Some recently adopted banking rules in Europe and others that are under discussion, all supposedly aimed at strengthening the banking system and reducing risks to the economy, are actually counterproductive. Not only for the economies of the peripheral countries, where today there are the greatest difficulties, but also for those of the core countries, which most inspired those rules. The proposal to limit the purchase of domestic government bonds by banks does not break the link between bank debt and sovereign debt. Banking systems remain "national" because in each country the yield on government bonds drives medium-long term rates, especially the cost of bank funding. Furthermore, that limit will not make more credit flow to the economy, rather it will reduce it.
The new rules for bank bailouts (bail-ins), which impose losses on shareholders, bondholders and account holders above 100 thousand euros of institutions in crisis, are aimed at protecting the taxpayer; in reality, in the face of systemic difficulties, the costs for taxpayers quadruple. The large amount of NPLs on banks' balance sheets was caused by the long and deep recession, not by careless lending. A set of interventions to free up bank balance sheets immediately, including the creation of several vehicle companies in which to transfer non-performing loans, the dilution of any losses over several years and the acceleration of the times for the enforcement of guarantees, is essential to boost credit and the economy, but some measures are hampered by new European rules. State guarantees at market prices do not solve the problem.
A dangerous limit to domestic government bonds present in bank balance sheets
The proposal to limit the purchases of domestic government bonds by Eurozone banks has serious contraindications and, if accepted, would have disruptive effects on the stability of the European Union. The declared objective is to reduce the exposure of institutions to the sovereign risk of their own country, with the intention of breaking the vicious circle between the banking system and public debt. Furthermore, we would like to induce banks to allocate more resources to granting credit to households and businesses.
The result would be diametrically opposite: higher costs for tax payers and less credit to the economy. Indeed, the proposed measure would prove to be useless and harmful. Useless because, even when the European Banking Union is completed, the banking systems will remain national given that the cost of funding will still be linked to the yields of each country's government bonds. This would be the case even if the banks held fewer of these securities. Indeed, in Italy and other European countries there is a very close relationship between the performance of yields on sovereign bonds and that of yields on bank bonds.
For Italian banks, the cost of funding through bonds rose to its peak at the beginning of 2012, immediately after the 2011-year BTP, the guiding security, had reached its peak at the end of 10. Subsequently, the rate on bank bonds gradually decreased, in the wake of the decline in sovereign yields since 2012.
Before the crisis, the state of health of Italian banks was clearly better than in other Eurozone countries. But then, with the sovereign debt crisis, the policies adopted in Europe and the long recession that followed, the situation of bank balance sheets in Italy worsened. The cost of bank funding has increased and non-performing loans have increased. At the worst moment of the crisis, Italian banks made massive purchases of national sovereign bonds: their portfolio of these bonds rose from 205 billion at the end of 2011 to 402 billion in June 2013, then remaining at those values (390 billion in December 2015 ). This contained the increase in sovereign yields, which were already higher than the values justified by country risk.
It has also enabled banks to improve their balance sheet, supporting their profitability. If in 2011-2012 institutions had had to limit their purchases, in Italy we would have had a banking system with worse balance sheets and a greater credit crunch, and therefore less credit to the economy. And we would also have had higher yields on government bonds, with negative impacts on the public finances and on the GDP trend. If today the purchase of sovereign bonds by banks were reduced, by eliminating an important source of demand for these bonds, in the Eurozone countries with higher public debts, the yields on government bonds would be structurally higher than elsewhere.
Reflecting on the cost of borrowing in these countries, this would limit access to credit, compressing growth. In a vicious circle that would undermine the sustainability of public debts. Exactly the opposite of what one would like to achieve with the limit on government bonds in bank balance sheets, ie to make more funds from banks flow to businesses and households, to support growth. The introduction of a limit on bank purchases of government bonds would therefore increase the divergence between the peripheral economies on the one hand, which would be even more penalized, and the core economies on the other. With the result of widening the divergences in Europe and therefore increasing the centrifugal forces that are threatening the stability of the EU.
