Atlas to the Rescue

Italian banks have €360 Billion in non-performing loans. They have another €180 Billion or so in troubled loans that are late just some of the time.

To address the problem, the Italian banks came up with a “whopping” €5 Billion rescue fund dubbed “Atlas”.

The deal was at gunpoint, just as happened in the US when then Treasury Secretary Hank Paulson told banks what they would do.

Please consider Italy Agrees €5bn Fund to Rescue Weaker Lenders.

I highlighted key phrases in italics.

Italy’s strongest banks, insurers and asset managers have agreed to create a €5bn backstop fund to bail out weaker lenders in an effort to calm growing investor concern about the stability of the banking sector of the eurozone’s third-largest economy.

The rescue fund, announced by prime minister Matteo Renzi and finance minister Pier Carlo Padoan on Monday night after a six-hour meeting of financiers, regulators and ministers in Rome, comes after a plunge in the value of Italian bank shares this year on growing concerns about the effect of €360bn of non-performing loans on Italy’s financial stability.

Dubbed “Atlas” after the mythological god who held up the sky, the privately-run fund will see UniCredit, Intesa Sanpaolo and UBI Banca, Italy’s strongest banks, handing over hundreds of millions of euros to a vehicle that will mop up unsold shares from cash calls demanded by European regulators at several distressed smaller lenders.

“In the next days we will make the bankruptcy procedure faster and more simple so that everyone can be assured of getting their money back in a reasonable timeframe,” Mr Renzi said.

Senior financiers in the room on Monday described a tense meeting where the governor of the Bank of Italy, Ignazio Visco, told bankers they had no choice but to give money to ensure financial stability.

The new fund will be run by a private company, to avoid coming up against EU state aid restrictions. Nonetheless, the Treasury-owned Cassa Depositi e Prestiti has an unspecified stake in the project which is likely to trigger competition scrutiny.

The agreement comes at the eleventh hour ahead of a €1.75bn cash call demanded by the single banking supervisor and due to start on April 18 to fill a capital hole at regional bank Popolare di Vicenza, uncovered by EU regulators after a mis-selling scandal.

Bankers and investors have seen the capital call — which is underwritten by UniCredit, Italy’s largest bank by assets — as a “flash point” for the Italian system. It could force UniCredit, which has a core tier 1 ratio of about 10.5 per cent, to raise capital itself if it is left holding shares, turning a local issue into a more systemic one.

The Atlas fund is expected to mop up any unsold shares in the Vicenza cash call and two further cash calls demanded by the European banking supervisor at regional banks Veneto Banca and Banco Popolare worth a combined €2bn.

The deal is not the first time Italy’s banking system has drawn together to protect its weakest constituents. In 1982 eight large banks bailed out the collapsed scandal-hit lender to the Vatican Banco Ambrosiano to prevent wider contagion.

Non-Performing Loans

Atlas

Key Terms Explained

  • €5bn backstop – 2% of what’s needed
  • Atlas, a mythological god who held up the sky – It is a myth this scheme has any chance of working
  • Bankruptcy procedure – Banks will take over pledged assets and sell them for whatever price they can get, causing more capital shortfalls.
  • Tense meeting – Tense meeting
  • No choice but to give money to ensure financial stability – This is the exact equivalent of Hank Paulson gathering US banks together and demanding various mergers or he would shut them down
  • Private company – Taxpayer sponsored under the table
  • Capital hole uncovered by EU regulators after a mis-selling scandal – Hole was so big regulators did not find it, they fell into it
  • Capital call – Margin call by regulators
  • Likely to trigger competition scrutiny – Illegal under EU rules
  • Eleventh hour – Noon
  • €1.75bn cash call – First margin call is set at €1.75bn
  • Two further cash calls – Two more margin calls coming
  • Flash point – Flash point
  • Not the first time – And certainly not the last

Mike “Mish” Shedlock