Italy agrees €5bn fund to rescue weaker lenders
Italy’s strongest banks, insurers and asset managers have agreed to create a €5bn backstop fund to bail out weaker lenders in an effort to calm growing investor concern about the stability of the banking sector of the eurozone’s third-largest economy.
The rescue fund, announced by Prime Minister Matteo Renzi after a six-hour meeting of financiers, regulators and ministers in Rome, comes after a plunge in the value of Italian bank shares this year on widening concerns about the effect of €360bn of non-performing loans on Italy’s financial stability.
Dubbed “Atlas” after the mythological god who held up the sky, the fund will see UniCredit, Intesa Sanpaolo and UBI Banca, Italy’s strongest banks, handing over hundreds of millions of euros to create a backstop facility to bail out distressed smaller lenders.
Crucially, in return for providing private funds, the government has agreed to bring the country’s laggard bankruptcy laws in line with European norms which are seen as an impediment to the sale of bad loans.
“In the next days we will make the bankruptcy procedure faster and more simple so that everyone can be assured of getting their money back in a reasonable timeframe,” Mr Renzi said in a statement.
The deal, which has defied expectations that it would be watered down at the last moment, is the first time Italy’s banking system has drawn together to protect its weakest constituents since 1982 when eight large banks bailed out the collapsed scandal-hit lender to the Vatican Banco Ambrosiano.
Shares UniCredit, Intesa Sanpaolo and UBI Banca have jumped about 15 per cent in the past three days since reports of a possible deal became public.
At present, it takes an average of eight years in Italy compared with an EU average of about two to three years to recover bad loans. Bankers consider this a drag on the ability of Italian banks to sell their bad loans.
A senior banker who had been at the meeting said the government had agreed to pass the tougher bankruptcy laws within the next 10 days, raising the prospect of a stand-off between Mr Renzi and the Italian civil judiciary.
“The fund is an instrument that could contribute to completing the process of strengthening the solidity of the Italian banks and expanding the market for non-performing loans,” said Pier Carlo Padoan, Italy’s finance minister, who has driven the deal.
Eoin Mullany, analyst at Berenberg, has argued “a balance sheet clean-up is needed for investors to trust bank balance sheets” in Italy. And for this to happen, a robust stress test with a credible capital backstop was needed, he added.
Italy is keen to present the agreement as a private sector deal in order to avoid coming up against EU state aid restrictions. Nonetheless, the Treasury-owned Cassa Depositi e Prestiti has an unspecified stake in the project which is likely to trigger competition scrutiny.
Overall, the fund had the specific role of providing a “backstop facility” to ensure “the success of capital hikes demanded by the single banking supervisor of banks that today are facing difficult market conditions”, Rome said.
A large investor with direct knowledge of the talks said Italy would “probably squeak through as a result of this deal”. But this person still bemoaned the fact that Italy’s regulators had not forced a clean-up of the banks “years ago” and “at less expense”.
The agreement comes at the eleventh hour ahead of a €1.75bn cash call demanded by the single banking supervisor and is due to start on April 18 to fill a capital hole at Popolare di Vicenza, a regional bank, which was uncovered by EU regulators after a financial mis-selling scandal.
Bankers and investors have seen the capital call, which is underwritten by UniCredit, Italy’s largest bank by assets, as a “flash point” for the country’s system as it could have forced the bank, which has a core tier 1 ratio of about 10.5 per cent, to raise capital itself if it were left holding shares, turning a local issue into a more systemic one.
The Atlas fund is expected to mop up any unsold shares in the Vicenza cash call and two further cash calls demanded by the banking supervisor at regional banks Veneto Banca and Banco Popolare, worth a combined €2bn.
Senior financiers in the room on Monday described a tense six-hour meeting where Ignazio Visco, the governor of the Bank of Italy, told bankers they had no choice but to give money to ensure financial stability.