Who Gets To Pay For The Italian Banking Crisis?

By Don Quijones: Six years after Europe’s sovereign debt crisis began, the Eurozone’s third largest economy, Italy, has finally decided to do what just about every other country has done when facing a full-blown, almost out-of-control banking crisis: to set up a bad bank to hide its worst debt.
It was only a matter of time: in the last six years, Europe’s economies have been drowning in an ever-expanding vitrine of bad debt — and none more so than Italy, where non-performing loans have soared to more than 350 billion euros, a fourfold increase since the end of 2008. At 18%, Italy’s ratio of nonperforming loans is more than four times the European average (and Europe’s banks are in worse shape than America’s). It’s the equivalent of 21% of GDP in a country that boasts Europe’s second highest public debt-to-GDP ratio (130%), just behind Greece, and where the banks hold over 70% of the country’s debt.
To make matters even worse, if Brussels gets its way, Italy’s government will not be able to dip into future taxpayer funds to stop its debt-laden banks from dropping like flies. European law no longer allows that sort of thing.
Well, not really. Now, in the wake of new regulations that came into effect at the beginning of this year, collapsing banks in Europe will be “resolved” with the funds of stockholders, bondholders and other investors, including account holders with deposits of more than €100,000 euros — instead of classic bailouts that would raid directly or indirectly the taxpayers of other countries.
It might even make bank creditors realize that investing in a bank is not a risk-free venture.
That’s not to say that the bail-in approach doesn’t have its share of problems – chief among them the “super-priority” status covertly granted to derivative claims in recent international banking regulation. In other words, as the former hedge fund manager Shah Gilani warns in a Money Morning:

If your too-big-to-fail (TBTF) bank is failing because they can’t pay off derivative bets they made, and the government refuses to bail them out, under a mandate titled “Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution,” approved on Nov. 16, 2014, by the G20’s Financial Stability Board, they can take your deposited money and turn it into shares of equity capital to try and keep your TBTF bank from failing.

There’s also the niggling little fact that Europe’s banks have not yet built up the capital buffers needed to comply with the EU’s new bail-in rules.
“In an ideal state we would like to find ourselves in a situation where banks have all built their financial buffers in terms of MREL (…) but we are not there yet,” one EU official told Reuters. “It’s a challenging situation because we may be confronted with a situation when there is a (resolution) case but the buffer has not been built,” the official added.
That didn’t stop four small regional banks in Italy from being semi-bailed-in late last year, with the bulk of the losses imposed on unsecured investors, including many small-time retail clients who were conveniently “misssold” complex financial products they did not understand, just as happened to hundreds of thousands of pensioners in Spain’s multi-billion-euro preferentes scam.
Meanwhile, the race is on to get hundreds of billions of euros worth of toxic assets off the big banks’ balance sheets and into a safer place – i.e. a bad bank. As experience in Spain and Portugal has shown, setting up a bad bank serves as little more than an accounting gimmick to cloak reality. As WOLF STREET reported last year, Spain’s bad bank, Sareb, is hemorrhaging funds at a frightening rate while taxpayers are likely to be on the hook for roughly half of its decomposing assets for at least another ten years to come.
Despite all that, a new agreement has just been reached between Italy’s Finance Minister Pier Carlo Padoan and Europe’s Competition Commissioner Margrethe Vestager that will establish a new bad bank in which to bury, mafia-style, some of Italy’s most toxic financial waste.
“We believe that a measure to create a market for non-performing loans would be useful, but if it is done, it has to be done right away,” said a shrill sounding Giovanni Sabatini, director-general of the Italian Banking Association.
There’s good reason for the haste: since the year began, the shares of Italian Banks are down on average by more than 20%, and shares of Monte dei Paschi di Siena, the country’s oldest and third-largest lender, plunged more than 50%, before recovering gingerly toward the end of last week. The bank’s NPLs are estimated at nearly 100% of its tangible equity (a sentence that bears re-reading).
Bankers say concerns about new bail-in rules, which came into force on January 1, are only adding to market jitters. “It is a perfect storm for Monte dei Paschi,” one senior banker told the Financial Times.
By applying the bail-in model across the board at a time that most banks do not even have the required capital buffers in place, Europe’s new financial regulations could end up producing the exact outcome they were supposedly designed to avoid. By imposing losses on creditors of a failing bank, the authorities could end up unleashing the mother of all bank runs as depositors and creditors across the land finally cotton on to the fact that their savings and investments might no longer get bailed out by unwitting taxpayers in other countries! 

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