Joke Of The Week: Italy’s Bank Rescue Fund

Italian Banks Bank of Italy


Italian banks have been facing rough seas for quite a while now as the total amount of non-performing loans and bad debt is piling up now. The Italian state has been trying to find a solution for this increasingly important problem as all of its banks continue to report high write-downs on the value of their assets, which is undermining the health of the entire financial system in the country.

Italy had to do something which would keep the European bureaucrats happy (as any financial support would have to be injected without being seen as some sort of state aid). Previous media reports discussed the possibility of the European Central Bank acting as ‘saving grace’ of the Italian financial system, but the ‘whatever it takes’ adage seems to be another bold statement turning out to be hollow words. Of course, a central bank should not buy non-performing loans as that’s most definitely not a part of its mandate, but it also tells you that the ‘whatever it takes’ shout-out does come with some caveats.

ITalian Banks Impairment Charges

Source: Financial Times

The Italian state had to find a solution on its own, and the proposed way out of the current vicious circle is just laughable. Italy has proposed to start a bad-bank fund called Atlante, which would focus on buying distressed assets from the Italian banks to help them to improve their balance sheets once again. Theoretically that’s an excellent plan, but the size of the new fund is just laughable. Italy’s bad bank fund will have a total available cash resource of 5B EUR.

Italian Banks Bad Debt

Source: Financial Times via Thomson Reuters

Sure, 5 billion Euros sounds like a pretty decent amount of money, but you need to put things in perspective. According to the most recent estimates, the Italian financial system was holding in excess of 200 billion Euro of non-performing loans (‘NPL’) on the balance sheet, whilst at least the same (gross) amount could be described as ‘questionable’. So, the new fund has the size of less than 3% of the total amount of NPL’s in the sector and just over 1% of the total amount of bad loans.

That’s most definitely not sufficient as almost 40% of the funds will immediately be used to rescue the Banca Popolare di Vicenza which needs an injection of 1.8B EUR as soon as humanly possible to keep its balance sheet issues under control. And the other Italian banks will also be quite happy as they saw their share prices slide since the beginning of this year. Unicredit saw its share price fall by almost 50% since the end of last year, whilst Intesa Sanpaolo experienced a 25% drop in its share price.

Italian Bank Performance

Source: Financial Times

Italy thinks the 5B EUR will be sufficient to cover a lot of the expected losses as it says the banks have already recorded impairment charges on the value of their bad loans and this has been confirmed by the CEO of Intesa Sanpaolo a few months ago. He claims there’s close to zero risk of the banks collapsing, but we have heard this before.

But hey, let’s not worry. Italy has got this all figured out!

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