Italian Taxpayers To Foot €17 Billion Bill As Rome Bails Out Another Two Insolvent Banks

Tyler Durden's picture

Two weeks after the first, and biggest, European bank bail-in took place under the relatively new European bank resolution mechanism, the EBRD, when Spain's Banco Popular wiped out the holders of its most risky securities, including equity and AT bonds, and then selling what was left of the bank to Santander for €1 - a process that took place without a glitch -  Italy may have just killed any hope of a European banking union, when the bailout of two small banks made a "mockery" of Europe's new regulation.

Late on Sunday, Italy passed a decree that will effectively sell the good part of the two banks to Intesa, Italy’s second-largest and best-capitalized bank. Intesa said last week that it would be willing to buy the best assets for a token price of €1 as long as the government assumed responsibility for liquidating the banks’ large portfolio of sour loans. As a result, Italy said it would commit as much as €17 billion in taxpayer funds to clean up the two failed "Veneto" banks in one of Italy's wealthiest regions and support the takeover of their good assets by Intesa Sanpaolo SpA for a token amount. After an emergency cabinet meeting on Sunday, Finance Minister Pier Carlo Padoan said the Italian government will provide Milan-based Intesa with about €5.2 billion euros to allow it to take on Banca Popolare di Vicenza SpA and Veneto Banca SpA assets without hurting capital ratios, The European Commission, in a separate statement, said it approved the plan for the two banks and that it is in-line with state-aid rules.

Unlike the Banco Popular bail-in by Santander, however, Intesa would only take on the good assets. PM Gentiloni said the lenders will be split into good and bad banks and that the firms, with taxpayers on the hook for the bad banks. The process was rushed to allow the failed banks to reopen on Monday and avoid a depositor panic and bank run. The intervention is necessary because depositors and savers were at risk, Gentiloni said. The northern region where they operate “is one of the most important for our economy, above all for small- and medium-size businesses.”

In addition to the €5.2bn handed to Intesa, an additional €12bn will be available to cover potential further losses at the bad banks, Padoan said, while the Italian Treasury estimates the fair value of the losses at about €400 million. The final number will be far greater.

Just like in the case of Banco Popular, the government tried for months to find a way to keep the banks afloat, including an appeal to wealthy businessmen in the region to contribute to a rescue according to Bloomberg. Those efforts ended on Friday when the European Central Bank said the two banks are failing or were likely to fail and turned the matter over to the Single Resolution Board in Brussels for disposal. The SRB, in turn, passed the issue back to Italian authorities to allow the banks to be wound down under local law. In the subsequent 48 hours, culminating with today's announcement by the prime minister, which also required a change to Italy's bankruptcy law, Italy rushed to assemble the measures to carry out the plan because a local regulatory framework was required to allow the banks to open on Monday.

Ultimately, the plan unveiled by the government is virtually the same as that suggested earlier in the week by Intesa, which "offered" to take on the assets of the two Veneto banks on the condition that it wouldn’t harm its own capital and dividends, in some ways mirroring an FDIC-backed bailout of a US bank, in which a safe lender assumes all the deposits and loans, which the insurer plugs the capital shortfall. Only in this case, the NPLs are spun off into a separate entity: Intesa'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.

But where the rest of Europe will be infurated, is that unlike the recent bail-in of Popular in which billions in unsecured liabilities were wiped out, in the case of the Veneto banks the proposed bail out ensures that senior creditors and depositors of Popolare di Vicenza and Veneto Banca would be protected in the wind-down under national insolvency law, and customers would see no interruption in service. Retail junior bondholders involved in the burden sharing - who can be reimbursed up to 80 percent according to rules - will be totally refunded because Intesa said it can fill the gap.

And, as the WSJ adds, "the decision over the weekend to spare two failed Italian lenders from the full force of those new rules raises questions about the effectiveness of the banking union."

* * *

Some background:

The decision to create a banking union was the decisive moment in the eurozone's response to the global financial crisis. The establishment of common banking rules and oversight institutions were intended to help restore trust in a system badly shaken by concerns that weak national supervisors in thrall to local political pressures were colluding to hide from investors the full scale of bad debts.

 

It also formed the centerpiece of a grand political bargain: By committing to sever the link between weak banks and over-indebted sovereigns, governments prepared the way for European Central Bank president Mario Draghi's 2012 promise to do "whatever it takes" to save the eurozone, including buying government bonds.

