Italy Guns For Glass-Steagall-Type Law to Break Up Banks, Cut Bailout Costs for Taxpayers

By Don Quijones of Spain, Mexico, and the UK, and an editor at Wolf Street. Originally published at Wolf Street

On Friday, Italy’s coalition government unveiled new banking regulationsthat it hopes to pass in the coming months, including a rule that would separate banks’ commercial and investment arms. It would be the Italian equivalent of the Glass-Steagall Act, the 1933 U.S. law that separated commercial banks that took deposits, made loans, and processed transaction, from riskier investment banking activities. The law was designed to protect deposits. Its repeal in 1999 led to the consolidation of the U.S. banking sector, unfettered risk-taking by deposit-taking banks, and arguably the Financial Crisis just eight years later.

In Italy investment and commercial banks have been able to operate in unison since 1993, but that could all change if this new law is passed. Breaking up the banks would remove a lot of the risk, such as derivatives and other speculative instruments, from Italy’s deposit-taking banks. Without these hedge-fund and investment-banking activities, large banks such as Unicredit and Intesa Saopaolo would become smaller, less interconnected and less systemically risky.

In an economy as large, chronically weak and systemically risky as Italy’s, that would be no bad thing. The country has already experienced a string of bank collapses in the last couple of years.

Less than a month ago, Italy’s populist government, in its eighth month in power, held its nose, ate its words, and agreed to bail out mid-sized Banca Carige with public funds, adopting virtually the exact same playbook it had criticized its predecessor for using in the previous three bank resolutions.

If the government needs to pour capital into Carige it will take full control of the lender, Deputy Prime Minister Di Maio told parliament’s lower house on Friday. Di Maio, who is also industry and labor minister, said that after its precautionary capitalization, Carige, with the State’s help, “will become a bank for citizens”. In other words, it will be a full-blown bank nationalization, which both the European Commission and the ECB are likely to oppose.

The Italian government is already the majority owner of the perennially troubled Tuscan bank Monte dei Paschi di Siena (MPS) following the Gentiloni administration’s controversial bailout of the lender in 2017. Despite having billions of euros of public funds poured onto its balance sheet, and many of its worst assets taken off its books, the 547-year-old bank is still not nearly out of the woods.

A couple of weeks ago, its shares, which have lost almost three-quarters of their value since being relaunched in October 2017, were halted after plunging on news that the ECB had cautioned the lender about potential funding and profitability risks it faced as well as its weakened capital position. The central bank also told MPS to boost provisions against bad loans in the coming years. Even following a record €24 billion sale of bad loans, MPS’ soured loans are still equivalent to almost a fifth of its total lending.

Italy’s banking sector as a whole holds the largest stock of non-performing loans (NPLs) in the EU. The total gross stock of NPLs decreased by approximately €50 billion during the first six months of €238 billion thanks to a combination of direct sales and securitizations backed by the GACS (Garanzia Cartolarizzazione Sofferenze) Government Guarantee Scheme, according to the credit ratings agency DRBS. Italy’s gross NPL ratio is now down to 12.5% from a mind-boggling peak of 18.2% in 2015. But it’s still three times the EU average, which itself is verging on the high side.

Italy’s NPL problem could be exacerbated by the economy’s recent slowdown. Economic output as measured by GDP shrank by 0.2% in the fourth quarter, following a 0.1% drop in the third quarter, statistics agency Istat reported on Thursday, putting Italy once again in a “technical recession.” The declines are small for now, but if they pick up momentum, triggering a fresh cascade of bankruptcies, job losses, and mortgage defaults, the banks’ NPL problems would swell with renewed vigor.

This is all happening at a time that monetary conditions in the Eurozone are beginning to tighten. While the ECB’s Main Refinancing Operations Announcement Rate remains anchored at 0%, the central bank has finally ended its four-year QE program, one of the largest expansionary monetary experiments of recorded history. Since QE funds were instrumental in keeping a lid on Italian sovereign bond yields, this is bad news for both the Italian government and the Italian banks that are among the biggest holders of Italian government debt.

The ECB’s multiyear virtually-free-loans-for-banks (LTRO or TLTRO) program has also, for now, apparently run its course. ECB Chairman Mario Draghi recently said there are no plans to launch a new round of LTRO loans unless there were guarantees that such funds would translate into lower lending rates for bank customers. This is bad news for Italian banks since they were the biggest recipients of the funds, accounting for one-third of the total money issued.

It is against this backdrop that Italy’s populist government now seeks to launch its own version of the Glass Steagall act. But getting it passed and implemented is likely to be a gargantuan feat given the already parlous state of Italy’s rickety banking system — and it’s going to do nothing to alleviate the NPL problem.

The bill will face stiff opposition from the domestic banking sector as well as the European Commission, which in 2017, under pressure from Europe’s banking lobbies,abandoned its own pledge to break-up too-big-to-fail lenders.

Since the global financial crisis, big banks on both sides of the Atlantic have been fighting tooth and nail all regulatory attempts to split their deposit-taking commercial units from their riskier investment banking units. Such legislation would would make each entity smaller. And that is not in the interests of the big banks, nor the ECB, which hopes to breathe life into a new generation of trans-European super-banks by serving as matchmaker to Europe’s largest domestic lenders.

