Bank Bondholders Italy Aims to Protect Are Not All That Poor

  • Households owning bank debt are twice as wealthy as average
  • Only 1 in 20 Italian households own any bank bonds at all

As Italy’s government prepares to shield retail bondholders under its bank-rescue plan, it probably won’t be helping many ordinary folk.

Just 5.4 percent of Italian households own bank bonds, and those families are more than twice as wealthy as the national average, according to an analysis of Bank of Italy data by Bloomberg. Cabinet ministers agreed early Friday to plow as much as 20 billion euros ($21 billion) into the country’s lenders after Banca Monte dei Paschi di Siena SpA’s capital-raising failed, under terms that will help protect retail owners of bank debt.

Pier Carlo Padoan

Photographer: Jasper Juinen/Bloomberg

Bloomberg’s calculations cast doubt on the argument that the government must act to protect pensioners and families. While European Union rules for state aid dictate that junior bondholders must bear losses before a bank can -- in extraordinary circumstances -- receive public support, Prime Minister Paolo Gentiloni and Finance Minister Pier Carlo Padoan have both said their intention is to protect retail savers.

“There is a tendency in Italy to use the emotional argument of the pensioner and the widow and orphan to protect people who actually don’t deserve protection,” said Nicolas Veron, a senior fellow with Bruegel, a Brussels-based think tank. “The competition experts in the European Commission are very aware of this. But in Italy it’s essentially taboo.”


Padoan on Wednesday reaffirmed the government’s commitment to ensure “maximum protection for retail savers” who own bank bonds. Gentiloni’s office said earlier this week that its aim is “protecting savers.”

Yet Bloomberg calculations, based on the central bank’s Survey on Household Income and Wealth, suggest that bank-bond holders aren’t likely to be made destitute by losses from a bail-in. Households that own the securities had average net assets of 501,986 euros at the end of 2014, compared with 218,135 euros for the general population, and their mean disposable income was in the top 12 percent nationwide at 52,304 euros.

Moreover, those households keep on average more than 70 percent of their wealth in real estate. Excluding real estate, their average net wealth is 147,626 euros, or more than four times the national average. Even then, lenders’ debt makes up less than half their holdings of financial assets.

The 5.4 percent of Italian households that owned bank bonds at the end of 2014 is equivalent to just under 1.4 million families, each holding an average of 34,468 euros of the securities.

Bond Mis-selling

The government plan will provide both emergency liquidity guarantees and capital injections. Banks will be able to request precautionary recapitalizations that would see some bondholders taking a hit.

Holders of Tier 1 securities in banks that request a capital infusion will get shares that represent 75 percent of the nominal value of the bonds. Tier 2 bonds, mainly owned by retail investors, will be converted at 100 percent of nominal value. Individuals who were mis-sold subordinated bonds will be able to swap for fresh non-subordinated debt.

Monte Paschi, the world’s oldest lender, said it would ask the government for a precautionary capital increase after its attempt to raise 5 billion euros privately failed. A nationalization of the lender would be the biggest in Italy since the 1930s, and could be followed by rescues for peers including Veneto Banca SpA and Banca Popolare di Vicenza as part of the government package.

The country’s banks are struggling under the weight of a 360 billion-euro mountain of bad loans, a plight that has eroded profitability and undermined investor confidence. In that environment, retail investors have been pulling out of bank bonds. While Italian households have traditionally owned a hefty chunk of lender debt, the value of such holdings fell by half to 163 billion euros in mid-2016 from 342 billion euros in 2012.

— With assistance by Sonia Sirletti, Boris Groendahl, and Chiara Vasarri

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