Wolf Richter: Two Italian Zombie Banks Toppled Friday Night

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

ECB shuts down Veneto Banca and Banca Popolare di Vicenza.

When banks fail and regulators decide to liquidate them, it happens on Friday evening so that there is a weekend to clean up the mess. And this is what happened in Italy – with two banks!

It’s over for the two banks that have been prominent zombies in the Italian banking crisis: Veneto Banca and Banca Popolare di Vicenza, in northeastern Italy.

The banks have combined assets of €60 billion, a good part of which are toxic and no one wanted to touch them. They already received a bailout but more would have been required, and given the uncertainty and the messiness of their books, nothing was forthcoming, and the ECB which regulates them lost its patience.

In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be wound up because they “were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.”

“Failing or likely to fail” is the key phrase that banking supervisors use for banks that “should be put in resolution or wound up under normal insolvency proceedings,” the statement said. This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation. The ECB explained:

The ECB had given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward.

Consequently, the ECB deemed that both banks were failing or likely to fail and duly informed the Single Resolution Board (SRB), which concluded that the conditions for a resolution action in relation to the two banks had not been met. The banks will be wound up under Italian insolvency procedures.

And the ECB provides a little history of its failed efforts to put these banks on the right track:

ECB Banking Supervision has closely monitored the two banks since capital shortfalls were identified by the comprehensive assessment in 2014. Since then, the two banks have struggled to overcome high levels of non-performing loans and underlying challenges to their business models, which resulted in further deterioration of their financial position.

In 2016, the Atlante fund [Italy’s government-sponsored “bad bank” set up in Luxembourg to take toxic assets off Italian banks books] invested approximately €3.5 billion in Veneto Banca and Banca Popolare di Vicenza. However, the financial position of the two banks deteriorated further in 2017.

The ECB had therefore asked the banks to provide a capital plan to ensure compliance with capital requirements. Both banks presented business plans which were deemed not to be credible by the ECB.

So nothing worked. Private sector money stayed away in droves. JP Morgan, which had been recruited to save the Italian banks, threw in the towel. These banks had been zombies for too long. Everybody knew it. But the government kept denying it.

Just weeks ago, Italy’s Minister of Economy Pier Carlo Padoan insisted that the two banks would not be wound down. Last year, to dispel the mountain of evidence to the contrary, he insisted that that there would be no need of any future bail outs; and that, furthermore, Italy did not even have a banking problem.

In early June, the two banks were instructed by the European Commission to raise an additional €1.25 billion in private capital. No one bit. Italy’s government then tried to persuade the European Commission and the ECB to water down the requirement to €600-800 million, and it urged Italian banks to chip in to the bank rescue fund.

All that failed. So this weekend, the Italian government gets to sit down together for a friendly chat to enact the necessary measures to protect depositors and senior bondholders in those two banks. Stockholders will be crushed. Junior bondholders will likely get slammed hard. And the Italian taxpayer might face some additional pain – all of it caused by many years of terrible and reckless bank management. The saga of the long-festering banking crisis has thus moved on to the next chapter.

A new era has begun in Europe. And it started in Spain. Many Banco Popular investors were wiped out. Taxpayers are off the hook. Read…  “Bail-In” Era for Europe’s Banking Crisis Begins

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  1. OpenThePodBayDoorsHAL

    They materialize money from nothing to lend to an enterprise; and then are allowed to accept funds on deposit against 10% of the cash from the materialized money loan as collateral. And people are surprised when the scheme falls apart?

    1. Mael Colium

      A correct assessment of the manner in which banks create currency from thin air. Of course the problem in the EU is that the currency they create is not one their sovereign issues, so it all ends up in tears.

  2. Hans Suter

    “caused by many years of terrible and reckless bank management” sure, but why should banks do well when GDP per capita goes from 40 000 $ in 2008 to 29 000 $ in 2015 ?

    1. ambrit

      Sorry Mr. Suter, but this idea of yours’, “…why should banks do well when…” ignores the basic design of Neo-liberal economics: “All for me and none for thee.”
      That this is happening in Italy, and otherwhere in the European Experimental Zone, is a testament to the insidious influence of the Technocrats and Meritocrats. Wasn’t Mussolini executed by Italian Communists? Imagine what he might have salvaged of his crumbled career if the “Western” Allies had gotten their hands on him first. He would have fit right in with the “Paperclip” crowd.

  3. EndOfTheWorld

    The Italian bankers are all laid-back in accordance with their old adage “c’est la vie.” No, wait—wrong lingo. Maybe it’s “que sera’ sera’.” No, wrong again. But I’m sure there is an equivalent expression in the Eye-tal lingo.

  4. Mael Colium

    The endemic monetary union dilemma of States giving away their monetary sovereignity. They should just get on and do an Italian exit and be done with it. The ECB is not a Central Bank, they are a Brussels puppet and the strings are being pulled by Germany who are enjoying the export benefit of a devalued currency brought about by the internal devaluation of the economies of Southern States. What’s not to like if you live in Berlin. You couldn’t make this stuff up. It’s starkly similar to the beginnings of the Greek fiasco where all the sovereign assets have now been plundered to benefit the global oligarchs.

    1. Scott

      I have posited that Brexit might result in the UK adopting an Industrial Service Banking System to attract European business.
      Or at least my theory is that it would be a good idea, since the flaws of Finance banking are evidence from high endemic unemployment & low wages causing general Western world unrest.
      I met Jeff Houghton once, and he said it was always government to clean things up. Or something like that.
      Much of the world is out of balance. South America has only the Drug War producing 10,000 firearms deaths a year. Drug use is a folkway in the US, and the market was altered towards Heroin when the last generation went looking for kicks.
      There truly is a struggle with evil in our world. Economic & political policies require institutions to be carried out. The Fed with its purpose of creating debt when there is no good reason for it, can go to hell far as I’m concerned.
      My model unites the insurance company for the care of core needs & business operations & the education of the people with the bank. Money is printed as related in a classical manner to human capital as determined by the insurance arm of the treasury. For my territory so far I require only national currency when in it.
      Strong government is a necessity. Things like bitcoin, will I be forced to take it for taxes?

    1. Yves Smith Post author

      In Italy, the bad loans generally are commercial loans, to medium and small business. Those dominate the Italian economy.

  5. disc_writes

    It is a pity for the money, time and energy that was wasted into keeping the banks alive, but it is good that it is now over with. Failed companies in Italy tend to suck public blood for decades and decades before they are wound down (like FIAT, Alitalia, parts of Finmeccanica, FFSS, IRI…).

    However little sympathy I may have for Brussels and Frankfurt, I am glad there is control from without Italy, and not within. This is in itself a very good argument for keeping the Euro, and I say this as a Euro-skeptic.

    Sure, taxpayers will still be on the hook for some money. But better drawing the line now, than extending the problem into infinity.

    Also, this might start the conversation about the real problem banks in Italy: MPS and UniCredit.

  6. Madmamie

    I guess I had a bad dream this morning. I distinctly heard it announced on the radio that these banks (or at least one of them) were to be bailed out.
    Fake news? In France straight out lying (oops sorry, “misspeaking”) is not yet that common in the media, especially not in the state media.

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