Italy is gearing up for one last old-school bank bailout. Italian lenders may have to pony up euro 1.4 billion to rescue three small lenders. The rescue looks rushed to avoid a bail-in under European rules due in January. It may save depositors and stop any fallout spreading - but leaves the system as a whole weaker.
The fate of Banca delle Marche, Carife and Banca Etruria highlights the challenges faced by Italy's many small banks in coping with a stagnating economy. Banca delle Marche was placed in so-called special administration by the Bank of Italy as far back as 2013.
The government's plan, according to Reuters, will see Italy's larger banks inject funds into the banks through a vehicle, backed by a common fund, which will restructure and sell down the banks over time. The hope is to complete the recapitalisation before the start of next year, when the European Bank Recovery and Resolution Directive will require failing banks to force losses on senior creditors and large depositors, according to Il Sole 24 Ore. Instead, just euro 700 million of subordinated debt will take a hit.
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Still, it's hard to see how a resolution of the banks would have triggered a systemic crisis. The three lenders have assets of about euro 40 billion, roughly one per cent of the Italian banking system. Saddling other banks with the cost of a rescue leaves them exposed and weaker. And it also raises moral hazard risks, since depositors and creditors may be less inclined to worry about who they lend to.
Italy is within its rights to have pulled its punches. But the sooner European states are forced to see bail-in as mandatory rather than an optional extra the better.
