Italy Hardens Resistance to Bank State-Bond Limits Before Talks

  • Padoan says Italy is `strongly against' imposing debt limits
  • EU should follow Basel Committee on any restrictions, he says

Italy stiffened its resistance to proposed restrictions on banks’ holdings of sovereign debt as European Union finance ministers prepare to discuss the issue in Amsterdam.

Pier Carlo Padoan, Italy’s finance minister, told lawmakers in Rome on Tuesday that the government of Prime Minister Matteo Renzi is “strongly against” imposing limits on state-debt holdings. The issue is particularly important in Italy, where domestic state debt accounts for 10.5 percent of banks’ total assets, well above the euro-area average of 4.2 percent, according to European Central Bank data.

The potential for such restrictions “worries me a lot,” Padoan said. “This would be a tough constraint, one that would be even more onerous for a high-debt country,” he said, adding that Europe should defer to global regulators on this issue. “It’s wrong to deal with such an issue at EU level, because it is a global issue,” he said. “As such, it has to be dealt with at the global level, the Basel Committee being the suitable venue.”

The state-debt debate comes as Italy struggles to tackle an estimated 360 billion euros ($408 billion) in soured loans on banks’ books that have undermined lending as the country struggles to recover from a recession. A 5 billion-euro rescue fund called Atlante was created in a bid to stabilize the system.

Deposit Insurance

Regulatory treatment of sovereign debt has become the subject of political debate in recent months because of Germany’s insistence that the 19-nation currency bloc should reduce the risks banks are facing, including government debt on their balance sheets, before creating a common deposit insurance system to round out the so-called banking union.

Two EU task forces have been studying the question for months, but their reports, due by mid-year, will set out the pros and cons of possible reforms rather than deliver clear-cut policy recommendations, according to two officials with knowledge of the matter, who asked not to be identified because the talks are private. As a result, the EU may not be able to move forward with its deposit-insurance plan any time soon, complicating efforts to break the bank-sovereign loop that fueled the debt crisis.

‘Gradual Manner’

The Basel Committee on Banking Supervision is reviewing the existing regulatory treatment of sovereign risk and will “consider potential policy options,” according to the regulator’s work program. Basel Chairman Stefan Ingves said last year that the review would be conducted in a “careful” and “gradual manner.”

EU finance ministers will consider five options for reforming state-debt rules on April 22, according to a discussion paper published by the Netherlands, which holds the bloc’s rotating presidency.

The two main options on the table for dealing with sovereign bonds would be to impose limits on the concentration of debt that banks can hold, or to limit the current practice of treating many sovereign bonds as risk-free for regulatory reporting. Germany favors adding risk weights to give incentives for weaker sovereigns to sell less debt to their banks, while countries including France prefer concentration limits that would prevent giving overt advantages to banks in stronger countries at the expense of their peers.

A hybrid approach that combines non-zero risk weights and exposure limits will also be considered, according to the Dutch paper.

Capital Needs

“Introducing non-zero credit risk weights for sovereign exposures would increase banks’ capital needs,” the paper states. “This could likely be accommodated by banks in the short to medium term.”

A large-exposure limit “set at a low level of eligible capital would require a large number of banks to decrease their exposure to individual sovereigns significantly,” according to the paper. “This would at a minimum necessitate relatively long transitional arrangements to make sure that these ‘excess’ exposures can to a large extent be reduced by holding these excess sovereign bonds to maturity.”

While finance ministers will take up the Dutch proposal, they’re unlikely to reach any conclusions at the meeting and the issue will be pushed into the future, according to a third person who declined to be identified because the deliberations are sensitive.

One reason for the slow progress is Italy’s adamant opposition to introducing new rules, the person said.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE