Just how many banks are insolvent? Turns out, a lot! But elections are coming up.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
For a country that is on the brink of a gargantuan public bailout of its toxic-loan riddled banking sector, or failing that, a full-blown financial crisis that could bring down the European financial system, things are eerily quiet in Italy these days. It’s almost as if the more serious the crisis gets, the less we hear about it — otherwise, investors and voters might get spooked. And elections are coming up.
But an article published in the financial section of Italian daily Il Sole lays out just how serious the situation has become. According to new research by Italian investment bank Mediobanca, 114 of the close to 500 banks in Italy have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves — or as American money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.”
If the TR is over 100%, the bank doesn’t have enough money “pay for all the bad stuff.” Hence, banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.
Granted, many of the banks in question are small local or regional savings banks with tens or hundreds of millions of euros in assets. These are not systemically important institutions and can be resolved without causing disturbances to the broader system. But the list also includes many of Italy’s biggest banks which certainly are systemically important to Italy, some of which have Texas Ratios of over 200%. Top of the list, predictably, is Monte dei Paschi di Siena, with €169 billion in assets and a TR of 269%.
Next up is Veneto Banca, with €33 billion in assets and a TR of 239%. This is the bank that, together with Banco Popolare di Vicenza (assets: €39 billion, TR: 210%), was supposed to have been saved last year by an intervention from government-sponsored, privately funded bank bailout fund Atlante, but which now urgently requires more public funds. Their combined assets place them seventh on the list of Italy’s largest banks.
Some experts, including the U.S. bank hired last year to save MPS, JP Morgan Chase, have warned that Popolare di Vicenza and Veneto Banca will not be eligible for a bailout since they are not regarded as systemically important enough. This prompted investors to remove funds from the banks, further exacerbating their financial woes. According to sources in Rome, the two banks’ failure would send shock waves through the wider Italian financial industry.
There are other major Italian banks with Texas Ratios well in excess of 100%. They include:
- Banco Popolare (the offspring of a merger of Banco Popolare di Verona e Novara and Banca Popolare Italiana in 2017 and then a subsequent merger with Banca Popolare di Milano on 1 January 2017): €120 billion in assets; TR: 217%.
- UBI Banca: €117 billion in assets; TR: 117%
- Banca Nazionale del Lavoro: €77 billion in assets; TR: 113%
- Banco Popolare Dell’ Emilia Romagna: €61 billion in assets; TR: 140%
- Banca Carige: €30 billion in assets; TR: 165%
- Unipol Banca: €11 billion in assets; TR: 380%
In sum, almost all of Italy’s largest banking groups, with the exception of Unicredit, Intesa Sao Paolo and Mediobanca itself, have Texas Ratios well in excess of 100%.
But, as Eisman recently pointed out, the two largest banks, Unicredit and Intesa Sanpaolo, have TRs of over 90%. As long as the other banks continue to languish in their current zombified state, they will continue to drag down the two bigger banks. And if either Unicredit or Intesa begin to wobble, the bets are off.
To stay on the right side of the solvency threshold, Unicredit has already had to raise €13 billion of new capital this year and last week it took advantage of the ECB’s latest splurge of charitable lending (formally known as TLTRO II) to borrow €24 billion of free money. But as long as the financial health of the banks all around it continues to deteriorate, staying upright is going to be a tough order.
This is where things get complicated. In order to qualify for public assistance, banks must be solvent. Presumably, that would automatically disqualify any bank with a Texas Ratio of over 150%, which includes MPS, Banco Popolare, Popolare di Vicenza, Veneto Banca, Banca Carige and Unipol Banca. The bailout must also comply with current EU regulations including the Bank Recovery and Resolution Directive of Jan 1, 2016, which specifically mandates that before public funds are injected into a bank, shareholders and creditors must be bailed in for a minimum amount of 8% of total liabilities, as famously happened in the rescue of Cyprus’ banking system in 2013.
The Italian government knows that this approach could end up wiping out retail investors (otherwise known as voters) who were missold, in many cases fraudulently, subordinated bonds by cash-hungry banks in the wake of the last crisis, in turn wiping out the government’s votes. To avoid such an outcome, the government has proposed compensating those retail bondholders with public funds, just as the Spanish government did with the holders of preferente bonds. Which, of course, is in direct contravention of EU laws.
So far, the European Commission has stayed silent on the issue, presumably in the hope that the resolution of Italy’s financial sector can be held off until at least after the French elections in late April, if not the German elections in September. Then, if those elections go Brussels’ way, a continent-wide taxpayer funded bailout of banks’ NPLs can be unleashed, as already requested by ECB Vice President Vitor Constancio and European Banking Authority President Andrea Enria.
With no guarantee that Italy’s NPL-infested banks can hold out that long, it’s a dangerous waiting-and-hoping game. In the meantime, shhhhhhhh… By Don Quijones.
This trend is not your friend. Read… Italy at the Grim Edge of a Global Problem
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great article!
Great article. Clear, focused, with zero noise or pretense.
In a simple language, easy to understand. Thanks.
How about some fake news just before the elections to bring people’s attention about what’s really happening behind the scenes
The game is afoot – which happens first:
French elections
German elections
Banks start openly failing in Italy
Or… Something in Greece, Portugal gives way first?
Don, Whatever happened to the recently jailed Spanish bankers which you reported on earlier this year? Did they stay in the big house or have they been let out?