Desperate measures for desperate times? Read…  Lloyds Bank Resurrects 0%-Down Adjustable-Rate Mortgages for First-Time Buyers to Prop Up UK’s Housing Market 

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  1. Down2long

    Two years after we Angelenos voted ourselves into indebtedness dor $1.2B to build housing for the homeless, not one unit has been built. Those that are proposed are at $400k to $500k a door.

    I voted for the bond issur in the vain hope it might actually help the situation, but I also voted for it so when I go as a housing provider to city hall to speak against another punitive measure against us mom and. Pop landlords, who City Council blames for all the homelessnesa, that I can point out we have voted to tax outselves to find a solution – the ball is in your court.

    During the financial crisis a developement was built on Bonnie Brae St. With some HIUD money. HUD warned City Council that one developer associated with the project had defrauded HUD before. True to form, he mad. off with $18M. But no problem since he had seen fit to line two councilmeber’s pockets with $40k each. (The individual donation is $1k each, but they have their ways….)

    The project cost $600k a door when you could buy homes in L.A. for $250K in the crash. I went to several meetings at City Hall to beg them to buy the homes instead of fund this boondoggle, but no. So the homes got got foreclosed on, got boarded up, banks refused to maintain them, you know the story.

    So two yeara after our bond issue, no homeless housing has been built, and finally our City Accountant is auditing the finances of the measure: $360M in an account and nothing done besides developers trying to figure how to steal every penny of it.

    1. Down2Long

      This was meant for general comments, but my smartphone kept jumping around. Ah well, proves I am a luddite, which was never in doubt.

    2. Unna

      Down2Long, even though a bit off topic, thanks for this comment. Maybe the abolishment of Glass-Steagall was sort of the same thing, a giant grift for Wall Street similar to what you described for the developers. And note the weeping and gnashing of teeth at even the hint of any country anywhere attempting to reinstate a Glass-Steagall type law accompanied with the threat of maximal economic damage to that country and its citizens.

      Also a bit off topic, but I wonder, with all the talk of a Green New Deal and the obvious threat of global warming, are Western countries, whose financial establishments and politicians mostly worship at the alter of Baksheesh, even capable of efficiently and honestly implementing such a plan? Or would the Green New Deal, funded by congress and administered by contemporary governments, be nothing more than a gigantic F-35 project overseen by the same regulators who gave us the repeal of Glass-Steagall and the Great Recession?

        1. philnc

          This is why the swamp still really needs to be drained. At this point I’m pessimistic about the electoral process alone being enough. There probably need to be massive street protests, general strikes, and criminal prosecutions for fraud and bribery in such huge numbers that they would drive a lot of these robber barons into exile overseas — leaving most of their wealth behind.

      1. Bob Anderson

        Lol, Glass Steagall was there when the bubble was blowing up in 1997. You just don’t get it. You just don’t get it.

        1. Synoia

          True. Was 1997 as severe as 2007?

          Not to my recollection, and Bankers went to Jail. Thus Glass Stegall was effective.

          Got another quip?

          1. Bob Anderson

            2007 started in 1997. GS is a fatansy progressives have lived forever. Unsecured debt is the problem. One that computers and rules based deregulation stripped in the 80’s. By 1993 the damage was done.

            GS or no GS the unsecured debt was going to create problems.

        2. Hamford

          The real damage on GSA started in the late 70s. A big blow was in the 80s when commercial banks were allowed to underwrite Mortgage Backed Securities. Before the 90s, commercial banks could have 25% assets in investment functions… Long, Long before GLBA did-in GSA, the GSA’s investment-commercial bank wall became a membrane. So your comment about “1997” is akin to accusing a legless, armless guard of failing to stop a burglary.

          Start here for some background:

          Also, a foundational part of GSA stands strong today- FDIC!!! Interestingly, CATO, Brookings, etc. dont bother to mention that. GSA put safeguards in place, because if the govt was going to provide insurance to commercial banks, the speculation needed to end. Well not today – Socialize the risk, privatize the profits.

        3. m

          Glass Steagall was in place and Clinton & wrecking crew allowed banks to disregard it (?BOA), then they got rid of it. Now it can’t be put back into law w/o violating WTO regulations. Thank you Clinton crime syndicate

  2. disc_writes

    Interesting, I did not read anything about this in the Italian press nor on TV.

    Why are they doing that? If they just let the zombie banks merge and become too big too fail, they would come under the ECB umbrella who would be responsible for them. Or what am I missing?

  3. The Rev Kev

    If both the European Commission and the ECB are likely to oppose the nationalization of the Banca Carige with public funds because the Italian government will take full control of that bank, then the obvious solution is for both the European Commission and the ECB to put their hands into their own pockets and bail out the damn thing themselves.

  4. Louis Fyne

    i was thinking along the same lines….if you’re the Italian government and cynical, let the Italian banks get big. Brussels is not going to let Italy fail as then France would be the next domino.

    And the bill will be paid by zee Germans with some token help from the French.

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