Only when there is a fiscal union (or Fiscal Union), with the issuance of federal securities that can serve as a benchmark for all issuers, will the financial systems no longer be national and each issuer, including banks, will be valued for one's creditworthiness, and not for belonging to a State with a more or less high public debt. Only then, therefore, will it be possible to impose a restriction on the holding of public securities in bank balance sheets without having the negative effects explained above. For the proponents, the elimination of the null weighting of government bonds and/or a ceiling on sovereign bonds in bank balance sheets are a step towards Fiscal Union, but this goal risks never being achieved if that elimination and that ceiling are implemented because they would accentuate the distance between the countries that should give life to the Fiscal Union itself. A failure due to inconsistency
time between the various stages of construction.
The bail-in poses new risks, not only in the country whose banks are in crisis
With the entry into force of the bail-in on 2016 January 100, in the event of a banking crisis, the holders of all bonds (not just the subordinated ones) issued by these institutions risk being called upon to participate in any bailouts, together with the shareholders and to holders of deposits exceeding XNUMX thousand euros. If the crisis concerned only one bank, the bail-in could constitute a deterrent to moral hazard and therefore be an acceptable resolution tool (while not forgetting that the run on bank branches can start from the failure of even a single bank, and not even a large one ).
The serious mistake, however, was to conceive the bail-in as a safeguard for taxpayers against the risk of being called upon to bail out the banks, as happened in many countries (Germany in the lead) at the beginning of the crisis. But if the banking crisis were systemic, as it was in 2008-2009, then with the bail-in taxpayers would be called to foot the bill not once, but four times. First, with the loss of value of their assets, due to the collapse of stock prices and house prices. Second, with decreasing income.
Third, with job losses. Fourth, with the increase in taxation and/or with the cut in public spending, necessary to cover the public deficit caused by the worsening of the economy. This quadruple bill would, in fact, be presented precisely by the failure to bail out the banks to operate the bail-in in its place, which would trigger a violent recession. And in an integrated system such as the European one, the heavy bill would extend (through the channels of trust, commercial and financial ties) to other countries as well.
The new risks for savers created by the bail-in can also have an immediate consequence: if the perception of higher riskiness of bank bonds leads to an increase in the yields that banks must offer to issue them, this will be reflected in the cost of credit offered by institutes, resulting in a new squeeze. The same will happen if this perception translates into a reduction in bank deposits held by households.
In Italy the share of retail placement of bank bonds is high, while in other Eurozone countries the role is greater
of institutional investors in the subscription of bonds, investors who are professionally capable of assessing the actual balance sheet conditions of each bank. The stock of bonds issued by Italian banks amounted to 664 billion, of which 187 billion were purchased by Italian households (28,2%). The remaining part of the bank bonds is in the portfolio of other credit institutions, insurance companies, pension funds and foreign investors. Furthermore, on the collection of Italian banks (equal to 4.074 billion) bonds are far away: 16,3% (of which 4,6% are those sold to families). Values much higher than in other Eurozone countries. In Germany, banks have issued bonds for 1.250 billion, of which only 86 billion are in the portfolio of German households (6,9%, four times less than in Italy).
In Spain, the stock of bonds issued by banks is equal to 371 billion, of which only 1 billion purchased by Spanish households (0,2%). Of the funding of German banks, bonds represent 15,0%, one and a half points less than in Italy, and in Spain only 11,6%. In any case, the bail-in should be suspended not so much because of the situation of one country or another, but because its real economic effects have been misjudged, which are completely counterproductive precisely with respect to the understandable reasons that prompted the her
introduction.
Too many non-performing loans in banks and public interventions held back by EU rules
The banking system in Italy today has a large stock of non-performing loans that has built up due to the long and deep recession. Non-performing loans rose to 143 billion at the end of 2015 (18,3% of business loans), from 25 billion at the end of 2008 (2,9%). This has made banks particularly cautious and is holding back the disbursement of new credit. In Italy, the mass of non-performing loans (non-performing, substandard, past due, restructured) is equal to 20,9% of total loans for the top 8 Italian institutions (equal to 250 billion euros), against 6,0% for the top 21 European banks.
The greater presence of non-performing items in bank balance sheets in Italy. however, it is not due to a worse management of the banks in credit lines, but it is explained by the double and deep recession, which caused the GDP to fall by more than 9%, the industrial production by more than 25%, the construction activity by almost 50%. These terrible macroeconomic conditions inevitably made many credit assessments carried out before the crisis and above all before the 2011-2014 recession fall short. And the Italian banking system as a whole must be recognized for having been able to withstand the impact of such difficult macroeconomic conditions; not the same, probably, would have happened in other countries.
