By the end of February this year, it was clear that the Italian authorities had no other option left than to pursue a “precautionary recapitalisation” of the two lenders. This procedure requires, under the new set of European rules, that shareholders take the first hit in covering capital shortfalls, followed by junior bondholders. If the capital cushion remains inadequate post-junior bondholders bail in, the new system allows for a simultaneous bailing in of senior bondholders and provision of taxpayers supports. The Italian authorities decided to deploy only the first step, of bailing in shareholders. Which proved insufficient not only in terms of covering future capital losses, but even in covering existent losses at the time.
Which marks the fourth “plus ça change” moment for the EU reforms: as in the case of all peripheral Euro area countries heading into their respective bailouts, the system of risk warnings have failed the public, the policymakers and the regulators. In not a single European bailout of 2008-2013 did the supervisory and regulatory authorities pro-actively spotted the developing risks. And the reforms post-crisis did not change this inherent, systemic incapacity to assess risks either. It is worth noting that SRB decision to declare Banca Popolare di Vicenza and Veneto Banca non-systemic was based on the lenders holding assets of €28 billion and €35 billion, respectively, at the time of the bailout. Alas, the main reason why the two banks fell below the SRB thresholds for designating a bank as systemically important was that the SRB delayed issuing its decision until the crisis hit banks have bled enough assets to slip under the SRB thresholds. Whether incompetence, or worse, intent were behind this outrun of events is the moot point. The SRB and SSM pillars of the Euro area banking reforms has failed once again. “Plus ça change” moment number five is that after reforming the system of banks supervision, the Euro area still ended up with a situation, where extend-and-pretend measures were deployed to superficially conceal the true nature of the two banks’ insolvency, imposing unnecessary delays in resolving the problem, and, as a result, amplifying losses to the taxpayers. This is exactly what has happened during the peak of the crisis in Ireland, Spain and Greece, as well as in Cyprus.
All along, the ECB’s new Single Supervisory Mechanism (SSM) - designed as a warning system for banks solvency risks and serving as a cornerstone of the banking sector reforms - insisted that the Italian banks were solvent. Only two days before the announcement of the final taxpayersfunded bailout in June this year did the SSM acknowledge that the banks are “failing or likely to fail”. In theory, the SSM was set up back in 2015 to explicitly put some distance between the banking regulators’ and supervisors’ risk assessments and the national governments. In practice it failed. A similar failure also involved the SRB which was also set up to remove national political leaders from meddling with the decisions involved in shutting down insolvent banks. It took SRB until a day before the official banks rescue to declare the two Italian lenders to be ‘non-systemic’, de facto washing SRB’s hands of any responsibility for restructuring them.
SYSTEMIC FARCE In other words, within the 15 months span through to June 2017, all and every part of the European banking reforms package designed to create a structured system for resolving banking failures, have been found inadequate in the case of just two regional lenders. The end result of this farce was that Italian taxpayers were left on the hook, while senior banks bondholders were left whole and happy. The rules were circumvented, bent, but de sure, not broken. De facto, however, the whole policy infrastructure for addressing the banks’ insolvency was exposed as a fake facade, hiding the same old rotten building as the one that existed in the pre-2008 world. Adding insult to the already grave injury, the Italian deal used taxpayers money to directly subsidise Intesa Sanpaolo - the bank that took over performing assets from the regional banks. Inset got allots € 4.8 billion in cash for capital and operating expenses, plus €400 million in loans guarantees. In exchange for these monies, the Italian Government did not even get a single share in Intesa. Paraphrasing the old Dire Straits song, the new EU banks resolution infrastructure turned out to be “Money for nothin’ and assets for free” for Intesa.
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