Why Has Italy’s Banking Crisis Gone Off the Radar?

By Don Quijones of Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street

For a country that is on the brink of a gargantuan public bailout of its toxic-loan riddled banking sector, or failing that, a full-blown financial crisis that could bring down the European financial system, things are eerily quiet in Italy these days. It’s almost as if the more serious the crisis gets, the less we hear about it — otherwise, investors and voters might get spooked. And elections are coming up.

But an article published in the financial section of Italian daily Il Sole lays out just how serious the situation has become. According to new research by Italian investment bank Mediobanca, 114 of the close to 500 banks in Italy have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves — or as American money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.”

If the TR is over 100%, the bank doesn’t have enough money “pay for all the bad stuff.” Hence, banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.

Granted, many of the banks in question are small local or regional savings banks with tens or hundreds of millions of euros in assets. These are not systemically important institutions and can be resolved without causing disturbances to the broader system. But the list also includes many of Italy’s biggest banks which certainly are systemically important to Italy, some of which have Texas Ratios of over 200%. Top of the list, predictably, is Monte dei Paschi di Siena, with €169 billion in assets and a TR of 269%.

Next up is Veneto Banca, with €33 billion in assets and a TR of 239%. This is the bank that, together with Banco Popolare di Vicenza (assets: €39 billion, TR: 210%), was supposed to have been saved last year by an intervention from government-sponsored, privately funded bank bailout fund Atlante, but which now urgently requires more public funds. Their combined assets place them seventh on the list of Italy’s largest banks.

Some experts, including the U.S. bank hired last year to save MPS, JP Morgan Chase, have warned that Popolare di Vicenza and Veneto Banca will not be eligible for a bailout since they are not regarded as systemically important enough. This prompted investors to remove funds from the banks, further exacerbating their financial woes. According to sources in Rome, the two banks’ failure would send shock waves through the wider Italian financial industry.

There are other major Italian banks with Texas Ratios well in excess of 100%. They include:

  • Banco Popolare (the offspring of a merger of Banco Popolare di Verona e Novara and Banca Popolare Italiana in 2017 and then a subsequent merger with Banca Popolare di Milano on 1 January 2017): €120 billion in assets; TR: 217%.
  • UBI Banca: €117 billion in assets; TR: 117%
  • Banca Nazionale del Lavoro: €77 billion in assets; TR: 113%
  • Banco Popolare Dell’ Emilia Romagna: €61 billion in assets; TR: 140%
  • Banca Carige: €30 billion in assets; TR: 165%
  • Unipol Banca: €11 billion in assets; TR: 380%

In sum, almost all of Italy’s largest banking groups, with the exception of Unicredit, Intesa Sao Paolo and Mediobanca itself, have Texas Ratios well in excess of 100%.

But, as Eisman recently pointed out, the two largest banks, Unicredit and Intesa Sanpaolo, have TRs of over 90%. As long as the other banks continue to languish in their current zombified state, they will continue to drag down the two bigger banks. And if either Unicredit or Intesa begin to wobble, the bets are off.

To stay on the right side of the solvency threshold, Unicredit has already had to raise €13 billion of new capital this year and last week it took advantage of the ECB’s latest splurge of charitable lending (formally known as TLTRO II) to borrow €24 billion of free money. But as long as the financial health of the banks all around it continues to deteriorate, staying upright is going to be a tough order.

This is where things get complicated. In order to qualify for public assistance, banks must be solvent. Presumably, that would automatically disqualify any bank with a Texas Ratio of over 150%, which includes MPS, Banco Popolare, Popolare di Vicenza, Veneto Banca, Banca Carige and Unipol Banca. The bailout must also comply with current EU regulations including the Bank Recovery and Resolution Directive of Jan 1, 2016, which specifically mandates that before public funds are injected into a bank, shareholders and creditors must be bailed in for a minimum amount of 8% of total liabilities, as famously happened in the rescue of Cyprus’ banking system in 2013.

The Italian government knows that this approach could end up wiping out retail investors (otherwise known as voters) who were missold, in many cases fraudulently, subordinated bonds by cash-hungry banks in the wake of the last crisis, in turn wiping out the government’s votes. To avoid such an outcome, the government has proposed compensating those retail bondholders with public funds, just as the Spanish government did with the holders of preferente bonds. Which, of course, is in direct contravention of EU laws.

