After failing Spanish bank Banco Popular was recently wound down using new European banking regulations – subject to ‘resolution’ in the jargon – European regulators have reverted to form in relation to failing Venetian banks Veneto Banca and Banca Popolare di Vicenza.
These Italian banks were loss-making for years, had insufficient capital and non-performing loans of around 37% of customer loans compared to the Italian banking average of 18%. Unsurprisingly, their deposit bases fell 44% over the past two years as depositors feared having exposure to them.
To avoid being subject to resolution, a year ago the Italian government arm-twisted other Italian banks and financial institutions to create the Atlas fund. It aimed to be a backstop to struggling Italian banks that failed to raise the additional capital demanded by European banking regulators. Ultimately the Atlas fund invested €3.5bn to become the majority shareholder in the two Venetian banks.
In the ‘bail-in’ of Banco Popular, ordinary shareholders and holders of its Additional Tier-1 securities (AT1) and Tier 2 securities lost their entire investment. Banco Santander (BME: SAN) also took on all of Banco Popular’s assets, both performing and non-performing, and raised €7bn from shareholders to cover the necessary capital requirements and increased provisions relating to the acquired assets. Importantly, Spanish taxpayers weren’t required to contribute.
In the case of the two Italian banks, however, Intesa Sanpaolo (BIT: ISP), Italy’s largest retail bank, bought the two Venetian banks’ performing loans and deposits for a mere €1. Ordinary shareholders in the two Venetian banks and holders of their AT1 and Tier 2 securities will be ‘bailed-in’ and subject to losses of up to 100% as the non-performing loans are liquidated.
Intesa Sanpaolo also received a €4.8bn capital injection from the Italian government, along with €12bn in guarantees covering the non-performing loans that remain in the entities being liquidated and which Intesa is financing while the liquidation occurs.
So by not subjecting these two Italian banks to resolution, Italian taxpayers have footed some of the bill, something that the new European banking regulations and the resolution process aim to avoid.
For instance, Single Resolution Board (SRB) Chair Elke König declared that the Banco Popular ‘bail-in’ ‘shows that the tools given to resolution authorities after the crisis are effective to protect taxpayers’ money from bailing out banks’.
With Veneto Banca and Banca Popolare di Vicenza having assets of €28bn and €35bn compared to Intesa’s €740bn in assets, the SRB noted that their failure wouldn’t threaten financial stability in Italy. However, that Italian taxpayers were forced to contribute suggests otherwise.
Being in an even worse financial state than Banco Popular, the two Venetian banks’ senior bonds would also have been ‘bailed-in’. Individual investors own some of these senior bonds which seems to be the main reason why the two banks weren’t put through the resolution process.
While it’s good to see these two Venetian banks finally dealt with, by postponing making the hard decisions for as long as possible, the Italian government and central bank made taxpayer contributions more likely.
Their decisions have also increased moral hazard, which isn’t conducive to financial stability over the longer term.
The new banking regulations were also designed to stop governments and central banks taking actions for political reasons like in this situation. In other words, to avoid privatising any gains while socialising the losses. Yet the difference in treatment between Banco Popular and the two Venetian banks suggests political considerations will still play a part in any future bank failures while also increasing the uncertainty around how shareholders and, particular, lenders to banks will be treated going forward.
While European politicians and regulators passed their first test in the form of the Banco Popular bail-in, it seems they’ve reverted to form.