 

The centerpiece of the new regime was the Bank Resolution and Recovery Directive -- rules to ensure that no taxpayer money is used to bail out banks and that losses fall on private-sector creditors -- and the creation of the Single Resolution Board to oversee the process.

There was relief last month when this new regime was tested for the first time by the failure of the Spanish lender Banco Popular, which was sold to Santander for one euro after its shareholders and junior bondholders had been wiped out, with no adverse effect on the market.  But Veneto Banca and Banco Populare di Vincenza will be spared the same treatment. Using a loophole in the BRRD, the Single Resolution Board has ruled that the two banks are not systemically important and therefore can be liquidated under Italian insolvency rules, which permit the use of government cash without the need for senior bondholders to take losses.

As noted above, the plan is that the good assets of the banks will be transferred to Intesa Sanpaulo for a euro, but the bad assets and the cost of redundancies will be left with the government, which faces losses of up to €10 billion.

* * *

As the WSJ's Deborah Ball observes, the case of the Veneto banks is yet another example of Italy wriggling out of strict EU rules built after the financial crisis to prevent taxpayers from footing the bill in the event of the collapse of such institutions as banks. When the EU authority in charge of winding down the bloc’s failing banks—the Single Resolution Board—decided it wouldn’t take the case, it handed all power over to Italian authorities. This was followed by a Friday announcement by the SRB that it wouldn’t take action because neither of the banks would have “a significant adverse impact on financial stability" which is ironic becauase the whole point of the bailout - and not bial in - is to avoid a bankrun at the two banks which could then spread to the rest of the Italy's banking system.

So the two banks will be closed down under national insolvency procedures, and the painful process of EU bail-in—under which junior and senior bondholders absorb the losses—is averted. In Italy, a majority of bonds are in the hands of mom and pop investors.

Ironically, the EU Commission which pushed hard for the BRRD insists this is not a loophole and that the possibility of using national as opposed to eurozone-level insolvency regimes was clearly envisaged under the Bank Resolution and Recovery Directive. It points out that a number of failed banks have been liquidated using national insolvency regimes since 2015.

* * *

Even so, the WSJ notes that this decision has taken most observers by surprise. The two Italian banks, though smaller than Banco Popular, were large enough to be supervised by the European Central Bank. It therefore was widely assumed that their resolution would also be handled at the European level. Instead, it now appears that the SRB has discretion as to whether to apply the BRRD rules. Meanwhile the eurozone finds itself in the paradoxical situation where systemically unimportant banks are eligible for state aid, while systemically important banks must be subject to full bail-in.

And, as the WSJ correctly adds, it is hard to avoid the conclusion that the SRB's decision to spare senior bondholders in the two lenders is primarily political.

Adding insult to injury, and even more questions about whether the BRRD is even relevant any more, back in March Italian authorities tried in March to use another exception in EU rules to prop up the two Veneto banks. Under so-called precautionary recapitalization, Italy could have injected state money into the ailing lenders, but the commission didn’t approve the plans. 

More from the WSJ:

The Italian authorities have been fighting a rear-guard action to save the two banks from insolvency for two years, not least because they are major employers in the region and because many of the bondholders are retail customers of the banks who may not have known of the risks they were taking when they bought what were marketed as high interest savings products. 

 

Liquidating the banks under national rules at least removes the risk that 300, 000 retail investors might be hit by substantial losses less than a year before a general election is due.

 

No one wants to reignite a new political crisis in the eurozone just as the economy, including that of Italy, appears to have finally turned a corner.

Maybe, but Berlin, Europea's paymaster who had pushed hard for a uniform bank resolution mechanism and now finds Italian banks abusing one after another loophole to get bailed out instead of in, is not happy.

Speaking to Germany's Die Welt, Isabel Schnabel, a member of Germany’s Council of Economic Experts said that the wind-down of Italy’s Veneto Banca and Banca Popolare de Vicenza under national insolvency law is “a serious blow to the European settlement regime." and added that "the cases show that European settlement regime offers too many loopholes" as in the end bank senior creditors will be completely spared from losses while Italian taxpayers will foot the bill. According to Scnabel, the  Single Resolution Board’s authority should be expanded to include smaller banks in order to avoid situations where “creditors of banks are being spared from losses according to the convenience of the host countries.”

