- U.K. exposure to Italian risk is ‘modest,’ governor Says
- Systemic risk to U.K. comes from contagion of euro zone
Italy’s banking system is likely to need to raise fresh capital as it seeks to cover losses on non-performing loans, Bank of England Governor Mark Carney told U.K. lawmakers on Tuesday.
The direct exposure of U.K. banks to Italian lenders amounts to less than 1 percent of common equity and their lending to the Italian economy is about 11 percent of the British lenders’ capital, he said. Carney, who chairs the global Financial Stability Board, described the figure as “quite modest,” given Italy is the euro zone’s third-largest economy.
“The challenges in Italy, the Italian banking system, are at the acute end of the spectrum in Europe in our judgment at this stage,” he told Parliament’s Treasury Committee. “There’s likely to be required some form of recapitalization of some of those institutions. There is a macroeconomic risk, and the Italian authorities are aware of it certainly, and are looking through the solutions to that.”
Prime Minister Matteo Renzi, who has staked his premiership on winning a referendum on voting reform that will probably be held in October, is wrestling with the requirements of Europe’s new bank resolution laws, which require lenders’ shareholders and creditors to help cover their losses. The extent of Italian household ownership of banks’ securities makes the issue particularly sensitive if stress tests, the results of which will be announced on July 29, show that fresh money is required.
Italy’s lenders are saddled with non-performing loans amounting to about 18 percent of their lending, the result of years of economic stagnation and lax supervision. Reserves against those assets cover “less than half” the potential losses, Carney said.
U.K. exposure to Italy’s problems primarily stems from the risk of contagion seeping into other euro zone economies, Carney said.
“There are some issues in other Southern European countries, not of the same scale, and not as important economies,” he said. “One of the concerns that this committee had in March was that heightened risk aversion would increase spreads, challenge funding conditions, challenge equity prices on the continent, and that would have a feedback loop into economic performance. Italy is at the extreme end of that.”