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Eurozone: The restructuring of the Italian banking system is accelerating with more capital needed


The essential

The high amount of non-performing loans in Italy makes the banking system particularly vulnerable to any further deterioration in the economy.

On the eve of Donald Trump’s inauguration, examining the most controversial measure - the introduction of a plan to adjust taxes at the border (border tax proposal) - is necessary. It involves introducing a form of VAT in the United States on traded goods but not on wages. The economic and financial consequences of such a measure go well beyond the confines of US taxation alone.

In theory, this type of measure is neutral for trade, because it is supposed to trigger an appreciation of the dollar, which would neutralise the initial trade advantage (generated by taxing imports and subsidising exports). However, the fact that wages would be deductible changes the situation completely from a legal standpoint and goes against WTO regulations, which could potentially open the door to retaliation from trading partners.

Whatever happens, this type of measure is likely to be a source of confusion. In light of the uncertainty over its impacts (on the US economy, emerging markets and the dollar), investors’ jitters would be very much apparent, at least initially.

As such, the ECB has required the most fragile Italian banks to sell off surplus nonperforming loans. The market value of the non-performing loans is lower than their book value. Certain banks have attempted to raise capital from private investors in order to finance these sales, unsuccessfully in the case of Monte dei Paschi. In accordance with European regulations, holders of Monte dei Paschi’s subordinated, or even senior, debt, which in many cases are Italian households, should have contributed to the bank’s recapitalisation and borne some of the losses. This would have led to a deposit flight in the country, further weakening the banking system. The authorities were nonetheless able to invoke Article 32 of the BRRD in order to recapitalise Monte dei Paschi and avoid Italian households having to suffer losses, with the support of the Italian government.

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January 2017


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Janvier 2017


The Article



Focus on Banca Monte dei Paschi di Siena

Banca Monte dei Paschi di Siena is the world’s oldest bank, and Italy’s third largest bank. The bank’s governance has been poor due to its strong tie with its owner, the Monte dei Paschi foundation, and to the local economy. The balance sheet of Banca Monte dei Paschi di Siena also deteriorated significantly with the acquisition of Banca Antonveneta in 2008.


Despite raising €10bn of equity capital in 2011-15, Banca Monte dei Paschi di Siena had one of the worst non-performing loan ratios in Italy (36% of total nominal loans were non-performing) and a weak capital position with a fully-loaded Basel 3 common equity tier one ratio of 10.7%. The ECB requested that bold action be taken to settle the bank’s situation. The plan was to sell all defaulted loans to a securitisation vehicle, thus creating a capital shortfall of around €6-7bn. Under the plan, the non-performing loans of Banca Monte dei Paschi di Siena would have been split in two, to a level in line with its Italian peers. €1-2bn of the capital shortfall was to be provided by the Atlante fund, through its investment in the mezzanine tranche of the non-performing loan securitization vehicle, and €5bn was to be raised on the market and/or from converting subordinated debt into equity. The €5bn capital increase did not meet enough investor interest, causing the Italian government to intervene and circumvent European rules, in order to preserve the stability of the Italian financial system.

de BRAY, CFA Yasmine , Financial Analyst at Amundi
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Eurozone: The restructuring of the Italian banking system is accelerating with more capital needed
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