European Central Bank Governing Council Member Ignazio Visco said Italian banks may write down more bad loans as lenders from Rome to Berlin prepare to open their books to ECB oversight.
Tax rules regarding the deductibility of bad loans are set to be modified in the Italian government’s 2014 budget, removing what Visco called a disadvantage for Italian banks compared to European rivals.
The changes “should prompt banks to adopt more prudent writedown policies for bad loans, rendering their balance sheets even more transparent,” Visco, who also is the governor of the Bank of Italy, said today, according to the text of a speech delivered in Rome.
While analysts at France’s Societe Generale SA and the U.K.’s Barclays Plc said Italian banks are vulnerable to further writedowns, Visco disputed that they need large capital increases.
“The opinion that the Italian banking system today has strong need of recapitalizations is baseless,” Visco said.
The European Union’s push toward a banking union is setting the standards by which the largest lenders from one country to the next will be judged. ECB President Mario Draghi, who will oversee the bank exams, said on Oct. 23 that he won’t hesitate to fail lenders whose books don’t meet the standards. Draghi preceded Visco as Bank of Italy governor.
UniCredit SpA, Italy’s biggest bank, No. 2 Intesa Sanpaolo SpA and their smaller rivals have been hurt by the country’s two-year recession. In a report last month, Societe Generale said Italian banks will be a “hot spot” for the ECB’s review because they are the most vulnerable in Europe in terms of impaired loans. UniCredit and Intesa may need to set aside an extra 5 billion euros ($6.9 billion) for bad loans, Antonio Rizzo, an analyst at Barclays, said in a Sept. 27 report.
Visco, 63, praised Italian banks for raising capital in recent years and weathering the financial crisis. Still, operational costs are higher in Italy than the European average and must come down, Visco said. He said adjustments to the compensation for top executives must be part of this process.
“It’s hard to imagine a significant increase in bank revenue,” Visco said. “In the short term, decisive action on costs is needed to recover profitability.”