EconomyEuropeFinanceItaly

Italy’s Banca Carige Intervened by the ECB

The European Central Bank took control of a troubled Italian bank, Banca Carige, hoping to forestall a potential banking crisis in Italy. While Italian banks have become stronger since the recession, they overall remain the weakest link in the Italian economy.

This section contains some shortcodes that requries the Jannah Extinsions Plugin. Install it from the Theme Menu > Install Plugins.

In the final days of December, the European Central Bank took control of the troubled Italian bank, Banca Carige. This is the first time the European Central Bank has appointed new leadership for a commercial bank, though the intervention did not spark a large reaction in the financial markets. The Euro Stoxx Banks index fell only approximately 2%, and that was on a day when most stocks were down. However, shares of other Italian lenders fell following the announcement, with UBI Banca down 3.8%, and BPER Banca losing 3.4%. Nonetheless, this kind of action is entirely unprecedented, and serves to highlight how much of a risk political uncertainty in Rome poses to the wider financial system in the eurozone. It also may act as a precedent for how the EU handles other crises, or threats to EU finances.

Banca Carige is only a midsize lender, and by itself, is not a bank large enough to cause a systemic crisis, should it go under. However, it is the 10th largest lender in Italy, and even small banks can cause large problems, including a larger crisis down the road. “The current government is not prepared for a full-fledged banking crisis,” said Lorenzo Codogno, a former chief economist at Italy’s treasury, who operates LC Macro Advisors, a consultancy in London. And among policymakers and economists, looking to avoid the next financial crisis, eyes are on Italy, and its indebted banks – of which Banca Carige is one.

“If there was a risk of contagion from Banca Carige, that has been averted for now,” said an official close to the European banking supervisory authorities, as reported in Politico. “The ECB supervision grants continuity, and gives more time to the bank to find a partner, and pursue its turnaround plan.”

The EU Central Bank  appointed a six-person team to manage Banca Carige, after most of the bank’s board of directors resigned, once they, and their largest shareholders – the Malacalza family – failed to raise enough capital to revive the flagging bank. Now, the leading question is; who will buy the failing – but not insolvent – bank,  and whether shareholders will be responsible for a part of its debt? Should the bank’s situation worsen, the Central Bank would be obligated to make shareholders and creditors bear a portion of the losses, as per EU rules. Even if a buyer for the bank is found, this is likely to cause tensions between the EU, and Italy’s right-wing coalition government, which tends to defend the interests of shareholders, who are often middle-class Italians.

Carige shares have lost nearly 90% of their value on the Milan stock exchange over the past 3 months, trading at below one euro cent. This is after the rating agency, Fitch, lowered the bank’s credit rating to CCC+ this past October, with a negative outlook, warning that bankruptcy was “a real possibility”.

Consob, the government authority of Italy, responsible for regulating the Italian securities market – including regulation of the Italian stock exchange, the Borsa Italiana – suspended Carige shares during the day of the board’s resignation, further to the bank’s initial request. Consob later confirmed that the suspension would be prolonged, until it was possible to resume full information disclosure, on shares issued, or guaranteed by the lender.

What is more, some wonder whether the Central Bank violated EU rules on state aid, by trying to rescue Banca Carige at all. Sven Giegold, a member of the European Parliament, who speaks for the Green faction on financial issues, called for an investigation of this issue, claiming that other Italian banks were strong-armed last year, into providing the ailing bank with fresh capital, in a rescue attempt that ultimately proved to be futile.

[divider style=”solid” top=”20″ bottom=”20″]

European Central Bank Headquarters in Frankfurt, Germany. Copyright: EQRoy / shutterstock.com

[divider style=”solid” top=”20″ bottom=”20″]

“The coordinated rescue now looks like a waste of money by the already weakened Italian banking system,” Mr. Giegold said.

All Italian banks have been struggling since the 2008 financial crisis, but the challenges facing Italy’s economy have only increased since the right-wing coalition government took power this summer. Investors were spooked by plans to reverse cuts on pensions, and give cash to poor Italians, as such plans seemed to run counter to promises to pay off the national debt, resulting in higher interest rates on Italian bonds. This instability has been very hard on Italian banks, as rates on government bonds act as a benchmark to determine all types of credit. Italian banks were forced to borrow at far higher rates than banks in the rest of Europe. Banca Carige, for example, was paying a truly high rate of 16% annual interest on recently issued bonds.

While yields on Italian banks fortunately subsided, once the EU and Italy worked out their differences over the Italian budget, this has not allowed the sector to fully recover, due in great part to stubbornly high levels of non-performing loans (NPLs). Italian banks have undertaken considerable efforts to reduce their bad loan ratios since the onset of the debt crisis, including consolidation, via mergers and fund-raising measures. In effect, the sector’s common equity tier 1 ratio, has increased from 6.9% to 14.3%, which means that they are in a genuinely healthier position to absorb potential losses, with larger capital buffers. Nonetheless, Italian banks still remain the Italian economy’s Achilles heel. “The big picture is that they have strengthened their balance sheets over the past few years, but they remain perhaps Italy’s weakest link.” Jack Allen, a senior European economist, at Capital Economics, told CNBC via email.

Many economists expect the Italian economy to worsen in 2019, which will only augment the stress on the country’s banks. Bearing in mind that Italy is Europe’s third-largest economy, the shrinking of its manufacturing sector for a third consecutive month, is not a good sign. And it is within this landscape that the temporary managers, installed by the European Central Bank, are expected to try to sell Banca Carige, or look to merge it with another lender. Nonetheless, and given the likely reward that a buyer will expect, for handling a bank with unresolved capital issues, and bickering shareholders, the Italian government may be obligated to step in, even if doing so were unpopular amongst government supporters.

“This match has just started, and the Italian government, at some point, will have to make a decision and stop looking the other way,” said Mario Comana, a professor of banking economy at Rome’s LUISS university. “There are several technical solutions at hand if Carige wants to find a buyer, and some of them still involve a government’s role to make it an attractive buy.”

The three temporary administrators appointed by the central bank to replace the Board of Directors, and navigate the bank to long-term stability, include the existing chief executive, Fabio Innocenzi, and the chairman, Pietro Modiano. They, in turn, will be watched over by a three-member surveillance committee. The administrators will have more powers as central bank appointees than they would as regular managers, including the right to set the agenda for shareholders’ meetings, and are expected to “take charge of Banca Carige.” Their task is ultimately to safeguard the bank’s stability, monitor the situation, keep the European Central Bank informed, and, if necessary, “taking action to ensure that the bank restores compliance with capital requirements in a sustainable manner.”

“The decision to impose temporary administration is an early intervention measure, aimed at ensuring continuity and pursuing the objectives of a strategic plan,” the European Central Bank said in a statement.

Worth noting is that while a full-on takeover is without precedent, intervention by the EU is not. The Carige takeover comes about two years after the European Central Bank intervened in the management of Banca Monte dei Paschi di Siena (MPS), Italy’s third-largest lender. At the time, the ECB refused to give MPS more time to find a private investor, and the bank was rescued via  a state-backed precautionary capitalization, which cost a lot — both politically and monetarily — of the centre-left government led by former Prime Minister Matteo Renzi.

Tags
Show More

B. Lana Guggenheim

Lana is a freelance journalist based in New York City. She has a M.Sc. in International Conflict from the London School of Economics and Political Science. She has worked as an analyst, reporter, and editor, covering extremism, culture, economics, and democracy.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Close