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EU says Veneto banks must raise €1 bn in private capital as part of state rescue

by Marco Ferrando and Luca Davi

The stakes forthe rescue of Veneto Banca and Banca Popolare Vicentina just got higher: the European Commission has asked for €1 billion in private investment to grant the green light for a €6.4 billion state-backed rescue of the struggling regional lenders.

The problem is that the €1 billion will have to come from the private sector, and not from the €20 billion earmarked by state’s precautionary recapitalization fund.

The news, initially reported by Reuters, has been confirmed by sources close to the ongoing negotiations between the two banks, the Treasury and the European Commission consulted by Il Sole 24 Ore-ItalyEurope24, which can also provide new details.

EU Competition Commissioner Margrethe Vestager said in an interview with La Stampa the talks on the rescue for the two banks were “not so far” along, and sources now say that the last few days have radically changed the scheme of the €6.4 billion plan: the total amount should remain the same, but the private contribution --currently equal to €940 million of the advance paid by the Atlante rescue fund in December plus €700 million resulting from the conversion of subordinated bonds, has risen by another €1 billion.

At the same time, the contribution from the state should fall from €4.7 billion to €3.7 billion.

This is because during the recent phases of the negotiations the valuation of the €18.7 billion non-performing loan portfolios of the two banks was updated. Gross non-performing loans amount to €9.6 billion, and 62.2% of that value has have already been written down by Popolare di Vicenza and 59.4% by Veneto Banca.

So the banks have made a clean up, but values are still above the market average, so heavy write-downs will be needed when they are sold.

To cover the losses, according to the Bank Recovery and Resolution Directive (BRRD) rules strictly applied by Directorate General for Competition (Dg Comp), the two banks will only be allowed to use resources that don’t come from the state. There are €3.9 billion of net assets and €940 million from Atlante; but based on the considerably lower ratings of the NPLs in recent days, these funds will be insufficient.

Hence, the need for €1 billion from private investors. And if the money does not materialize, the worst-case scenario includes a resolution for one or both banks.

But who could invest this amount? In this respect, the Dg Comp is not particularly fussy: any investor would do. In theory, therefore, the two banks might also be able to raise the funds from additional asset sales. But that’s a theoretical hypothesis, however: everything that has market value is already formally for sale.

The alternative, therefore, is the entry of new outside investors -- namely, the healthiest banks in the sector which are the most interested in the stability of the financial system.

When word got out about the new demands from Brussels, the Treasury and the Bank of Italy sent out informal feelers to the top Italian banks. The answers are said to not all have been positive.

It’s hard to see the Atlante fund getting more involved, because it is already stretched by its commitment to Monte dei Paschi di Siena, the securitizations by the Veneto banks, and the Emilia savings bank sale to Cariparma.

There has been some talk about involving the Voluntary Intervention Scheme (FITD ), but at this stage that possibility looks remote.