So far, the European Commission has stayed silent on the issue, presumably in the hope that the resolution of Italy’s financial sector can be held off until at least after the French elections in late April, if not the German elections in September. Then, if those elections go Brussels’ way, a continent-wide taxpayer funded bailout of banks’ NPLs can be unleashed, as already requested by ECB Vice President Vitor Constancio and European Banking Authority President Andrea Enria.

With no guarantee that Italy’s NPL-infested banks can hold out that long, it’s a dangerous waiting-and-hoping game. In the meantime, shhhhhhhh…

Print Friendly, PDF & Email


  1. jsn

    Texas Ratio!

    I love it, hadn’t heard that before. Natural outgrowth of the S&L bubble I figure.

    What better state (my home state that I love/hate) to name a Bullshit to Bona Fide ratio for!

    1. craazyman

      I wanna tell you about Texas Ratios and he Big Cheat
      It comes out of the Italian swamps
      cool and slow without any precision
      like a fettuncini marinara recipe that’s hard to master

      Some call it heavenly in its brilliance
      others mean and rueful of the Prussian dream
      Don’t you love the friends gathered together for this Italian graft
      They have schemed up pyramids in honor of their escaping
      This is the land where the euro died.

      (Haygood knows what we’re talkin about . . . )

      1. AbateMagicThinking but Not money

        Seems no one else spotted, or can be bothered to comment on your allusion to The Doors and The Wasp. I for one, cannot let it pass.

        Reminds me that I used to to think it was:

        Cows piss down my window like the waves down on the beach.

        Happy mondegreens!

  2. Dr Duh

    Great article. A couple questions

    1. What is the overall Texas Ratio for the Italian banking system?
    2. What is the mechanism connecting a ‘bad’ Texas Ratio to failure in this case? Are they funding long term liabilities with short term borrowing like Lehman and hence are at risk of being locked out of the market?
    3. How interconnected are the Italian banks? Is there potential for a domino effect? What would be the mechanism, loss of confidence or actual counterparty risk?

    1. John Tipre

      All good questions. Come June, one may expect more EU austerity practices in the form of public bailout, Yes? The “public,” the disappeared element of modern western political cultures, is the “backstop,” the final insurer. Neoliberalism plays a strong role in the grossly unfair practice of public bailouts.

  3. craazyman

    What radar? Italy’s last radar stations shut down for lack of money in 2013 and all the operators who could leave the country left for science jobs in Uganda and Brazil. There is no radar in Italy. Germany has radar but it only picks up signals from NATO or Brussels. Italy’s scientific minds are busy with financial theory, in New Yawk. I’ve seen a few of them. Pretty smart dudes! And women! They like stochastic volatility and Wishart distributions but God Forbid you put them in front of a radar machine. They wouldn’t know a bird from the Luftwaffe (haha sorry that was a long time ago).

    What radar? Radar is so 20th century! Today we have Twitter and Facebook if you wanna stare at a glass screen and hear beeps. I think there’s a Wikipedia page for radar but it’s rusting. They use radar on boats and ships though. Maybe one of Italy’s banks will go floating by on the ocean of liquidity from the ECB. Then it might show up on a radar someplace out near the Azores. Too bad you’ll lose money no matter how you try to trade it. Or at least I would! That’s for sure.

    1. Susan the other

      a day late and a dollar short here, why do I have all my good ideas on April Fool’s day? – but anyway: Schaeuble’s “we are overbanked” is now Schaeuble’s Paradox because if they let the little ones go they will bring down the big ones because everybody and their dog has a stake in this – much like you explained about China’s bubble. So, yes Wolfgang, we are overbanked and no, Wolfgang, we are not overbanked… everything is in perfect balance. And all those euros and dollars racing around with nowhere to go? – here’s a suggestion: pour them as fast as you can back into the planet. Clean it up. Cool it down.

  4. DJG

    A couple of reasons come to mind, but I may be too anecdotal:

    When I was in Italy three weeks back, some friends of mine (and my friends are all pretty much red) mentioned that parties on the left had looted Monte dei Paschi di Siena. So the Partito Democratico, the successor party, is going to end up with a scandal (or with even more scandal).

    A second idea crossed my mind: For many years, the Italians were the champion savers of Europe. (They were nearly as good at savings as the Japanese.) So these banks are filled with Italians’ savings accounts and their retirement nest eggs. Weirdly, the Italian regulators may have some idea that the Italians and their savings habits can shift the balance. What’s more likely, though, and what’s worse is that once these banks start failing in series, you will see Italian families wiped out financially. The social devastation will bring down the government and may even bring down most of the political parties. The irony would be that the newer Movimento Cinque Stelle is less implicated (not that they have a plan either).

