“We will use all the tools available to support the banking system.” Bank of Italy Governor Ignazio Visco was very explicit about Italy’s latest bank rescue plan in an interview European Central Bank Forum in Sintra, where the official speakers went to great lengths to avoid the discussion of Brexit and its market consequences -- while central bankers and economists in the corridors talked about nothing else.
Visco called Brexit an “epoch-making event” but argued that we must avoid at all costs “turning it into a systemic crisis through the fluctuations of the financial markets. The volatility is greatly increased and there are risks of contagion.”
The markets, which initially suffered a widespread collapse, then focused their attention on Italian banks, which may have more to lose than rivals from a situation of instability and the slow growth which hurts profitability. Yesterday there was a rebound in markets, but financial authorities are careful not to say markets are stabilizing.
“We must create a safety net when faced with an epochal event like this,” Visco said in the interview.
“We are not talking about any possible figure (to recapitalize banks),” said Visco. “ I confirm what Economy Minister Pier Carlo Padoan has said. We do not know if and when these measures will be necessary. Instead, we need to clarify the valuation of impaired loans, the NPLs. The aggregate figures include amounts that already were written down by banks with the necessary provisions. Others are covered by guarantees, others are in the hands of banks that have no problem of digesting them.”
What is important to clarify, according to Visco, is that “there are measures to strengthen the banking system and that the problems it faces. Brexit is a strong shock, we must prevent it from turning into a systemic crisis.”
One of the figures circulated in recent days is the gross amount of €340 billion non- performing loans Italian banks. Considering provisions, however, it drops to about €200 billion, of which only about €80 billion to €90 billion are non performing, according to technical evaluations.
The guarantees and the amounts in the hands of the strongest banks must be taken into account. In addition, according to industry sources, any intervention should be only to cover any senior tranches of securitizations made with non-performing loans. The amounts are much lower than those circulated.
Brexit naturally shortens any timeframe, but the Italian authorities are discussing a menu of options that should be accepted by the European Commission. EU rules forbid governments from using state funds to shore up troubled banks. These rules can be suspended in the event of systemic risk.
The discussion at European level is not easy, as we’ve seen in recent months, but at this point a clause of systemic risk and financial instability could be triggered.
Europe will probably have to consider that after Brexit, another wave of instability hitting the banking system would risk a further shock to all European markets.
Participants in the ECB Forum on Central Banking at Sintra, who prefer not to be named because of the sensitivity of the situation, argue that while the market spotlight on Italian banks, because of the weight of the NPL, the European banking system has other “elephants in the room” such as Deutsche Bank, with its unresolved issue of derivative products where the situation worsens in a low interest rate environment.
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