For now, however it is too late, and Rome has once again outsmarted Berlin.

* * *

So with yet another gross evasion of Europe's bank resolution mechanism, where does that lead the banking union?

As WSJ writes, "the decision to put the liquidation into the hands of the Italian authorities is not being questioned by Germany. From Berlin's perspective, it is enough that it has headed off a long-standing attempt by Rome to try to keep the banks alive by injecting government capital using another controversial BRRD loophole known as precautionary recapitalization."

The decision to spare senior bondholders represents a pragmatic compromise to a saga that has cast a shadow on the Italian and eurozone banking system for too long -- and which German officials believe should have been addressed years ago.  Nonetheless, Berlin wants reassurance that this deal doesn't set a precedent and that the state aid rules will be rigorously applied to minimize the use of taxpayers' money, according to German officials.

 

In recent weeks, there has been much speculation about a fresh political push to strengthen the eurozone, including the creation of new mechanisms to pool banking risks via a common backstop to the eurozone's Single Resolution Fund and a common deposit-insurance scheme.

 

But the Italian episode highlights that before any steps can be taken to complete the banking union, new measures may be needed to strengthen the rules already in place.

A much more harsh assessment was offered earlier over the weekend by Bloomberg commentator Ferdinando Giugliano who wrote that as a result of today's bailout, "Europe's Banking Union Is Dying in Italy"
and that "Italy's plan to rescue two small banks makes a mockery of Europe's new regulations.

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.... 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.

Ultimately, however, as the WSJ notes the decision to bail out the two banks and their stakeholders was entirely political (involving fears over a popular backlash of impaired senior bondholders), which means that Italy's government will continue bailing out those exposed to bank risk as long as Italy's taxpayers - and voters - keep silent; after all the risks from the alternative: depositors runs, contagion, bank crisis, are just too high and could remind Europe that 7 years after the first Greek bailout, absolutely nothing has been fixed in Europe, where the artificial sense of calm is only at the behest of a European central bank which now owns a record €4.2 trillion in assets and rising every week.

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Impoverished Psychologist's picture

Because this bailout methodology worked so well in the past.... sheeesh...

SilverRoofer's picture

fuck the banks and the Bankers who run this shit show

Number 9's picture

this is just another long line of reasons to investigate crypto..

worldwide it seems to be no matter the problem..print moar fiat

Alt RightGirl's picture

Italians have too much money anyways.

They need to spend more for accommodating the dindus Soros is bringing from Africa, if not they will chimp out like they chimp out here in US.

VIDEO: Nigger Couple Attacks Restaurant Owner Over Being Served Cold Chicken


blueyefinity@yahoo.com's picture

Failed state with failed banks.

What else is new?

 

Art Van Delay's picture

Waiting for Bank of Vatican to fail.

That would be hilarious.

 

CheapBastard's picture

Bend over Eye-talian taxpayers and join the Americans who get screwed by the Central Bankers, Wall Street thieves and DC crooks.

assistedliving's picture

Girl, are you confusing your alphabet?

This is ZH not KKK

AtATrESICI's picture

Sorry for the off topic comment...Wonder why coinbase crashes each time BTC and ETH crashes. The people who run coinbase must be "bankers".??? Oh yeah... coinbase is now crashed.

junction's picture

Yeah, Bloomberg can talk, TARP is good, this is bad.  If Goldman Sachs is the beneficiary of the bailout, the NWO and Germany are a unified cheering section.  I don't believe for a second those figures that say that all the TARP funds were repaid and U.S. taxpayers did not get screwed out of hundreds of billions of dollars.  Who priced the value of all those worthless assets on the banksters' books.  Why, the banksters, of course.  Anyone complaining about Italian politicians helping out their bankster friends in northern Italy should realize that these guys are all insiders, they can do what they want and, if there is a mistake made here, just send the Finance Police orders to raise more money from the peasants.  

Justin Case's picture

Gotta love capitaliism. Like a social program for banks. privatize the profits and socialize the losses. The MSM spread all the bullshit about Greece that the Gov't was responsible and the people didn't pay taxes, early retirement etc. A bullshit list as long as yoar arm.

After six years of ongoing bailouts amounting to more than €220 billion, or $253 billion in loans, Greece just cannot get out of crisis mode.

