Deal on Italian Banks Raises Questions about Eurozone Rules
June 25 2017 - 12:55PM
Dow Jones News
By Simon Nixon
The decision to create a banking union was the decisive moment
in the eurozone's response to the global financial crisis.
The establishment of common banking rules and oversight
institutions were intended to help restore trust in a system badly
shaken by concerns that weak national supervisors in thrall to
local political pressures were colluding to hide from investors the
full scale of bad debts. It also formed the centerpiece of a grand
political bargain: By committing to sever the link between weak
banks and over-indebted sovereigns, governments prepared the way
for European Central Bank president Mario Draghi's 2012 promise to
do "whatever it takes" to save the eurozone, including buying
government bonds.
Yet the decision over the weekend to spare two failed Italian
lenders from the full force of those new rules raises questions
about the effectiveness of the banking union.
The centerpiece of the new regime was the Bank Resolution and
Recovery Directive -- rules to ensure that no taxpayer money is
used to bail out banks and that losses fall on private-sector
creditors -- and the creation of the Single Resolution Board to
oversee the process. There was relief last month when this new
regime was tested for the first time by the failure of the Spanish
lender Banco Popular, which was sold to Santander for one euro
after its shareholders and junior bondholders had been wiped out,
with no adverse effect on the market.
But Veneto Banca and Banco Populare di Vincenza will be spared
the same treatment. Using a loophole in the BRRD, the Single
Resolution Board has ruled that the two banks are not systemically
important and therefore can be liquidated under Italian insolvency
rules, which permit the use of government cash without the need for
senior bondholders to take losses. The plan is that the good assets
of the banks will be transferred to Intesa Sanpaulo for a euro, but
the bad assets and the cost of redundancies will be left with the
government, which faces losses of up to EUR10 billion.
The EU Commission insists this is not a loophole and that the
possibility of using national as opposed to eurozone-level
insolvency regimes was clearly envisaged under the Bank Resolution
and Recovery Directive. It points out that a number of failed banks
have been liquidated using national insolvency regimes since
2015.
Even so, this decision has still taken most observers by
surprise. The two Italian banks, though smaller than Banco Popular,
were large enough to be supervised by the European Central Bank. It
therefore was widely assumed that their resolution would also be
handled at the European level. Instead, it now appears that the SRB
has discretion as to whether to apply the BRRD rules.
Meanwhile the eurozone finds itself in the odd situation where
systemically unimportant banks are eligible for state aid, while
systemically important banks must be subject to full bail-in.
It is hard to avoid the conclusion that the SRB's decision to
spare senior bondholders in the two lenders is primarily
political.
The Italian authorities have been fighting a rear-guard action
to save the two banks from insolvency for two years, not least
because they are major employers in the region and because many of
the bondholders are retail customers of the banks who may not have
known of the risks they were taking when they bought what were
marketed as high interest savings products. Liquidating the banks
under national rules at least removes the risk that 300,000 retail
investors might be hit by substantial losses less than a year
before a general election is due.
No one wants to reignite a new political crisis in the eurozone
just as the economy, including that of Italy, appears to have
finally turned a corner.
But where does this leave the banking union?
Importantly, the decision to put the liquidation into the hands
of the Italian authorities is not being questioned by Germany. From
Berlin's perspective, it is enough that it has headed off a
long-standing attempt by Rome to try to keep the banks alive by
injecting government capital using another controversial BRRD
loophole known as precautionary recapitalization. The decision to
spare senior bondholders represents a pragmatic compromise to a
saga that has cast a shadow on the Italian and eurozone banking
system for too long -- and which German officials believe should
have been addressed years ago.
Nonetheless, Berlin wants reassurance that this deal doesn't set
a precedent and that the state aid rules will be rigorously applied
to minimize the use of taxpayers' money, according to German
officials.
In recent weeks, there has been much speculation about a fresh
political push to strengthen the eurozone, including the creation
of new mechanisms to pool banking risks via a common backstop to
the eurozone's Single Resolution Fund and a common
deposit-insurance scheme.
But the Italian episode highlights that before any steps can be
taken to complete the banking union, new measures may be needed to
strengthen the rules already in place.
Write to Simon Nixon at simon.nixon@wsj.com
(END) Dow Jones Newswires
June 25, 2017 12:40 ET (16:40 GMT)
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