Banks, default and public confidence: waiting for decision from the new Government

The Italian banking world is currently going through a period of deep-rooted change.

Last year, certain Italian banks took centre stage in the media, namely: Monte Paschi di Siena, a bank having a long tradition and operating throughout the whole of Italy, which has often been refinanced to avoid default; four small banks from Central Italy, previously put into liquidation; two banks from North-East Italy, i.e. Popolare di Vicenza and Veneto Banca, put into liquidation in June 2017, in respect of which Italy awaits a decision of the parliament.

Popolare di Vicenza and Veneto Banca are medium-sized banks deeply rooted in a part of Italy that is economically crucial for the country as a whole. The Veneto has been the powerhouse of the Italian economy in the last decade.

From the point of view of the delicate links between politics and finance, the most sensitive aspects that still need to be resolved concern the responsibility attributable to the Bank of Italy and Consob. In other words, has banking supervision been adequate in the last decade? The question raises concern about the whole Italian financial world with a broader impact on the economy and politics in general.

The Italian and European financial community expects quick and straight answers. The value of the confidence that European citizens may have in the financial world is a pre-condition for the proper development of that world itself. If undue harm is found to have been caused to savers and shareholders, they must obtain adequate compensation; on the other hand, if there is liability on the part of supervisory authorities (i.e. especially, the Bank of Italy and Consob), should there be some sort of punishment?

As noted, the Italian banking world is in turmoil: will there be calm after storm? There is a great deal of interest currently shown by media and operators, primarily because the “populist” Government, based on the combination of the Lega and the Movimento 5 Stelle, has only been in office for a short while and its economic policy strategy is still unclear.

The election promises of the two majority parties made a provision for, on the one hand, accurate determination of liability and, on the other, a legal mechanism of compensation for damage caused to savers and shareholders. So, will a move be made from words to deeds?

Assuming that the new government finds the political strength to design a mechanism of compensation in favour of savers and shareholders, the issues to be addressed can be summarised as follows:

• i. Which body will be responsible for determining breach of applicable Italian banking and laws and regulations to compensate savers and shareholders? The most widely held hypothesis is that this task should be attributed to a body of mediation and conciliation with an independent authority, e.g. the National Anticorruption Authority or the Arbitrator for Financial Disputes. This means a new entity must be added to the already complex legal scenario involving banks and financial intermediaries in Italy.
• ii. For the purposes of compensation for damage, will protection only be afforded to those having purchased shares in the last 10 years, i.e. within the limitation period for contractual damage? In this case, there would be no compensation for those having purchased shares earlier than the 10 years, now almost worthless. However, from criminal proceedings it is emerging that responsibility for the defaults of the banks is due to the actions of top managers. So is there no compensation for those left with nothing as a result of someone having negligently caused the banks to fail?
• iii. Finally, how will the State be able to allocate the sums awarded as compensation without being liable for State aid? Will such sums be public money or monies made available by the banking system itself?

European developments might have a role to play. In the context of the negotiations underway on the banking and capital markets union, which will have a further direct impact not only on banks but also on undertakings, one proposal that is making headway relates to the intent to turn the ESM (European Stability Mechanism) into a mechanism for granting loans for a bank recapitalisation fund (backstop).

While supporting such a role, one should however start from the principle that risk sharing and risk reduction are two sides of the same coin, rather than choosing a sequential procedure aimed at first reducing and only later sharing risk, based on a reduction of bank risk arising from progressive clearance of bad debts and other unspecified criteria.

Falling outside the scope of the proposal is the introduction of a common insurance for bank deposits (CIBD) and the creation of a recapitalisation fund.

These are just some of the issues to be tackled in the short term.

If the new government really wants to overcome the deadlock in which the Italian financial system finds itself, considerable political will shall be required, with strong attention also being given to technical and legal aspects.

This is a very delicate step, and only once it has been completed we will be able to tell whether the banking scene may be stabilised and whether the citizens’ confidence may support a growth trend that necessarily involves strengthening the financial system as a whole.

This article is for information purposes only and is not intended as a professional opinion.

For further information, please contact Tommaso Dalla Massara.