Cantillon: Difficult times ahead for Italian banking sector

“At least it’s not us this time.” That was the blunt assessment by one Irish official, as speculation swirls about the difficulties facing the Italian banking system. Controversy will continue for years about the cost of restructuring our banking system – a job still far from finished.

But at least Ireland is now some way down the road; Italy’s banks, however, face pressing problems.

Some of its banks, weighed down by bad loans and low profitability, need capital. In the spotlight is the famous old bank, Monte dei Paschi di Siena, but others, including Unicredit, are also estimated by analysts to need new capital.

With €300 billion-plus in bad loans not adequately provided for, a slow-growing Italian economy and too many branches, the outlook is not good.

Shares in Italian banks have lost ground very sharply since the Brexit vote – in tandem with bank shares across Europe – losing around one third of their value. Brexit emphasised that the super-low interest rate environment in which banks struggle to make profit is set to continue.

And, as often happens when the financial system gets a shock, Brexit has also caused the markets to focus on areas of risk – and the Italian banking system is one of them.

Ironically, while Ireland wanted to burn bondholders but failed to get EU approval, now the argument is in reverse. The Italian government wants to use public funds to recapitalise the banking system, but the euro zone finance ministers want to use new rules which would impose losses on bondholders – and potentially savers – as part of a recapitalisation process.

Up to half of the €60 billion in subordinated debt in Italian banks is owned by retail investors, who were sold bonds as part of savings products. So tens of thousands of Italians could be in the firing line, a crunch issue for the Renzi government.

The issue is likely to come to a head at the end of the month when ECB regulatory stress tests of the Italian banks are likely to confirm a capital hole.

The question is whether a political compromise can be reached in time.