This accusation has been around for a long time. But now, for the first time, the Berlin-based ESMT has compiled a detailed calculation over 24 pages. Their economists looked at every individual loan instalment and examined where the money from the first two aid packages, amounting to €215.9 billion, actually went. Researchers found that only €9.7 billion, or less than 5 percent of the total, ended up in the Greek state budget, where it could benefit citizens directly. The rest was used to service old debts and interest payments.

A reputable organization this IMF?

The current executive director of the IMF (July 2011-2015) Christine Lagarde is on trial in France for misappropriation of a $400-million-dollar payoff to tycoon Bernard Tapie while she was Finance Minister in the government of President Sarkozy.

The previous executive director (November 2007-May 2011), Dominique Strauss-Kahn, arrested and tried for pimping in the city of Lille, France.

His predecessor, Rodrigo Rato (June 2004-October 2007), was charged with tax evasion, concealing ?27 million euros in seventy overseas banks and swindling thousands of small investors who he convinced to put their money in a Spanish bank, Bankia, that went bankrupt.

His predecessor a German, Horst Kohler, resigned after he stated an unlikely verity – namely that overseas military intervention was necessary to defend German economic interests, such as free trade routes.  It’s one thing for the IMF to act as a tool for imperial interests; it is another for an IMF executive to speak about it publically!

Michel Camdessus (January 1987-February 2000) His term of office witnessed his embrace and financing of some of the worst dictators of the time, including his own photo-ops with Indonesian strongman and mass murderer, General Suharto.

 

QQQBall's picture

The plan is not to have Grease exit. It is to asset strip the country and enslave the people for debt that did not benefit them.  SHOCK DOCTRINE - read it!

CheapBastard's picture

Italians adopted the Bush-Paulson-Geithner, "No Banker Left Behind Act of 2008."

This law was renewed and strengthened under the Muzlim Barrack bin Bama ... as the middle class suffered and black poverty rate and joblessness also doubled.

 

Part of the Bush-Obama Legacies

veritas semper vinces's picture

To all Italian banks,Fed Reserve,Bank of England,Bank of Japan,ECB,Bank of Israhell,BIS,IMF,HSBC,Goldman Sachs,JPMorgan,Citi,Bof America,Deutchebank and all other CB I forgot:

 

Va Fanculo!

TeethVillage88s's picture

Headline doesn't explain who pays for this NOR who's Institution pays for it... nor who's bullshit we have to swallow.

- Swallow,.. there you go, good fairy

Number 9's picture

no one pays for it.. it is " hit the trillion button Lidia" @ the central bank..

you think anyone actually expects payback from something that is not real?

ebworthen's picture

Wait, let me guess, Bank Management keeps fat salaries & not one citizen has their mortgage, other loan, or tax bill forgiven.

Not one person from the Bank or Financial Industry or any Politician goes to jail for malfeasance, corruption, and graft.

Get back to work Serfs!

Number 9's picture

Breaks over, back on your heads

ronron's picture

yes. door number 3 looked enjoyable.

Too-Big-to-Bail's picture

Only $280 per every man, woman and child in Italy -- not too bad for this latest round of bank failures. Banking has become a total laughing stock

zzzz88's picture

we are not smarter than our ancestors. paper money existed before too. if printing works, our ancestors must know it. 

 

what centeral banks are printing like no tomorrow will kill us all. it is already 8 years. they can print forever? i do not think so

Number 9's picture

they can print forever?

it cost nothing nowadays.. not like before when the nations involved were so broke they couldn't afford the true cost of materials to make the bills..

with magic sky money all that is involved is a bit of electricity..

so.. unless the power goes out, i think that yes, they can print forever..

zzzz88's picture

technically, they can print forever with no cost. but remember, the socity is a compex system. if some people benefit from one policy, another group of people suffer. if central banks push to one extreme, something worse will happen. everything has a tolerance limit

 

did you see more and more killings recently? generally, behind war, turmoil, killings is economic problem. if i can choose, i would not prefer killings

Mr. Universe's picture

Indeed. This mortal coil is unwinding at record pace. How long until it is finished is anyone's guess, but it's closer to the end than most imagine. Expect more public violence (and false flags) to be met by an even more violent and draconian response from .gov. Donald is their perfect man for the police state as he has yet to meet a surveillance law he didn't think was necessary. Sooner the needed 3% of those willing to risk everything will either start a Civil War or be purged along with all other enemies of the state.

el buitre's picture

Not true.  The Donald disapproved of Obomba "tapping" his personal iPhone.  As to the other odd 330,000,000, not so much.

