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Report on Business ECB takes control of Italy’s Banca Carige to prevent wider crisis

The Carige bank in Rome, Italy, April 16, 2016.

Stefano Rellandini/Reuters

The European Central Bank took control of a troubled Italian bank Wednesday, an unprecedented step that spotlighted the risks to the Eurozone’s financial system from political chaos in Rome and a sputtering economy.

The central bank appointed a six-person team to manage Banca Carige, a mid-size lender that serves the region around Genoa, after most of the bank’s board of directors resigned Wednesday after the collapse of efforts to raise fresh capital.

It was the first time the European Central Bank has appointed new leadership for a commercial bank since it acquired expanded powers in 2014 to supervise lenders. The question of who will buy the bank – and whether shareholders will be responsible for some of its debt – is likely to heighten tensions between the central bank and Italy’s coalition government.

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Banca Carige is the 10th-largest bank in Italy, and the action by Europe’s central bank reassured investors that the lender’s vulnerabilities would not provoke a broader crisis. “It’s not a bank large enough to cause systemic crisis,” said Lorenzo Codogno, a former chief economist at Italy’s treasury who operates LC Macro Advisors, a consultancy in London.

“But,” he added, “we have seen that even small banks can cause huge problems.”

The central bank’s intervention was absorbed with relative calm by financial markets. The Euro Stoxx Banks index fell about 2 per cent on a day when most stocks were down.

But the episode provided a glimpse of how the policies and statements of the populist government in Rome have added to the woes of Italy’s long-suffering banks, and by extension, the whole economy. Economists regard Italy as a country that could trigger the next global financial crisis.

Almost all Italian banks have been struggling since the 2008 financial crisis. Monte dei Paschi di Siena, considered the world’s oldest bank, required an 8.3 billion-euro (US$9.4 billion) rescue in 2017 after years of mismanagement, a surge in bad loans and allegations that top managers conspired to hide the bank’s financial straits.

The challenges facing the banks – and Italy’s economy – have only increased since the populist government took power in June.

Plans in Rome to reverse cuts in pensions and dole out cash to poor people undercut investors’ confidence in the government’s ability to repay the national debt. As a result, investors have demanded higher interest rates on Italian government bonds.

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The instability has been poison for Italian banks because the rates on government bonds act as a bench mark for all types of credit. Banks have had to borrow at far higher rates than banks in other European countries.

Banca Carige, which has roots going back to the time of Christopher Columbus, is paying an astronomical 16 per cent annual interest on recently issued bonds.

The risk premium on Italian bonds has fallen since last month when the government backed down in a confrontation with the European Commission over its spending plan, which would have broken EU rules on debt limits. That has eased the pressure on banks.

But the Italian economy has never fully recovered from 2008. Businesses went bankrupt then, and many borrowers lost their jobs or are earning far less.

For Banca Carige, that meant borrowers were behind in payments or not making payments at all. More than a quarter of Banca Carige’s outstanding loans are considered non-performing.

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Economists and business managers expect the economy to worsen in 2019, increasing stress on banks. A survey of purchasing managers at Italian manufacturing companies published Wednesday by IHS Markit, a research firm, showed that business conditions deteriorated in December, and “there appears little sense of optimism that the current soft patch will come to an end in the near future.”

Confidence about the future was at its lowest in six years, the survey found. “The outlook for 2019 is not encouraging,” Rosie Colthorpe, an analyst at Oxford Economics, said in a note to clients Wednesday.

At Banca Carige, temporary managers installed by the European Central Bank are expected to try to sell the institution. The bank is not considered insolvent, although it lost 189 million euros (US$215 million) during the first nine months of 2018 on revenue of 373 million euros.

Finding a buyer will be difficult. If the bank’s troubles deepen, according to European rules, the central bank would be obliged to make shareholders and creditors absorb some of the losses.

That could put the central bank at odds with the government in Rome. The coalition of far-right League and populist Five Star Movement has so far tried to defend the interests of shareholders and bondholders, who are often middle-class Italians.

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“The current government is not prepared for a full-fledged banking crisis,” Codogno said.

Banca Carige could also create political conflict in Brussels. Sven Giegold, a member of the European Parliament who speaks for the Green faction on financial issues, called for an investigation of whether earlier attempts to rescue Banca Carige violated EU rules on state aid.

Giegold said in a statement Wednesday that other Italian banks last year were strong-armed into providing Banca Carige with fresh capital, which proved to be inadequate.

“The co-ordinated rescue now looks like a waste of money by the already weakened Italian banking system,” Giegold said.

The central bank’s intervention was prompted by the resignation Wednesday of a majority of Banca Carige’s board of directors. They quit after the bank’s largest shareholders, members of the wealthy Malacalza family, declined last month to support plans to raise more capital.

The temporary administrators appointed by the central bank Wednesday include existing chief executive, Fabio Innocenzi, and chairman, Pietro Modiano. Both had joined the bank recently. They will have more powers as central bank appointees than they would as regular managers, including the right to set the agenda for shareholders’ meetings.

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“The decision to impose temporary administration is an early intervention measure aimed at ensuring continuity and pursuing the objectives of a strategic plan,” the European Central Bank said in a statement.

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