Italy’s banking crisis could spread to the rest of Europe, and rules limiting state aid to lenders should be reconsidered to prevent greater upheaval, Societe Generale chairman Lorenzo Bini Smaghi said.
“The whole banking market is under pressure,” the former European Central Bank executive board member said in an interview with Bloomberg Television yesterday. “We adopted rules on public money; these rules must be assessed in a market that has a potential crisis to decide whether some suspension needs to be applied.”
With Italian banks weighed down by about €360bn ($389bn) in soured loans, the government has been sounding out regulators on ways to shore up lenders amid a renewed selloff in the wake of the British vote to leave the European Union. The government would invoke an EU rule allowing temporary state aid if regulatory stress tests uncover a shortfall at Banca Monte dei Paschi di Siena, a person with knowledge of the discussions said on Tuesday.
European banking stocks resumed their descent as policy makers disagreed and sometimes issued contradictory statements about what may come next. Deutsche Bank, Germany’s largest lender, slid 6.1% to its lowest level since at least 1989. Societe Generale, France’s second-biggest bank, which Bini Smaghi has chaired for just over a year, fell 1.8% as of 2pm in Paris.
The Bloomberg Europe 500 Banks and Financial Services Index fell 2.3% to its lowest since November 2011, in the midst of the European debt crisis.
Italian Finance Undersecretary Pier Paolo Baretta said in an interview on RAI radio yesterday morning that a “technical solution” on Monte Paschi could be hours away, before issuing a statement an hour later that said “no intervention is expected in the next few hours.”
German Finance Minister Wolfgang Schaeuble, speaking at a news conference in Berlin hours later, said his Italian counterpart Pier Carlo Padoan told him that Italy intends to stick to the banking-union rules.
Among the worst-hit Italian banks is Monte Paschi, which built up a pile of soured loans as the nation’s longest recession since World War II left businesses and households struggling to repay debt. Its market capitalisation has sunk below €1bn. The largest Italian lender, UniCredit, has slumped more than 60% this year and replaced its chief executive officer amid speculation the bank will need to tap its investors for more capital. Its shares fell 1.4% yesterday.
Despite the struggling market, it’s important to protect the regulations established for European banks since the financial crisis, Klaus Regling, CEO of the EU Stabilisation Fund, said in a separate television interview. Many solutions under the existing rules are still available to Italy, he said. “The Italian government is in a dialogue with the European Commission on how to apply the framework to these specific circumstances,” Regling said. “I am confident they will find a way.”
Bini Smaghi said on Bloomberg TV that Europe’s banking market faces the risk of a systemic crisis unless governments accept the idea of taxpayer money as the ultimate recourse. Any intervention should be as swift as possible, he said.
Both Italy and Germany have too many banks that are not profitable and more consolidation is needed, he said. Italy must do more to deal with non-performing loans, and Prime Minister Matteo Renzi will have to take politically unpopular steps, including encouraging mergers that will lead to job cuts, Bini Smaghi said. “What’s needed is a European solution,” he said. “So far, we’ve had national solutions. We need a clear backstop.”
On Brexit, Bini Smaghi said he expects “very long” negotiations. He expressed concern that Britain’s proposal to reduce corporate taxes to attract companies could lead to risky tax competition across Europe.