Italy to Shield Senior Creditors in Liquidating Veneto Banks

  • Cabinet to meet after ECB says two lenders to be wound down
  • Intesa may absorb Vicenza, Veneto Banca assets for token price

A customer uses an automated teller machine (ATM) at a Veneto Banca SpA bank branch in Rome, Italy.

Photographer: Alessia Pierdomenico/Bloomberg

Italy will take the next step to wind down two failed banks in the northern Veneto region when the government meets to adopt a plan that may smooth the sale of the stricken lenders’ assets to another firm.

The Finance Ministry said late on Friday that all measures would be taken to ensure that senior creditors and depositors of Banca Popolare di Vicenza SpA and Veneto Banca SpA would be protected in a wind-down under the national insolvency law, and customers would see no interruption in service.

The liquidation deal may see Intesa Sanpaolo SpA, Italy’s biggest bank by market capitalization, take on the two banks’ good assets for a token price. In recent months the ECB, the European Commission and the Italian Treasury reviewed several options for the two lenders. In the end, they settled on a plan to split the firms into good and bad banks, with Intesa buying the good one, people familiar with the matter have said.

The government tried for months to rescue the two banks, but its efforts ended on Friday when the European Central Bank said the firms were failing or likely to fail, and sent them to the Single Resolution Board in Brussels for disposal. The SRB, in turn, handed the banks over to Italian authorities after concluding there was no public interest in resolving them under European Union law, a process that would have exposed senior debt to losses.

The Italian news agency Ansa said the cabinet was expected to meet on the banks decree on Sunday morning, once the polished text is ready. The meeting had been expected Saturday, but never confirmed.

The ECB said it gave the banks “time to present capital plans,” but they were “unable to offer credible solutions going forward.”

Soured Debt

Intesa has offered to take on the assets of the two Veneto banks on the condition that it wouldn’t harm its own capital and dividends. The bank’s proposal excluded soured debt, higher-risk performing loans, and subordinated bonds, along with shareholdings and other “legal relationships.” A purchase would only move forward if it didn’t lower Intesa’s common equity Tier 1 ratio, the bank said.

The decision to allow Italy to dispose of the two banks under national insolvency law was crucial in shielding senior debt from losses. The EU’s bank-failure law, known as the Bank Recovery and Resolution Directive, puts investors, including senior creditors, on the hook for losses if necessary to fund restructuring. The BRRD is part of the EU’s attempt to prevent the kind of public bailouts seen during the financial crisis.

It remains to be seen if Italy will be allowed to use taxpayers’ cash to make the liquidation plan work. The Brussels-based commission, the EU’s executive arm, said it’s in “constructive discussions” on Italy’s proposal to provide state aid, “and good progress is being made to find a solution very soon.”

State Aid

EU state-aid rules “allow for the possibility of granting state support in these kind of situations,” though shareholders and junior creditors must share losses in the process, the commission said. State-aid rules don’t require senior creditors to contribute.

Still to be determined are the losses faced by junior bondholders and equity investors in the two banks, which aren’t publicly traded. Many Italian banks have sold bonds to clients who bought them unaware of the risks involved, making it politically difficult to inflict losses on holders.

The two banks were forced to ask the government for aid after they failed to raise capital from investors in 2016. After reviewing their books, the ECB in April said they needed about 6.4 billion euros ($7.2 billion) of new capital, prompting a search for ways of bridging the gap.

Previously, Italy sought to rescue the lenders through a so-called precautionary recapitalization, using a mix of state and private funds as well as debt and equity writedowns to finance a bad debt clear-out. That ran into the sand because the private sector balked.

— With assistance by Lorenzo Totaro, Dan Liefgreen, John Glover, Keith Campbell, and Kevin Costelloe

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