New_Meat's picture

"Meanwhile the eurozone finds itself in the paradoxical situation where systemically unimportant banks are eligible for state aid, while systemically important banks must be subject to full bail-in."

Ooopsies.

gregga777's picture

So, now Uncredit can claim that "we aren't a systemically important banking gangster, therefore the Italian taxpayers have to bail us out, too."

The MORONS who write Europes banking regulations are, well, MORONS.

robertocarlos's picture

Leaving depositors whole and giving the 17 billion dollar bill to the taxpayers is beyond fucked up.

markar's picture

Leaving the depositors whole not so bad. Leaving the bond holders whole, a travesty.

robertocarlos's picture

OK but depositors should only be covered up to a certain amount. There has to be some risk for the reward.

BeanusCountus's picture

Not sure what the reward is for anyone that just deposits their money in the bank. Not much one can gain except safety. Wait.. there's no safety?

el buitre's picture

Not to worry.  In the USSA, depositors come after the derivative "winners" in terms of senority of liquidation and insurance.  When the whole system blows, depositors will get nothing unless the FDIC gets the Fed or Treasury to print ten of trillions.

True Contrarian's picture

Molto stupido, che vi amo a dopo Italia.

VWAndy's picture

 I wonder just how much leverage they were really running. Also how rehypothocated they are.

 

  How much Chinese rebar do they own?

Rabbi Blitzstein's picture

This story make rabbi chuckle and spill little bit his Mogen David. Make rabbi think goyim so stupid still not know who really won WWII. Hint: not Britain, not America, not France, not USSR….LOL. It was International Jewry won WWII. We controlled it top to bottom. We killed Germany forever. Now we kill rest of Christian Western Civilization. Two failed banks in Italy for $17 billions from Italian goyim? Hahaha. Not like we need the money. We create all money could ever want. We do it to further enslave and suck out life force and substance of the goyim cattle. Remind you stupid cattle who rules over you. Is the world a better place since end of WWII? Of course it is! But only for International Jewish Bolshevik Communism. Hahaha! Rabbi now have more sip from glass of Mogen David. Mazel tov!

Number 9's picture

*Bang*

Flop..

didn't see that coming did ya?

 

Rabbi Blitzstein's picture

You are anti-semite jew-persecuting Nazi! If given chance, you would gladly turn rabbi into lampshade and bars of soap. Why do you Nazis continue to persecute chosen people of G-D? You make rabbi need another bottle Mogen David. Oy gevalt!

Bopper09's picture

Like the ECB has a problem with bailing out banks.  All Draggy has done is bail out banks by printing trillions of 'euros' out of thin fucking air.

When they quit printing money, the banks and their quadrillion in derivatives go poof.  But hey, why fucking bother suceeding when you're guaranteed that the people will save you from bankruptcy.  How long are we going to put up with this shit?

hooligan2009's picture

so we now have TS(mall)TF as well as TBTF?

"..systemically unimportant banks are eligible for state aid, while systemically important banks must be subject to full bail-in."

anyone can form a bank, make sure it doesn't get too big, and when it fucks up after paying millions to the directors of the bank, the state "socializes the losses".

libtard socialism at its finest and no surpirise at all - europe is an infected swamp of libtard socialism

bluskyes's picture

So. In trying to prevent runs on banks that deserve to be ran on, they are encouraging people to run on larger banks.

QQQBall's picture

1 Euro doesn't buy as much as it used to.

Shibboleth's picture

You got to love the italians. They get away with everything. Even WWII.

JackMeOff's picture

Just remember people, Italy fell to the Facsicts before WW2 and France rolled over to Germany...  See a pattern here?

Kaiser Sousa's picture

DEATH TO THE MONEYCHANGERS.

Lucretius's picture

What's the BFD? 17B lira is like what, $12.00 USD???

 

;-D)

Stormtrooper's picture

No, 17 billion euro.  Like 20 billion dollars.

The Italians are already broke and they could never produce a gun that shot straight to fix their politician problem so they are as fucked as the Greeks.

BeanusCountus's picture

Hey, the beretta is a great firearm. Even the ones made in italy. The 92FS is one of the most accurate mass produced handguns I'v ever shot. Try a PX4 Storm Compact as well. Great piece of equipment.