Italian Banks May Rely More on ECB Funding, Bank of Italy Says

Italian banks may be forced to increase their reliance on emergency funding from the European Central Bank as their liquidity levels dropped for the second month, the Bank of Italy said.

Italian banks’ liquidity fell in September and is back to the levels of January 2009 after the value of government securities declined, the central bank wrote in its Financial Stability Report published yesterday.

“In the absence of a reopening of the wholesale markets, there could be a further increase in refinancing” with the ECB, the Rome-based Bank of Italy wrote in the report.

Italian banks have become increasingly reliant on the ECB as the region’s sovereign debt crisis cut the value of government bonds and triggered a seizure in wholesale funding markets. European leaders yesterday called into question the future of the region’s common currency as Greece prepares to hold a referendum on a bailout package, heightening uncertainty about European banks.

“Prolonged tensions and limited access to long-term institutional funding could become a structural issue for Italian banks,” Goldman Sachs Group Inc. analyst Domenico Vinci wrote in a note to clients yesterday.

A measure of banks’ reluctance to lend to one another in Europe rose to the highest in more than 2 1/2 years today. Italian banks held about 13 percent of the country’s government securities at the end of June, according to the Bank of Italy.

ECB Financing Rises

ECB funding of Italian banks has already soared. In September, financing to Italian banks amounted to an average of 91 billion euros ($125 billion), and accounted for 15 percent of the ECB refinancing in the third quarter, the data show. Italian banks’ share of ECB refinancing peaked at about 19 percent in October, the data show.

The top five Italian lenders -- UniCredit SpA (UCG), Intesa Sanpaolo SpA (ISP), Banca Monte dei Paschi di Siena SpA (BMPS), Banco Popolare SC (BP) and UBI Banca ScpA -- accounted for 61 percent of the country’s ECB refinancing in September, almost double the share in January.

Italian banks had about 75 billion euros of freely available assets at the end of August, down from about 93 billion euros at the end of January, the Bank of Italy said.

The one-month net liquidity of the 32 lenders monitored by the Bank of Italy fell to about 4 percent of assets, the central bank said. Liquidity is measured by totaling assets available for use as collateral with the ECB and cumulative cash flow, which rose to a negative 5 percent of assets, the highest since at least 2008, the data show.

To contact the reporter on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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