Italy May Spur Pan-Europe Bank Crisis, SocGen Chairman Says

  • Rules on state aid to banks should be reviewed: Bini Smaghi
  • Says governments need to accept idea of taxpayer as backstop

Bini Smaghi: People Starting to Withdraw from the Market

Italy’s banking crisis could spread to the rest of Europe, and rules limiting state aid to lenders should be reconsidered to prevent greater upheaval, Societe Generale SA Chairman Lorenzo Bini Smaghi said.

“The whole banking market is under pressure,” the former European Central Bank executive board member said in an interview with Bloomberg Television on Wednesday. “We adopted rules on public money; these rules must be assessed in a market that has a potential crisis to decide whether some suspension needs to be applied.”

Lorenzo Bini Smaghi

Photographer: Luke MacGregor/Bloomberg

With about 360 billion euros ($389 billion) in soured loans saddling Italian banks, the government has sounding out regulators on ways to shore up lenders bruised by a renewed selloff after the British vote to leave the European Union. The government would invoke an EU rule allowing temporary state aid if regulatory stress tests uncover a shortfall at Banca Monte dei Paschi di Siena SpA, a person with knowledge of the discussions said Tuesday.

European banking stocks resumed their descent as policy makers disagreed and sometimes issued contradictory statements about what may come next. Deutsche Bank AG, Germany’s largest lender, slid 6.1 percent to its lowest level since at least 1989. Societe Generale, France’s second-biggest bank, which Bini Smaghi has chaired for just over a year, fell 1.8 percent as of 2 p.m. in Paris.

The Bloomberg Europe 500 Banks and Financial Services Index fell 2.3 percent to its lowest since November 2011, in the midst of the the European debt crisis.

Italian Finance Undersecretary Pier Paolo Baretta said in an interview on RAI radio Wednesday morning that a “technical solution” on Monte Paschi could be hours away, before issuing a statement an hour later that said “no intervention is expected in the next few hours.”

German Finance Minister Wolfgang Schaeuble, speaking at a news conference in Berlin hours later, said his Italian counterpart Pier Carlo Padoan told him that Italy intends to stick to the banking-union rules.

‘Find a Way’

Among the worst-hit Italian banks is Monte Paschi, which built up a pile of soured loans as the nation’s longest recession since World War II left businesses and households struggling to repay debt. Its market capitalization has sunk below 1 billion euros. The largest Italian lender, UniCredit SpA, has slumped more than 60 percent this year and replaced its chief executive officer amid speculation the bank will need to tap its investors for more capital. Its shares fell 1.4 percent Wednesday.

Despite the struggling market, it’s important to protect the regulations established for European banks since the financial crisis, Klaus Regling, managing director of the European Stability Mechanism, said in a separate television interview. Many solutions under the existing rules are still available to Italy, he said.

"The Italian government is in a dialog with the European Commission on how to apply the framework to these specific circumstances,” Regling said. “I am confident they will find a way."

Unprofitable Banks

Bini Smaghi said on Bloomberg TV that Europe’s banking market faces the risk of a system-wide crisis unless governments accept the idea of taxpayer money as the ultimate recourse. Any intervention should be as swift as possible, he said.

Both Italy and Germany have too many banks that are not profitable and more consolidation is needed, he said. Italy must do more to deal with non-performing loans, and Prime Minister Matteo Renzi will have to take politically unpopular steps, including encouraging mergers that will lead to job cuts, Bini Smaghi said.

“What’s needed is a European solution,” he said. “So far, we’ve had national solutions. We need a clear backstop.”

On Brexit, Bini Smaghi said he expects “very long” negotiations. He expressed concern that Britain’s proposal to reduce corporate taxes to attract companies could lead to risky tax competition across Europe.

Watch Next: Could the Next Banking Crisis Come From Italy?

“We are in a privileged position, being both on the continent and in London,” he said. “We think London will remain a major financial center. Whether it will be the only one remains to be seen.”

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