begin quote from:
Italian
ones, this time. Well, one bank in particular. Monte dei Paschi di
Siena (MPS), the centuries-old bank that is drowning under a growing
pile of distressed loans. Since the private sector has now refused to
cough up enough …
Italian ones, this time. Well, one bank in particular. Monte dei Paschi di Siena (MPS),
the centuries-old bank that is drowning under a growing pile of
distressed loans. Since the private sector has now refused to cough up
enough capital to close the shortfall identified in this year’s stress tests, it is to be provided with 8.8bn euros of new equity capital, most of it by Italian taxpayers.
Not that MPS is insolvent. Dear me, no. The adverse 2018 scenario in the stress tests reduced its core Tier 1 (CET1) equity to negative 2.23%. That is, of course, insolvency. But hey, it’s just a scenario. Officially, it meets its CET1 and baseline solvency requirements. So it is solvent. Isn’t it?
It must be, because otherwise the planned bail-out would be impossible. MPS is to receive a “precautionary recapitalization”. As the European Central bank helpfully explains, the whole point of this is to avoid putting a solvent bank into resolution:
No matter. All that was needed to justify a precautionary
recapitalization was a “serious disturbance” in the Italian economy. The
Italian referendum was good enough. MPS is to be rescued. Or, more
correctly, its depositors and senior bondholders are to be rescued,
together with a fair proportion of its junior bondholders.
Politically, this is a huge relief. Putting MPS into resolution under the European Bank Resolution and Recovery Directive (BRRD) would have meant bailing in 8% of total liabilities before involving taxpayer funds. According to Silvia Merler of Bruegel, this would have meant bailing in all or nearly all of MPS’s junior debt, almost 65% of which was sold to retail investors - small savers for whom this represents part of their life savings. In a precautionary recapitalization, junior debt would still have to be bailed in, but there is potentially a way of protecting small savers:
Personally, I would rather that savers who bought subordinated debt instruments were not rescued, unless they can prove that the instruments were mis-sold. After all, they bought these instruments because they paid higher interest. Even small savers should understand that a higher interest rate means higher risk. But mine is an unpopular viewpoint: Italian politicians, mindful of an upcoming election, see things differently.
Anyway, the recapitalization procedure has already commenced, and it includes measures to protect retail investors. The ECB has confirmed that MPS meets minimum capital requirements, and has determined the amount of the capital shortfall under the adverse scenario of the relevant stress test. We thought we knew this, didn’t we? Wrong. The ECB has decided that MPS needs an additional 3.8bn euros on top of the 5bn that the private sector balked at providing – a total capital shortfall of 8.8bn euros. Part of this will come from bailing in large and institutional holdings of subordinated debt, but that still leaves a bill of about 6.6bn euros for the Italian taxpayer, of which about 2bn is compensation to retail investors.
Not that MPS is insolvent. Dear me, no. The adverse 2018 scenario in the stress tests reduced its core Tier 1 (CET1) equity to negative 2.23%. That is, of course, insolvency. But hey, it’s just a scenario. Officially, it meets its CET1 and baseline solvency requirements. So it is solvent. Isn’t it?
It must be, because otherwise the planned bail-out would be impossible. MPS is to receive a “precautionary recapitalization”. As the European Central bank helpfully explains, the whole point of this is to avoid putting a solvent bank into resolution:
A precautionary recapitalisation describes the injection of own funds into a solvent bank by the state when this is necessary to remedy a serious disturbance in the economy of a Member State and preserve financial stability. It is an exceptional measure that is conditional on final approval under the European Union State aid framework. It does not trigger the resolution of the bank.Now, you may well ask why, if MPS is basically solvent even though it is at risk in a stressed scenario, the private sector wouldn’t provide the necessary funds. Ostensibly, the reason is the outcome of the Italian referendum. Raised political risk after the resignation of Matteo Renzi is apparently sufficient to explain why private sector investors would not contribute 5bn euros to recapitalize a bank with a market cap of 442m euros. I suppose if you tell yourself private sector investors are stupid often enough, you might start to believe it is true. But to me, it is evident that the private sector was never going to contribute 5bn euros or anything like it.
A Picture shows the logo of Italian bank the
Monte Dei Paschi di Siena (BMPS) on December 9, 2016 in Rome. Italy's
Monte dei Paschi di Siena saw its stock tumble more than 12 percent
today over reports the ECB had denied it more time to raise the cash it
needs to avoid being wound down. TIZIANA FABI/AFP/Getty Images
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Politically, this is a huge relief. Putting MPS into resolution under the European Bank Resolution and Recovery Directive (BRRD) would have meant bailing in 8% of total liabilities before involving taxpayer funds. According to Silvia Merler of Bruegel, this would have meant bailing in all or nearly all of MPS’s junior debt, almost 65% of which was sold to retail investors - small savers for whom this represents part of their life savings. In a precautionary recapitalization, junior debt would still have to be bailed in, but there is potentially a way of protecting small savers:
Avoiding a bail-in of junior bond-holders might be possible…..This would require that (i) the Italian government obtains the green light for a precautionary recapitalisation under Article 32(4.d) of BRRD; (ii) the resulting state aid is approved under Article 107 TFEU and (iii) the “financial stability” clause in the 2013 Banking Communication is granted to suspend burden sharing of junior bondholders.Ordinary Italian taxpayers might question why they should pay to protect the savings of people richer than them. But the ability of retail savers to tug at the heart strings of politicians is remarkable. Or perhaps not so remarkable. They vote.
Personally, I would rather that savers who bought subordinated debt instruments were not rescued, unless they can prove that the instruments were mis-sold. After all, they bought these instruments because they paid higher interest. Even small savers should understand that a higher interest rate means higher risk. But mine is an unpopular viewpoint: Italian politicians, mindful of an upcoming election, see things differently.
Anyway, the recapitalization procedure has already commenced, and it includes measures to protect retail investors. The ECB has confirmed that MPS meets minimum capital requirements, and has determined the amount of the capital shortfall under the adverse scenario of the relevant stress test. We thought we knew this, didn’t we? Wrong. The ECB has decided that MPS needs an additional 3.8bn euros on top of the 5bn that the private sector balked at providing – a total capital shortfall of 8.8bn euros. Part of this will come from bailing in large and institutional holdings of subordinated debt, but that still leaves a bill of about 6.6bn euros for the Italian taxpayer, of which about 2bn is compensation to retail investors.
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