Italy Banks From UniCredit to Intesa May Face Costly Ringfencing

Updated on

Italy’s ruling populist parties have opened the door to separating banks’ trading and deposit-taking operations, a shift that proved expensive to banks in other countries where the split up has been enforced.

Prime Minister Giuseppe Conte, in his first speech to Italy’s lower house of parliament, said that he’ll seek to review recent legislation on cooperative banks and said there is a need distinguish between “banks that provide credit,” and “banks dedicated more to speculation.” Conte was selected by the populist League Party and Five Star Movement.

While short on details, the approach echoes initiatives taken by governments from Europe to the U.S. to protect retail depositors and borrowers from the riskier parts of investment banking in the wake of the financial crisis. The so-called ringfencing in the U.K. imposed heavy costs on the country’s biggest lenders.

“We believe such measures would mostly affect the largest Italian banks, Intesa Sanpaolo, UniCredit and possibly Banco BPM,” said Riccardo Rovere, an analyst at Mediobanca SpA. “Given the complete lack of details on how the newly appointed government may overhaul the local banks, it is hard to provide an assessment of the possible impact.”

In the U.K., where investment-banking tends to take up a large part of lenders’ businesses, lawmakers required that investment banking units must be separated from core retail businesses by the end of this year.

British Experience

“A separation of investment-bank operations and retail bank would be extremely costly, as seen in the U.K. with Barclays Bank and HSBC Holdings ringfencing charges,” said Marta Bastoni, an analyst at Bloomberg Intelligence in London. “In addition, Italian retail banks are inherently more at risk than European peers due to non-performing loans, so it is difficult to see the rationale.”

Conte’s comments align with a Five Star and League program agreed to last month that led to a market selloff. The accord also calls for a review of Banca Monte dei Paschi di Siena’s recovery plan, includes measures to reimburse retail shareholders of banks that have been wound down, and calls for a review of Basel banking accords, which the document says “threaten the existence of Italy’s small and medium companies.”

Italian banks have slashed costs, cleaned up balance sheets and strengthened finances in recent years amid pressure from regulators and help from the previous Democratic Party government.

Measures to improve the banks’ governance and competitiveness, including transforming the country’s 10 largest cooperative banks into joint-stock companies and the forced merger of smaller mutual banks into larger groups, are now at risk. A few weeks ago, the League put in a request to both houses of parliament to delay the finalization of the process to combine the mutual banks into two groups.

Shares of Italian banks tumbled as negotiations over a new government dragged on. Italian lenders including UniCredit and Intesa Sanpaolo posted some of the biggest declines on the Bloomberg Europe Banks Index on Thursday.

— With assistance by Lorenzo Totaro

(Updates with analyst comment in fifth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE