Sunday, June 25, 2017

Italy Liquidates 2 Veneto Banks

Authorities in Italy have spent the weekend working out how to liquidate the two insolvent banks in Veneto that observers have been worrying about all year. The failed banks are Banca Popolare di Vicenza and Veneto Banca. Though not affiliated, the two banks are being liquidated together because they are facing the same regional economic problems and are in about the same financial condition.

“Good” assets — which are not quite so good as that term usually implies — are being transferred today to Intesa Sanpaolo. Having committed to liquidate the two Veneto banks while protecting depositors and keeping branches open, the government had few good options. A proposal by a hedge fund consortium was widely reported earlier in the month but rightly ignored. The hedge funds were seeking a controlling interest in the two banks but were willing to cover only a tenth of the capital shortfall. Such a plan would have postponed today’s liquidation by a few months at best, and it ran the risk of degenerating into litigation and chaos. Intesa Sanpaolo will apparently act as the government’s agent in managing and liquidating some of the assets it is not purchasing.

In retrospect, it would have been better if the two banks had been wound down five years ago. As it is, the bank liquidation will cost taxpayers an estimated €17 billion, of which €5 billion is being paid today. It was only two years ago, though, that auditors discovered problems in the loan portfolios and misselling of bonds, and not until last Friday that the European Central Bank referred the two banks for liquidation. Government lawyers then spent the weekend drafting a decree for the liquidation and transfer.

Ultimately not all of the branches will be able to stay open, but Italian regulators would prefer to have them close more quietly at another time rather than during such a visible crisis. Intesa is chipping in an estimated €60 million to protect bondholders, funds that would have been legally difficult for the government to provide. The fate of bondholders was an important political consideration because the banks fraudulently sold bonds to thousands of retail depositors, telling them that the bonds were certificates of deposit.