Two of Italy’s banks are set to be wound down after months of clashes between Brussels and Rome over their fate, leaving the eurozone’s third-largest economy facing another test to the stability of its financial system.
Veneto Banca and Banca Popolare di Vicenza, two mid-sized lenders based in the country’s prosperous industrial north-east, will be wound down by the Italian authorities after the European Central Bank confirmed on Friday evening that the two lenders were “failing or likely to fail”.
Italy has succeeded in protecting senior creditors in the banks having gained EU backing for a wind down of the lenders under Italian law rather than new European BRRD banking rules.
The ECB on Friday said the two banks had “repeatedly breached supervisory capital requirements.” It had “given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward”.
Italian authorities have considered protection of senior creditor and depositors to be crucial to avoid a more devastating fall out on the Veneto region where tens of thousands of local people invested in the lenders.
The European Commission said Italian authorities must now “determine the way forward for the two banks in line with Italian insolvency law”.
Brussels is in “constructive discussions” with Rome on the next steps “and good progress is being made to find a solution very soon”, the commission said, adding that the banks’ depositors “remain fully protected in line with EU rules”.
Prime Minister Paolo Gentiloni has called a cabinet meeting on Saturday to approve a decree for a liquidation of the banks. The government said it would be meeting during the weekend to ensure the necessary measures to ensure the protection of deposit holders and senior bondholders.
The announcement follows months of speculation over the fate of the banks, amid wrangling between Brussels and Rome over how to deal with the struggling lenders without falling foul of EU limits on state aid. Those limits require some capital to come from private sources before a government bailout can be undertaken.
Italy’s finance ministry and other lenders in the country had held talks in recent weeks to cover the banks’ incurred losses of €1.2bn. The talks were driven by fears that failure would have a knock-on effect on the stability of the Italian financial system, which is plagued by large amounts of non-performing loans.
Intesa Sanpaolo — Italy’s largest domestic bank, which is also considered among its healthiest — said it would approve a deal to buy the “good” assets of its troubled smaller rivals for a token price of €1, on the condition it had no impact on its core capital ratio or dividend policy. The purchase would exclude bad loans, the cost of at least 4,000 lay-offs and legal risks.
Bankers estimate the cost of the wind-down to the Italian taxpayer and Italian financial system, which may have to contribute to a deposit insurance fund, could be in the region of €10bn.
The future of the Veneto banks has hung in the balance over the past two years since ECB regulators uncovered a capital hole caused by a surge in bad loans compounded financial mis-selling scandal.
The length of time it has taken for regulators to come to any decision on the banks has also raised serious questions about their supervision, as during their prevarications deposit flight at the banks has accelerated, according to people informed on the matter.
The winding down of the Veneto banks follows the winding down of four small banks in central Italy and the sale of their good assets to Italian midsized lender UBI Banca. Another midsized regional lender Genoa- based bank Carige is considered at risk of resolution if it fails to shore up its balance sheet, say people informed of the discussion with authorities.
Italian and EU authorities have agreed a precautionary recapitalisation for Monte dei Paschi di Siena, which has about 8 per cent of Italian deposits. The bank is due to present a restructuring plan as a condition of the rescue deal by the end of this month.