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Taking stock of bank restructuring: a stronger system in compliance with European rules

Rome, 11 July 2017 - The reform of the banking sector, which the government has been working on for some time, aims at improving the quality of market operators by making their activities and governance more transparent. This will benefit the real economy as there will be greater availability of financial flows. The action taken by the Government is in compliance with the spirit of the new common European rules: inefficient operators are driven out of the market and the amount of public funds used in the various operations is moderate, as subordinate shareholders and bondholders will also be liable and public funding is made available on condition that it will be repaid over time.

The action taken over the last few weeks, which led to two failing banks being driven out of the market with no consequences for their clients and savers and an authorisation by the European Union for a capital increase for Monte dei Paschi di Siena, led Minister of the Economy and Finance Pier Carlo Padoan to state that  “the worst is over’’. Let's see why.

On  June 25 the Government adopted a decree that triggered the liquidation of Banca Popolare di Vicenza e Banca Veneta (Italian Version). The decree  envisages the provision of State aid aimed at limiting the adverse impact of a standard liquidation procedure on the economy and the social fabric of the region.
On July 4 the European Commission adopted the restructuring plan for Banca Monte dei Paschi di Siena (Italian Version), including a capital increase, underwritten by the State as a precautionary measure to strengthen the bank's equity to make sure that  the bank can withstand the serious economic crises in the hypothetical scenarios developed by the European Central Bank.
These two restructuring efforts come after the resolution of four regional banks in autumn 2015. Overall, three measures were taken to deal with seven ailing banks which had given rise to worries for some time.
These flashpoints have led to concerns that the entire banking system might be under such strain and at such risk as to raise doubts over its viability. However, a solution was found for those cases and the overall weight of non-performing loans began to decline rapidly, which showed that the banking sector as a whole is healthy and can withstand a serious economic downturn.

The Italian banking system has weathered the most serious recession since the post-war period and demonstrated its extraordinary resilience. Unlike other countries, Italy has not had to inject massive government funding into the sector to ensure its viability nor  has it resorted to international aid (as was the case with Greece, Portugal, Ireland, Spain and Cyprus). Italian banks have adopted the necessary measures to adjust to a changed situation and rise to the challenges posed  by new technology and the changed behaviour of clients.
The main problem during the economic crisis that began in 2009 has been the surge in non-performing loans, i.e. loans to companies which - mainly because of the recession - have not been able to honour their commitments to banks. In Italy the NPL phenomenon has taken on more serious proportions for two reasons. The first is the Italian economy's overreliance on bank lending due to  the lack of other significant channels to access financial resources. The second is linked to the anomalous behaviour of bank executives, currently being investigated by prosecutors, who have undermined the stability of financial intermediaries, in some cases causing their financial failure.

The banking sector has been restructured over the past few years through a series of structural reforms adopted by the Government in order to promote  banking consolidation and therefore transparency and efficiency. At the same time, the long-smouldering crises reached the point of no-return and Governments were forced to deal with them by adopting different solutions tailored to the specific concerns and issues of each individual case. Some smaller banks were acquired by bigger ones  with the take-over having no adverse effects. Other take-overs entailed costs for shareholders and certain categories of creditors such as holders of subordinate (or 'junior') bonds.
In some of these cases the Government stepped in to provide State aid (approved by the European Commission which ensures the rules of fair competition are complied with) in order  to ward off any adverse impact  on  the economic and social fabric of the country. Government intervention, where necessary, is temporary and limited - as envisaged by European rules - hence any public funds employed at this stage will be recovered over time.

In addition to action on the composition of supply, the Government has i) strengthened the ability of lenders to recover loans; ii) strengthened the courts specializing in handling business litigation; and iii)   introduced a new specific guarantee on securitization transactions of non-performing loans.

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