Unfortunately yet predictably, North, they never quite made it to the big house. As I reported in the article below, they were given their get-out-of-jail-free cards before they even got to jail. Seems that senior bankers can get sentenced to jail in Spain, they just never get sent there:
https://riggedgame.blog/2017/02/28/former-imf-chief-just-got-his-get-out-of-jail-free-card/
Come si fa a tradurre “Creditanstalt?” (Don’t blame me if google translate got it wrong!)
Istituto di credito??
Name of an Rothschild Austrian bank founded in 1855. https://en.wikipedia.org/wiki/Creditanstalt Habsburg state lender of choice and later a major credit provider for large projects until finally sold off and the name changed when its German holder was sold to Unicredit in 2008. So, “Istituto di Credito” could be a faithful Italian description.
“if those elections go Brussels’ way”.. big IF there
Wolf I think the mafiosi at the ECB, along with the Eu commision, is praying for Red Red Green in Germany.
If they dont get it. I would expect another EU comission ECB manufactured crisis (probably in greece) under which they will bury the illegal state aid to Italys bank’s with some special Eu commission/ECB measure.
The contagion both Banking and Economic, from italy, when it brakes, will be very difficult to control, and must travel far outside the EZ.
So the ECB EU commission reasoning will be.
Dont let it brake.
That’s when laws become irrelevant, just as in china, where the political consideration’s of those holding power, top law, every time…
“… to borrow €24 billion of free money” Is it actually free – I mean is the interest 0%? Googling shows that the loan is for 4 years.
…. er yes it is. “The interest rate applied to TLTRO II will be fixed for each operation at the rate applied in the main refinancing operations (MROs) prevailing at the time of allotment.” and the MRO has been 0% since 16th March 2016.
Yes, the interest is at the most 0% and can dip into the negative under certain conditions … so that would be better than “free.”
sweden had minus 0.5% interestrate last 2 years to bolster inflation,,,nothing happened with inflation.
Nouriel Roubini said “There’s not enough money in the world to save the Italian banking system” and i tend to agree with him.
Over thrirty years have passed, so very few in Italy remember the demise of Banco Ambrosiano in 1982, following the death of its CEO, Pietro Calvi, in London.
While Ambrosiano was suspected of having some financial issues, nobody could have imagined the bank was sitting on a colossal black hole worth 1,200 billion lire (in 1982 money).
The bank was taken over, debts and all, by a consortium of eight banks (three State-owned and five private ones) which sank a further 600 billion lire into the “new” Ambrosiano by the end of 1983.
Further investigations turned out the Ambrosiano had already gone close to an early death twice before but both times it had been saved by emergency (and “off the book”) cash transfusions from BNL (a State-owned bank) and ENEL (the State-owned electric company). Intriguingly these stealth bailouts happened in New York and were paid in US dollars.
Those €360 billion are just the tip of the iceberg, what Italian banks have chosen to make public. Don’t be fooled by the no piece staged in Rome, Frankfurt, Berlin and Brussels: the Italian government, the EU, the Germans and the ECB know fully well how bad the situation truly is, they are just playing their part in the script.
They also know fully well that Roubini is absolutely right: the Italian banking system is beyond salvation. The only things that can be done are postponing the inevitable and making the demise of many banks as painless as possible, still a gargantuan task even for a central bank with as few scruples as the ECB.
The Italian banking system shares some similitudes with China’s and Sweden’s in that it’s expected to fuel “growth” no matter what. All the phony growth Italy experienced over the past fifteen years was fueled by banks lending with complete abandon, with the government’s and the EU’s tacit approval. Again: don’t be fooled.
Just like the German government and the EU mandarins knew perfectly well Greece’s GDP growth (higher than China’s in the same time frame!) was a Potemkin Village waiting to blow up, they knew perfectly well what Italian banks were doing. And are still doing.
I tend to agree.
It just like the ECB with MDP every-time they are due to make a report on the final figures they postpone.
As they keep on finding halls full of rugs with mountains of NPL’S under them
Thanks for reminding me of Banco Amrosiano in the historic era on which the page has been turned. Although, you do not need to give it a Nouriel Roubini stamp to give the argument a greater credibility.
Thanks for a fascinating story! I remember the Calvi affair. He was found dangling (by the neck) from a bridge in London, I forget which one. It was felt that the Vatican was involved. No, I don’t know why.
Blackfriars Bridge.
Symbolic apparently.
I checked Wikipedia: “At 7:30 am on Friday, 18 June 1982, a postal clerk was crossing Blackfriars Bridge and noticed his body hanging from scaffolding beneath Blackfriars Bridge on the edge of the financial district of London. Calvi’s clothing was stuffed with bricks, and he was carrying around $15,000 worth of cash in three different currencies”
Black friars bridge is, The BRIDGE OF/BY THE DOMINICAN FRIARS.
It is possible he committed suicide but highly unlikely he would do it there with his clothing stuffed full of bricks.
The symbolism was all very Davinci code, old Catholic/Mafiosi.
The Vatican and various Mafia groups lost a lot of money, in the associated banking collapse.
And of course with our wonderful “democratic” system, once the elections are safely over the politicians can ignore the voters completely for another few years.
Italian bankcrisis is more than 10 times bigger problem than greece, And you saw the big issue about greece every time they were bailed out…you can imagine what will happen with Italys problem.
EU can just hope nothing happen before french election bec. most of the loans has been giving from french banks,,,,,,,,
the first big crisis was the S L Crisis, and meanwhile, if memory does not betray me, some 6’000 small US banks do not exist anymore