Exclusive: EU in stronger position to tackle Italy after Spain bank rescue

By Francesco Guarascio and Stefano Bernabei

BRUSSELS/ROME European Union regulators believe their rescue of Spanish lender Banco Popular (POP.MC) has strengthened the case for intervening in Italy’s two weakest lenders, but expect it will be harder to use the same approach, a senior EU official said on Wednesday.

EU regulators arranged for Spain’s biggest bank, Santander (SAN.MC), to take over Banco Popular, but only after wiping out the investments of the troubled lender’s shareholders and junior creditors — a move welcomed by financial markets which saw it as a possible template for other EU banking crises.

Italy is struggling to resolve a crisis inside two regional banks, Banca Popolare di Vicenza and Veneto Banca, which are in an even weaker position in terms of capital than Banco Popular, according to the EU official who declined to identified.

Unlike Banco Popular, however, the official said the two Veneto banks lack a willing buyer like Santander.

Without a buyer, the banks, which face a combined capital shortfall of 6.4 billion euros ($7.2 billion), run the risk that regulators would wind them down and impose losses on senior creditors and large depositors — which Banco Popular avoided.

The Italian government is opposed to such a solution and will explore every alternative option, the official said.

Financial markets, too, could react badly if senior creditors were to be hit in Italy. The two Veneto banks declined to comment.

Italy is home to the euro zone’s fourth-largest banking industry, which holds a third of the bloc’s total bad debts. However, both regulators and Rome have so far shown less willingness to take swift, decisive action there.

Apart from the Veneto banks, which have been in crisis for two and a half years, Italy has also been propping up its fourth-largest lender, Monte dei Paschi di Siena (BMPS.MI). The EU last week gave a preliminary green light to a state bailout of the world’s oldest lender after months of negotiations.


The EU official said the “relatively successful” resolution of Banco Popular could in principle strengthen the case for winding down the two Veneto banks.

“The resolution did not trigger negative reactions in the market because of the intervention of a solid bank,” the official added, noting that losses had been limited to ordinary shareholders and junior bondholders.

“In Italy it is difficult to find buyers and the two (Veneto) banks are in worse solvency conditions. Popular went bust because of liquidity problems, not solvency.”

A second source familiar with the two Veneto banks’ situation said Italy cannot take much longer to resolve their worsening crisis.

“The longer you wait, the smaller the chances of success,” the source said.

“Spain has delivered a colossal lesson – a solution in a few days, within ECB rules and with a united banking sector stepping in.”

The banks have already been bailed out last year by a special banking-rescue fund orchestrated by Rome and financed by dozens of private investors, including Italy’s healthier banks.

They have requested state aid like Monte dei Paschi, but negotiations have been trickier with Brussels, which has demanded an injection of additional private capital before any taxpayer money can be used.

The two lenders have collectively lost 7.5 billion euros in direct funding in 2016 and are still bleeding deposits but continue to operate thanks to government-guaranteed liquidity. The EU has agreed that Rome can step in to provide capital as well, but it first requires that private investors stump another 1 billion euros.

No bank has shown a willingness to invest more money in the two Veneto banks. Heavyweights Intesa SanPaolo (ISP.MI) and UniCredit (CRDI.MI) are the only two Italian lenders with a size that would allow them to take on a Veneto bank.

However, Intesa has pointedly ruled out investing any more money in the two lenders and has always said it does not want to grow its domestic market share any further. UniCredit, meanwhile, has just completed a 13 billion euro share issue to clean up its balance sheet.

(writing by Silvia Aloisi, editing by Mark Bendeich and Susan Fenton)

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