MILAN/ROME Italy began winding up two stricken Veneto-based banks on Sunday in a deal that will see their good assets transferred to Intesa Sanpaolo and could cost the state up to 17 billion euros ($19 billion).
The government will pay 5.2 billion euros to Intesa, Italy’s top retail bank, to take on Popolare di Vicenza and Veneto Banca’s best parts. But Economy Minister Pier Carlo Padoan said the total funds “mobilised” by the state would be for up to 17 billion euros – three times more than what had initially been estimated to recapitalise the banks with public money.
The deal, which received preliminary approval from European authorities on Friday, allows Italy to solve its latest banking crisis on its own terms, ensuring that the two Veneto lenders are not wound down under potentially tougher European rules. The cost for Italian taxpayers, however, is hefty.
“Those who criticise us should say what a better alternative would have been. I can’t see it,” Economy Minister Pier Carlo Padoan told a press conference after the government spent the weekend drafting an emergency decree to liquidate the two banks.
The decree effectively means that the Veneto banks’ branches and employees will be part of Intesa Sanpaolo by Monday morning, a move designed to avoid a potential run on deposits that could have spread chaos across the whole banking industry.
The decree will have to be voted into law by parliament within 60 days.
Under the plan, the banks’ soured loans, as well as legal risks stemming from a mis-selling scandal, will be moved to a bad bank, partly financed by the state. Junior bond holders and shareholders will also be hit, but senior bonds and depositors will be shielded from any losses.
Padoan said that on top of the 5.2 billion euros payment to Intesa, which includes 1.2 billion euros to cover for job cuts, the state will offer additional guarantees for up to 12 billion euros to fund potential losses stemming from a due diligence of the two banks’ soured and risky loans.
Intesa Sanpaolo, Italy’s best-capitalised large bank, said last week it was open to purchasing the rump of the good assets for one euro on condition Italy’s government passed a decree agreeing to shoulder the cost of winding down the two banks.
Setting tough conditions for the deal, Intesa CEO Carlo Messina has insisted that his bank’s capital ratios and dividend policy would not be affected by the transaction.
“Without Intesa Sanpaolo’s offer – the only significant one submitted at the auction held by the government – the crisis of the two banks would have had a serious impact on the whole Italian banking system,” Messina said in a statement on Sunday.
The European Central Bank, which supervises the two lenders based in the country’s north-eastern Veneto region, had declared on Friday that they were “failing or likely to fail”, setting in motion the process that led to them being wound down.
After months of tense negotiations between Rome and EU regulators, Italy has been allowed to use national insolvency procedures rather than EU rules meant to prevent the use of state money to deal with bank crises.
Those rules could have imposed losses on senior bondholders and large depositors, a politically unpalatable prospect ahead of national elections next year given that Italian households hold a large chunk of bonds issued by banks.
Some European officials have voiced exasperation at the way Italy has dealt with a string of trouble spots in its banking industry, which is weighed down by nearly 350 billion euros of soured debts – a third of the euro zone’s total.
The country’s fourth-biggest bank, Monte dei Paschi di Siena, is being bailed out by the state to cover a capital shortfall of 8.8 billion euros. Four other smaller banks were wound down in 2015.
The future of the Veneto banks had hung in the balance over the past two years since the ECB uncovered a capital hole caused by a surge in bad loans and a mis-selling scandal whereby the banks’ customers were given shares in exchange for loans.
The dragged-out negotiations between Rome, Frankfurt and Brussels and their outcome on Sunday have raised serious questions about the effectiveness of banking supervision and the credibility of Europe’s own rules for dealing with bank crises.
(Additional reporting by Stefano Bernabei in Rome and Gianluca Semeraro in Milan; editing by Susan Thomas)