  5. ChrisAtRU

    Thanks for this. I follow Bloomberg on Twitter and this came across the wire a day of so ago:

    Italy Finance Minister Says Banking Problems ‘Solved’

    Needless to say, raised eyebrows by yours truly given previous material posted here. Just gave a first listen to it, and nothing he (Padoan) says suggests the dire straits outlined in the NC post. I’ll follow up later, but perhaps a shorter version of his answers to the interviewer here would have been “Shhhhhhhhh …”

    1. JustAnObserver

      All we need now is for some Italian financial official to utter the Words Of Doom:

      “The Fundamentals of the Economy are Sound”.

      (H/T J.K. Galbraith (I think))

      1. dontknowitall

        Maybe they are expecting a mysterious cash drop like it happened a number of years ago when two Japanese men were arrested at the Italian-Swiss border at Chiasso with fat briefcases carrying $134 billion in US bearer bonds. Of course since it was undeclared money the Italian State got to keep 50%. Now, since the Italian finance minister thinks the banking problems are resolved I imagine there must be a whole bus of Japanese moneymen on their way to Chiasso…


      2. ChrisAtRU

        Ha! Yes, it was JKG. And for sure, the Words of Doom will be uttered just before … well, Doom.

      3. John

        Well isn’t that what most Keynesians think? That the fundamentals are relatively sound, the only problem is a financial crisis caused by asset bubbles? And that if we just increase the deficit (update the nation’s infrastructure), things will be fine?

        The reality is that it wasn’t just a financial crisis that caused the post 2008 recession. The real economy is not in good shape, nor has been since the 1970’s. The industrialization of Europe and Japan, followed by China and India, has caused a crisis of overproduction/under-utilization of capacity that has eaten away profit rates in manufacturing firms around the globe (even with the abundant supply of labor available from the ease of outsourcing). The only growth we’ve had since then has been from asset bubbles (Japanese real estate in the 80’s, the US stock market in the 90’s, US real estate in the 00’s, EU bubbles in the 00’s, etc.).

        Fiscal stimulus can temporarily ease the burden by increasing demand, and monetary stimulus can temporarily reflate the asset bubbles, but there’s no light at the end of the tunnel. (Not to mention that US federal deficit spending just boosts Chinese manufacturing sector and pollutes the planet more than anything else.) Earth has a finite amount of space and resources, and the mathematics of compound interest mean that growth rates will have to be low from here on out (there’s no way the global economy will double by 2060 and then double again by 2100; not even the Chinese and Indian booms together could get us growing like that, nor do I think Africa alone could, either). That’s something that fixing up a few dilapidated subway stations won’t change–eventually, the gains will slow as we’ll run out of infrastructure to repair.

        The reality is the urbanization and industrialization are the lifeblood of capitalism, and without those two processes happening on a major scale, growth is low (just as it was during the 17th century). The only thing that will get us growing again is a major world war that blows up buildings and infrastructure everywhere, just like World War II did.

  6. BillC

    The article does not emphasize the factor that should (but surely will not) mitigate the extent to which the EU requires bail-ins by depositors and retail bondholders: the Italian banks’ problem is non-performing loans substantially attributable to the austerity imposed by the EU’s [non]growth and [non]stability pact. (Of course there’s also the factor of bank managers’ favoritism to political allies and back-scratching among the local elites. While that’s a key factor with MPS and some of the four already-partially-rescued smaller regional banks, it’s not the main cause of the Italian banking crisis).

    Why should this be significant? Because some Italian political party (5 Stelle? Fratelli d’Italia? Lega Nord?) may be able to clearly and simply enunciate the case that (1) EU austerity is the direct result of other nations’ (Spain, UK, Germany, US, …) banks’ irresponsible speculation in derivatives and the like but (2) Italian banks did not participate in that speculative orgy; they were just fulfilling their proper mission of financing local, regional, and national enterprises and (3) much of the Italian middle class will be ruined by EU-required bail-ins. If the voting public understands this causal chain, I think Italians’ conservative tendency to thus far stick with the EU and the Euro no matter what might be reversed overnight — and high time, too.

    1. Stein

      I’m sorry; but for the current problems, the Italians have nobody to blame but themselves.
      1/ Their system did not allow them to fix their banks in time. The financial crisis was in 2008. It’s almost TEN years after and they still haven’t fixed their non-performing loans. The US did it quite fast (thanks, Obama) and put in a new bail-in rule. The EU took their time, but eventually did it and put in the BRRD, too. THe BRRD took years to negotiate and was not immediately implemented – so Italy could have bailed in its banks in the mean time, too.

