Europe's Banking Union Is Dying in Italy
The Italian government looks set to put Veneto Banca and Banca Popolare di Vicenza, two troubled regional lenders, into liquidation, selling off the good assets to a rival bank for a symbolic price. The toxic assets would be transferred to a bad bank, mostly funded by the government. Shareholders and junior bond-holders would contribute to the rescue, while senior creditors would be spared.
The rival bank, Intesa Sanpaolo, would be getting a great deal for little risk. But for the Italian taxpayer, and the credibility of euro zone financial regulation, the plan is a loser and should be stopped.
The Italian scheme is radically different from the one put in place two weeks ago, when the Spanish lender Banco Santander bought Banco Popular for one euro. In that case Santander also acquired Popular's non-performing loans as well as all the future legal risks. It also immediately went to the markets to raise capital to pay for it. Here, Intesa will only pick the assets it wants and insists that the operation not impact its capital ratio.
This plan is a slap in the face of Italian taxpayers, who according to some estimates could end up paying around 10 billion euros ($11.1) for it. The government could have taken a less expensive route, involving the "bail in" of senior bondholders. It chose not to: Many of these instruments are in the hands of retail investors, who bought them without being fully aware of the risks involved. The government wants to avoid a political backlash and the risk of contagion spreading across the system. However, 10 billion euros is a whale of a premium to pay as an insurance against a contagion. And Rome may still face a backlash -- from taxpayers who will feel defrauded.
Most importantly, this plan is a dagger in the heart of the euro zone banking union. This was one of Europe's main responses to the sovereign debt crisis, designed to limit the contribution of taxpayers to bank rescues and to ensure all euro zone lenders faced a coherent set of rules.
Italy is relying for its plan on its domestic liquidation regime. Rome will effectively by-pass the EU's "single resolution board" which is supposed to handle bank failures in an orderly way and the "Banking Recovery and Resolution Directive," which should act as the euro zone's single rulebook. The advantage will be to spare senior bondholders but the cost will be huge: denting, perhaps irreversibly, the credibility of Europe's newly formed institutions.
This matters for the present as much as for the future. The euro zone's banking union is incomplete: It requires a common deposit guarantee scheme to ensure deposits -- up to 100.000 euros -- are equally protected in all the member states. Ironically, among the most vocal proponents of this measures are two Italians -- Ignazio Visco, governor of the Bank of Italy, and Pier Carlo Padoan, Italy's finance minister. Germany is more skeptical, fearing it would amount to excessive risk-sharing. After this rescue, it will be much harder to convince Berlin to complete the banking union. After all, Germany would fear the joint deposit guarantee could be used improperly, to rescue senior bondholders, for example.
Italy seems determined to go ahead with the plan regardless. This means the European Commission must take a hard look at it and decide whether it really fits within existing laws. Intesa Sanpaolo is cherry-picking the assets it wants and leaving the bill to the government: It's hard to see how this doesn't involve state aid, which the EU forbids.
The euro zone's new resolution regime passed its first test when it successfully handled the rescue of Popular. Credibility, however, is hard to build and very easy to destroy.
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