Fears grow over possibility of banking crisis in Italy

It was a Saturday afternoon and Lidia stepped out of the house for a few minutes to water the flowers in the family’s garden. When she came back into the house, she found her 68-year-old husband, Luigino D’Angelo, hanging from the balustrade of the stairs leading down to the cellar.

D’Angelo had committed suicide in the family home in Civitavecchia, 70 kilometres north of Rome, essentially because he was devastated by the loss of his €100,000 life savings, invested in Banca Etruria, a small local bank. D’Angelo was one of about 130,000 small investors and local clients who lost their money when four local banks, Cassa di Risparmio di Ferrara, Banca delle Marche, CariChieti and Banca Etruria got into trouble last autumn.

The problem for D’Angelo and the others was that the bank rescue, co-ordinated by the Matteo Renzi Italian government via a €4 billion fund set up by three nationwide banks, was a “bail-in”, not a “bail-out”. In other words, Etruria bank shareholders and Etruria bank bondholders (D’Angelo had invested in subordinated bonds) and not the taxpayer had to pick up the tab.

High-risk products

D’Angelo’s suicide last November set alarm bells ringing. First, what had Banca Etruria been up to when it decided to sell inappropriate, high-risk products such as subordinated bank bonds to their regular “high street” clients, rather than to larger institutional and professional investors?

Second, and more ominously, did these small bank “best practices” reflect in any way the modus operandi of Italy’s large nationwide banks?

Third, and more political, there was the embarrassing “involvement” of Renzi’s reforms minister Maria Elena Boschi in Banca Etruria: her father, Pierluigi, had been bank vice-chairman, while her brother, Emanuele, served as head of cost management. Opposition forces, in particular the protest M5S movement, even called for a vote of no confidence – which was rejected – in Boschi because of a conflict of interest, alleging that cabinet decisions had been taken to favour her father’s bank.

First things first: the idea that problems at four of Italy’s many small, territory-linked banks means that the whole national system is beginning to shake at the knees does not at first seem logical. After all, the four banks rescued in December hold just 1 per cent of Italian bank deposits, while the total shareholder loss caused by the rescue was €790 million.

By comparison, Italian banks hold €350 billion of non-performing loans (NPLs), which is a fifth of GDP, by far the highest of the G7 countries.

‘Toxic debts’

What is certain is that the rescue of the four local banks did not make for a serene climate.

Last month when six Italian banks, including MPS and Unicredit, said the ECB had requested information as part of a review of NPLs, the announcement precipitated losses in Italian bank shares with Italy’s oldest and third largest bank, Monte Paschi di Siena, being especially hard hit.

However, Renzi, Italy’s dynamic prime minister,continues to fight the good fight. Just before Christmas, he went on television to say that Italian banks were “more solid than German banks”.

In the senate this week, on the eve of an EU summit in Brussels, he said it was time to “have the courage to say that European banks have far too many derivatives and toxic debts in their bellies”.

In a reference to Deutsche Bank, he suggested there was perhaps a “European [banking] problem”.

Italy, Renzi concluded , “has done its part” whilst it is the EU which “has not done its homework”.

Renzi’s readiness to travel to Brussels (and Berlin) not so much “cap in hand” or in a state of “psychological subjection” but rather with complaints and criticism (in relation to migration, flexibility as well as banking issues) saw him argue bitterly in the senate this week with former prime minister and European commissioner, Mario Monti. His predecessor accused him of attempting to alienate Italians from the European Union, in the process running a “big risk” for Italy.

Off the record, Italian bankers suggest it is not Renzi but rather his compatriot, European Central Bank president Mario Draghi, who provides real assurance when he says, as he did this week, that the ECB will take measures to ensure its monetary policy reaches the real economy if that appears threatened by turbulence for financial market.

State guarantees

Some economists argue that the Renzi government has done its best to restore confidence, as witnessed by a recent bill which not only regulated the administration of 4,000 local banks but which also offered state guarantees for bad loans. That legislation was in direct response to the Banca Etruria scandal, in particular to the irresponsible manner in which local banks had dished out credit on the basis of crony contacts rather than sound commercial criteria.

However, with the Italian economy still registering sluggish growth – GDP rose by just 0.1 per cent in the last quarter – and with Italy's debt-to-GDP ratio currently at 132 per cent, many would probably agree with the Financial Times which last week ominously pronounced that "Italy's debt problem is too big to ignore".