Jun 24, 2017

European Central Bank Moves to Wind Down Two Italian Banks

The European Central Bank effectively euthanized two small Italian banks late Friday, in another sign that the euro zone financial system remains vulnerable even as the economy improves.


The central bank said in a statement that Veneto Banca and Banca Popolare di Vicenza, both based in northern Italy, had failed or were likely to fail because they did not have enough capital to meet regulatory requirements.

They become the second and third banks to be declared effectively dead by the central bank, which acquired power to supervise eurozone banks at the end of 2014.

The first, earlier this month, was Banco Popular, Spain's fifth biggest bank.

Shareholders of the two Italian banks will lose their money, as will investors in so-called junior bonds that are intended to absorb losses first.

But deposits in the bank will be protected, as will investors in so-called senior bonds.

The banks will continue to operate and depositors will not suffer any inconvenience, officials said.

The action is likely to raise questions about Monte dei Paschi di Siena, an Italian bank that suffers from some of the same problems as the two banks that failed but is much larger. The Italian government has established a 20 billion euro (about $22.4 billion) fund to supply capital to Monte dei Paschi and other troubled Italian banks.

All Italian banks are plagued by bad loans and slack demand for credit because of the country's stagnant economy. But Veneto Banca and Banca Popolare di Vicenza are the first Italian banks to be declared effectively dead by the European Central Bank and wound down.

The central bank said Friday that it had been keeping a close eye on Veneto Banca and Banca Popolare di Vicenza since 2014, when it was clear that both were short of capital. After the condition of both banks continued to deteriorate, the central bank asked the lenders to explain how they would rebuild their capital buffers.

"Both banks presented business plans which were deemed not to be credible by the E.C.B.," the central bank said Friday in a statement.

Intesa Sanpaolo, Italy's second-large bank after UniCredit, said earlier this week that it would be interested in buying the healthy parts of Veneto Banca and Banca Popolare di Vicenza. The bad loans and other troubled assets will be put into a separate "bad bank" and probably sold at a deep discount.

By announcing the failure of the banks on a Friday evening, the European Central Bank gave financial markets the weekend to absorb the news, in hopes that the news would not cause turmoil. Financial markets reacted calmly to the collapse of Banco Popular earlier in June, a sign that the eurozone's system for troubled banks was working.

In Italy, protecting small investors in troubled banks has been a sensitive political issue, with elections expected by next spring. The protection of the senior bondholders of Veneto Banca and Banca Popolare di Vicenza may ease pressure on the Italian government.

The New York Times