps around 10 bln euros) will be borne it appears by taxpayers through the government.”

“A few years ago, news before the weekend that the ECB declared that two troubled Italian regional banks had either failed or were about to fail would have quickly risen to the level of systemic concern and rattled the capital markets.  However, it speaks to the progress that has been made, and the institutional capacity built that it will be contained and localized.  Italy will commit up to 17 bln euros to clean up these banks.  It seems that shareholders and subordinated creditors will be liquidated, but depositors and senior creditors will be kept whole.  The second largest Italian bank will take over the deposits and assets (for the token euro) and the bad assets will be absorbed by the state and warehoused in a "bad bank."  

“Italy also spared senior creditors, unlike Spain.  The logic was that some of the senior creditors were retail investors who were not necessary aware of the risks that were being assumed.  There are other ways that such retail investors could have been protected (e.g., a refund process).  European banking regulators are unlikely to be pleased with the Italian course, and their response will help shape the evolving process.”