Over the years, the major Italian banks have made provisions for risks for a total of 115 billion. These funds cover 46,0% of the non-performing loans on their balance sheets, more than what happens for the major European banks (44,8%). In relation to the stock of loans, provisions amounted to 9,6% in Italy and 2,7% in Europe. It should also be emphasized that Italian banks traditionally grant credit against high collateral guarantees, so much so that for the top 8 Italian institutions the coverage rate rises by 40 points including these guarantees, ie to 87,6% of non-performing loans. Comparison data with European banks are not available.
Banks count on recovering a more or less large share of non-performing loans, also through the enforcement of guarantees. This will be affected by macro (economic performance) and micro (bankruptcy proceedings, efficiency in debt collection) factors. In June
2015 the Government launched measures to speed up bankruptcy proceedings, as well as the tax deductibility in one year of credit losses; in February it introduced new tax measures to facilitate debt collection.
It should also be remembered that the amount of capital of banks in Italy is in line with European values, in relation to total loans: 10,6% for the major institutions, 11,3% in Europe. However, the amount of non-performing loans is holding back credit and, therefore, the country's economic growth. This makes system interventions essential to lighten the balance sheets of institutions from this burden and, consequently, favor the recovery of credit and support the recovery of the Italian economy. Interventions on several levels: creation of several vehicle companies in which to transfer non-performing loans, dilution of any losses over several years, acceleration of the times for enforcement of guarantees. Vehicle companies would make it possible to create a time bridge between the market price of non-performing loans (which is currently depressed due to their high amount which increases their supply) and their fair value.
The new European rules (in particular those on state aid) hinder some of these measures. Many other European countries, on the other hand, have already supported their banks with public resources in recent years, between 2008 and 2013. Up to now, among the main EU countries, Italy is the one that has allocated the least amount of resources to the support from the banks: 8 billion in capital injection, against 73 in Spain, 56 in Germany, 49 in Ireland and 28 in France. In relation to GDP, 0,5% in Italy, against 1,4% in France, 2,2% in Germany and 6,6% in Spain. Similar considerations apply to guarantees: 119 billion in Italy (data at the end of 2013), compared to 382 in Germany and 141 in France. Between 2011 and 2012, in the midst of the sovereign debt crisis, Italy faced considerable difficulties on international markets, in particular with a surge in government bond yields, which at that time did not allow the country to intervene on non-performing loans with the same resources fielded by other countries.
At the beginning of 2016, with the new European rules in force which no longer allow for this type of intervention, the MEF launched a mechanism for the granting of State guarantees, against payment, to favor securitization transactions of non-performing bank loans (GACS ). This is an intervention in the right direction, but not a solution to the issue of suffering. The State guarantees only the senior tranche of the securitisations, the safest one, which bears any losses last, not the riskiest tranches (junior and mezzanine).
Furthermore, the State will issue the guarantee only if the securities have obtained, from an agency recognized by the ECB, a rating at least equal to investment grade, i.e. not lower than BBB, not far from that of the Italian State which fluctuates between BBB- and BBB+. These two stakes
significantly limit the amount of non-performing loans that can make use of the guarantees. The guarantees can be requested by the banks that securitize non-performing loans, against the payment of a commission to the State, expressed as a percentage of the guaranteed amount. The price of the guarantee was the critical point, on which the MEF had to reach an agreement with the EU Commission: it will be a market price, so that the guarantee will not be considered state aid.
The price will be calculated taking as reference those of the Credit Default Swaps of Italian issuers with a level of risk comparable to that of the guaranteed securities. The price will increase over time, both to take into account the greater risks associated with a longer duration of the securities, and to introduce an incentive to quickly recover the receivables. This market mechanism represents a step forward, because a new tool is made available to the system. However, guarantees do not appear capable of having a rapid impact on the disposal of non-performing loans on banks' balance sheets. In fact, the mechanism does not decisively improve the current market conditions for banks and potential investors. It will be able to gradually facilitate the disinvestment of those non-performing loans for which the initial distance between the asking price and the offer price is smaller.
But it will take several years to reduce the current stock of non-performing loans to physiological levels. The main way to lower the mountain of non-performing loans remains economic growth, which however is being held back precisely by the credit nodes.