      They did not.

      2/ The bail in would have worked like a charm in a non-fraudulent system. But Italian banks sold their subordinated bonds – fraudulently – to mom&pop investors, thus making it ill-adapted.

      3/ Italian banks did not receive non-performing loans out of nowhere. It is the Italian banks themselves that gave or bought such non-performing loans.

      So they did participate in the orgy, did not clean up afterwards for more than 10 years, fraudulently tried to cover everything up (because the subordinated bonds that are bail-in able are supposed to provide more capital to the banks), and are now going to screw the entire European Union because of this.

      I think Italian banks should be bailed in.

      But Italian bankers should be sent to jail.

      1. Stein

        Clarification: second to last paragraph should be read as “should be bailed out”. Typo (kind of important typo, though).

  7. sunny129

    What’s Shhhhhhhhh?

    They have successfully masked the Banking problems under various CREATIVE accounting with final paint job of Extend & Pretend’ No one challenged and the investors have accepted without any skepticism. Besides, they believe in the PUT by Draghi!

    1. LT

      They’ve also masked it as I’ve said before:
      They say it’s a “populist” (voter) created crisis.
      At root, it’s yet anothet gift from the financial sector.

  8. Gman

    Italy as a country, 8th richest in global terms I believe, ain’t poor, so somewhere along the line as ever, both within and without, as elsewhere in the EZ and the rest of the world, some are making hay out this debt crisis and have an interest in perpetuating it, whilst the blameless are yet again forced to endure its bitter consequences.

    1. TheCatSaid

      I wonder how Italy would fare if they left the Euro, compared to the problems discussed here in the case of Greece. Specifically, how easily could Italy be self-sufficient in food at medicines? I suspect Italy would be in a stronger position to weather any such storm, and they would have even more tourism Euro revenue in a transition period. (Assuming a messy transition period during which the conventional payment systems would be in disarray.)

      1. John

        I’ve seen Yves and NC writers argue a few times that Italy is the euro country best suited to ditch the euro. I think it’d be France though; their economy has always been more national and independent than the rest of Europe, which is why in the early years of the crisis, things weren’t nearly as bad there as they were in the PIIGS.

        Whichever country decides to do so will end up facing economic ruin as the powers that be will make sure to punish it as much as possible (just as they’ll do to the UK with the trade agreements) to make an example of it. Currency speculators will destroy the value of the new currency. And there are all of the crazy logistical and IT challenges that have been well-documented here as well.

        Of course the most interesting scenario, by far, is Germany leaving the euro. But I can’t ever seeing them be the first to do so, as they benefit too much from it.

        1. H. Alexander Ivey

          Germany leaving the euro. But I can’t ever seeing them be the first to do so, as they benefit too much from it

          That might have been Cameron’s thought about Brexit. How well did that work out?

          1. John

            Well, Cameron was an idiot for holding that referendum. And it’s also important to remember that Germans hate referendums.

  9. John

    I think that the EU and Italy will come to some sort of compromise on the bail-in law, or they will organize some sort of private sector rescue. And if not, I don’t think Italians are quite ready to ditch the euro, even if a lot of folks lose money on the bail-in. Also, Beppe Grillo is not allowed to run for public office because of that manslaughter charge. We’ll see more of the status quo, at least for a few more years.

  10. RBHoughton

    “…. the more serious the crisis gets, the less we hear about it” Isn’t that always the case with our ‘keep it under your hat’ media – information is money. For the money reporter its “What am I bid for an early chance to avoid loss?” For the politician hoping for a trouble-free life its “Don’t excite the natives you know how irritable they can get!”

    Don Quijones, Wolf Street and Naked Capitalism have done us all a great favor yet again. The level of money inflation is accelerating everywhere.

  11. Stein

    I was left under the impression that naked capitalism endorses the bail out of Italian banks. Has that changed?

  12. Ignim Brites

    Why are NPLs important in determining the solvency of a bank? Certainly, the bank doesn’t have to pay to keep them on their books. So they are neither an asset or a liability. All that is relevant are performing loans, i.e. income, to liabilities. Now, it is certainly probable that banks have taken on liabilities in the expectation that what are now NPLs would be performing. And that is the core of the problem. But the measurement of the extent of the problem is simply income, future and current, based on performing assets vs liabilities, future and current.

Comments are closed.