Renzi’s short-term fix to the banking challenge in Italy

dbacd017-1709-4c94-8e6b-15e770bbb1fcItaly’s decision to issue guarantees to assist banks in selling their portfolios of bad loans shows the political limits of bail-in, a regulatory tool intended to transfer the risks of banking from taxpayers to the creditors and shareholders of banks, argues the FT’s editorial.

“Italy’s financial system produces too many bankers and not enough credit, Matteo Renzi has long argued. The deal the Italian prime minister has reached this week with the European Commission, over government guarantees to assist banks in selling their portfolios of bad loans, while far from perfect, could eventually help to address both problems. However, even if this helps to calm markets and defuse acombustible political situation, it will be no substitute for broader reforms to a fragmented and inefficient sector.”

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Novo Banco’s selective bail-in a test to the EU’s new resolution regime

b34ac93a-e64b-4881-9c68-a7f053f0d039.imgBank of Portugal’s selective transfer of bonds from Novo Banco back to Banco Espírito Santo is the first test to the “no creditor worse off” rule under EU’s new bank recovery and resolution regime. It remains to be seen whether this measure was a one-off now that the Single Resolution Board has taken over from national resolution authorities.

“Portugal’s central bank has offered to partly compensate Novo Banco bondholders who lost money when their securities were transferred to a “bad bank” last month in a bid to ease tensions with the government and furious international investors.”

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Novo Banco: picking losers

Investors should price in the risk that EU authorities may exclude from bail-in bondholders of the same class, the Financial Times’ Lex column argues.

“Banks in urgent need of capital have no easy options. State bailouts sow moral hazard and raising equity or selling assets is hard, particularly at a moment of public weakness such as the aftermath of a failed stress test. The fashion now is for bondholders to step up and absorb losses, almost as if they owned equity. Fairness and prudence require that losses be dispersed evenly across all bondholders — so the hit is painful to all, but lethal to none.”

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Investors cry foul over bank bail-ins

New EU bail-in rules spread fear among large depositors and senior bondholders, the FT reports.

40107a74-07b0-4bde-8886-8ed32c4e623c“In both the Greek and Italian cases, banks were rushed into recapitalising before the new EU regime came into force on January 1, which could have meant losses for large depositors. When depositors have been bailed in before — such as in Cyprus three years ago — it has caused public fury and economic instability.

However, it is the Portuguese situation that has most upset investors. The central bank chose five senior bond issues out of a total of 52 to move from Novo Banco to the “bad bank” it set up to hold its toxic assets after a bailout in mid-2014.”

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Bank rescues: putting bondholders on the hook

From bail-out to bail-in: Will the Single Resolution Mechanism set a new paradigm? The Financial Times reports.

1f8fc88f-8476-4007-a6ff-ab294868608aEurope’s new system, which puts bank bondholders rather than taxpayers on the hook for losses, has been cemented with the creation of the Single Resolution Board. Within the eurozone, much of the responsibility for preventing any backsliding in the application of the new standards will fall to Elke König, the 61-year-old former head of Germany’s financial regulator BaFin, and the first chief of the SRB.

It is a crucial element in Europe’s three-pillar “banking union” construct, which also spans eurozone regulatory supervision and deposit guarantees. The implications are vast but the big question is: will it work?”

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