The Italian Bank Bail-outs: A Decade-old Issue for Financial Regulation

At the beginning of the month, we discussed here in Financial Regulation Matters the state-backed rescue of the world’s oldest bank – Monte dei Paschi di Siena (BMPS) – and what it may have meant for the issue of ‘too-big-to-fail’. Over the past weekend, news emerged from Italy that confirmed that the deterioration of BMPS was, as had been predicted, only the start of the troubling financial environment that is enveloping Italy at the moment. With the Italian Government receiving the support from the European Commission to provide financial assistance to two Venetian banks – Banca Popolare di Vicenza and Veneto Banca – the Government duly ‘bailed-out’ the two banks to the tune of €5.2 billion, with additional guarantees of €12 billion being put in place. In this post we shall therefore assess these recent developments, but then it will be important to ask what this means for the role, better yet the belief in financial regulation as an ideal – if the financial elite are conscious of the fact the institutions they represent will be ‘bailed-out’ with taxpayer money in times of crisis, what really prevents them from taking excessive risks? With the noticeable lack of punishment after the financial crisis bail-outs, the new millennium is seemingly being defined by a systemic lack of deterrent which, potentially, means that news like that emanating from Italy may be the new normal, or perhaps it has been that way for a while.

The biggest fear for Banking regulators and politicians is a ‘run’ on a bank, which essentially denotes the collective panic to withdraw funds from a failing bank. It was for this reason, predominantly, that Italian banking ministers took action on Sunday to wind-down the two banks in question, with the process entailing the banks being split up into ‘good’ and ‘bad’ banks – in terms of assets – with the good assets being acquired by the largest retail bank in Italy, Intesa Sanpaolo, which as part of the deal also saw the Government provide €5 billion to Intesa. As for the ‘bad’ components, the Government will foot that particular bill to the tune of €12 billion, which takes the bail-out to a likely total of €17 billion as it is assumed the quantification of the amount of ‘bad’ loans controlled by the banks is accurate. The move to dissolve the banks came after an announcement on Friday from the European Central Bank that the two lenders were ‘failing, or likely to fail’, which allowed the Government to bring an end to attempts to resolve this issue privately and circumvent the supposed viewpoint of the European Union: ‘taxpayers are no longer meant to stump the cost to rescue a failing bank’. The government’s response was staunch, with the Economy Minister stating ‘those who criticise us should say what a better alternative would have been. I can’t see it’, with the European Commission’s Competition Commissioner supporting the action, ultimately suggesting that the provision of state aid would ‘avoid an economic disturbance in the Veneto region’. Whilst this may be the case, some of the details will be extremely disheartening for the Italian taxpayer.

The first point to mention is that it is predicted that even though the ‘good’ components of the banks are being transferred to Intesa, along with €5 billion, there could be up to 4,000 job losses and the closure of many branches is a distinct possibility. Also, it will provide no comfort for the taxpayers footing the bill that senior bondholders have been protected from suffering losses, with those bonds being transferred to Intesa as part of the deal – the Government were able to skirt the rules imposed by the E.U. – that investors pay the penalty for bank failures, not taxpayers – by invoking a ‘public interest’ clause that argues the bank failures would have ‘wrecked’ the economy in the region. To perhaps rub salt in the wounds, the news at the time of writing is that the value of the bonds are soaring on the back of this governmental protection, which is unlikely to reduce the amount of criticism towards the situation. German Politicians have been quick to show their displeasure – given their status within the Union – with MEP Markus Ferber declaring that ‘with this decision, the European Commission accompanies the banking union to its deathbed’ and that ‘the promise that the taxpayer will not stand in to rescue failing banks any more is broken for good’. This point is crucial, as the situation is continually developing. News has just broken that the recapitalisation of BMPS has just been formally completed, which comes after news that the large Italian lender UniCredit is also experiencing problems which have seen it tap the marketplace for financing on three separate occasions since the Crisis. The recent rescue of the Spanish bank Banco Popular saw junior bondholders and shareholders suffer losses instead of the taxpayer, but the Italian taxpayers have not been so lucky this time.

Yet, whilst the news is bad for the Italian taxpayer, it is even worse in the grand scheme of things. The proclamations stemming from the E.U. regarding the end to taxpayer bailouts has been proven to be false, which hints at a much bigger issue. The appropriation of the ‘public interest’ defence means that banks can and will be rescued, despite any political rhetoric to the contrary. The news that the major U.S. banks have passed the first phase of their annual stress testing, in spite of some worrying news, arguably means very little in the modern environment because, unfortunately, the Financial Crisis produced an extremely anti-social precedent: the taxpayer will be forced to rescue a filing bank, particularly if its interconnectedness is such that its failure would have systemic effects. Whilst many would presume this to be just i.e. a banking crisis could affect our way of life, what does it mean for the ‘balance’ within society? At the moment, there is very little deterrent for the leaders of a banking institution to act responsibly: will they be imprisoned for their negligence? No. Will the institution they represent perish as a result? No. Will they be allowed to keep all of their bonuses which were tied to short-term targets? Yes. There will be those that read this and will argue that things have changed, that regulation has made a repeat of the Financial Crisis impossible. There will be those that read this and will argue that there is plenty of deterrent and that these banks represent a tiny minority. Whatever merit those viewpoints have is irrelevant when we look at the amount of money being taken from the pockets of taxpayers to supplement these grand games of finance. Whilst it is suggested here that the pendulum has already swung, any more crises in the near-future will cement this lack of deterrent and confirm that the public will always pay the price for private failures; financial regulation and financial penalties are thus obsolete in the battle against venality and negligence in the financial sector – only extensive prison sentences, in real prisons, can stem this particularly awful tide.