Italian Corporate Bail Out Rescue Plan

The Italian Government has initiated a bail out rescue plan worth €3.6 billion to save four troubled small and medium sized local banks from winding up before the new EU rules takes force in 2016.

The resolutions were reached after the country’s cabinet approved a decree law which entails procedural measures in regard to managing banks crisis. The affected four banks are Banka delle Marche, Cassa di Risparmio di Ferrara, Banka Popolare dell’Etruria e del Lazio and Cassa de Risparmio della Provincia di Chieti SPA, which are currently under special administration. The banks have a market share of about 1% of the system-wide deposits, as reported by the Bank of Italy.

According to the approved resolutions by Matteo Renzi’s Government, the Bank of Italy, which is the resolution authority, has a mandate to set up one of the banks that will take up all the bad debts including the non-performing assets and liabilities for all the other banks. The bank will undertake the deteriorated loans which have a nominal value of €8.5 billion but have been written down to €1.5 billion.

Four good banks, which will be headed by Roberto Nicastro, the former Director General of Unicredit, will also be formed. They will take care of the distributed healthy assets and liabilities of the four banks under special administration until buyers for the good banks are found.

The plan is aimed at selling the good banks in the near future to the highest bidder to enable the investors in the resolution fund to recover some of their investments. The National Resolution Fund and three Italian major banks will provide the initial liquidity. The operations are already underway and the banks include Banca Intesa Sanpaolo, Unicredit and UBI Banca.

The capital raised is aimed at recapitalizing the four good banks, and it is expected to raise the four banks’ capital to about 9% of the banks risk weighted assets. The expected annual contribution is about €600 million

The plans have been reached after long periods of putting measures in place that could put the four banks on a recovery path. The Italian authorities tried replacing the management and even recapitalizing the banks with the aim of making them more profitable.

The Bank of Italy and the Italian Government have resorted to apply the newly approved European rules in resolving the banks crisis which had been adversely affected by the rising bad loans and lack of sufficient capital to help in absorbing the losses.

The bank of Italy who is charged with overseeing the four banks resolution, said the request of the Bank Recovery and Resolution Directive, has been initiated as the shareholders and bondholders have already partially shouldered the losses of their four lenders.

The move to rescue the small banks have however raised concerns with the authorities that it could scare away small savers from the key source of funding for the Italian lenders, a move that can potentially trigger bank runs.

27/11/2015