Italian banks are furious and have more than one reason to rise up against the maxi-recapitalization (over 14 billion euros) requested by Europe on the basis of the criteria defined by the EBA, the European banking authority chaired by the Italian Andrea Enria, but inspired by France and Germany. The bankers' anger exploded on Savings Day through the unequivocal words of two meek but determined people like the president of Acri, Joseph Guzzetti and that of Abi, Joseph Mussari. The Bank of Italy itself, while warning that new capital strengthening of Italian banks will become necessary, has distanced itself from the EBA code. But who is really undermining the stability of Italian banks? The EBA, the Merkel-Sarkozy directorate or the Italy risk that the current government has skyrocketed. FIRSTonline asked Giovanni Ferri, a renowned economist with a past in the Bank of Italy and the World Bank and now a member of the Banking Stakeholder Group at the EBA.
FIRSTONLINE – Professor Ferri, Italian banks have always had a business model linked to the territory and to retail rather than investment banking and trading: is it right that they are now penalized by the EBA rules on recapitalization more than French and Anglo-Saxon banks?
IRONS – As Jacques de Larosière wrote authoritatively criticizing the approach of Basel 3 "the cruel irony is that the banking model (the universal bank of continental Europe) which most favors financial stability and economic growth could be the main victim of the new framework … [while] … effective regulation requires competent and efficient on-site supervision. Rather than aligning European banks with the weaknesses of the Anglo-Saxon model, inspiration should be sought from those supervisory systems that worked best during the crisis.” In short, it seems that the regulation (not only Basel 3, but also the other interventions that focus exclusively on the capitalization of banks) has preferred to continue above all on the (mechanical) approach of the minimum capital and has not instead been courageous enough to valorise the contribution that financial stability derives from national structures with more restrictive regulation/supervision and from the adherence of individual banks to the traditional model (a model that certainly does not change from one day to the next). What is happening today with recapitalization calls is yet another manifestation of this mechanical approach.
FIRSTONLINE – The president of ABI Giuseppe Mussari rose up against the new rules on Savings Day arguing that we are faced with the paradox of paradoxes, namely the fact that investing in one's own country's government bonds has always been considered a prudent choice and now risks to turn into a penalizing choice. What is his opinion?
IRONS – I agree that, in this case, the decision to recapitalize the banks seems to suffer from a logical flaw. If the risk of default affecting banks comes from their own sovereign debt, there seems to be no way out. In fact, even if the banks of the country that defaults did not hold government bonds of their own country, the path to instability would open up for them because the sovereign debt default would inevitably cause widespread failures in the national economy and, consequently, a sea of bad debts for the banks themselves. Therefore, if we are talking about the default risk of our sovereign debt, the decision to recapitalize does not seem to solve the problem. The only possibility in which recapitalization is not illogical concerns the case in which we are talking about the default not of one's own sovereign debt but of other sovereign debts. Therefore, it makes sense for non-Greek banks to recapitalize against the Greek default, which does not seem logical for Greek banks. Mutatis mutandis, the same goes for Italian banks.
FIRSTONLINE – Some say that the rules envisaged for Italian banks are the result of automatisms that the EBA applies but does not define, but here two questions arise: A) are the automatisms blind or can they be corrected with qualitative assessments? B) how much does Italy's political weakness weigh in the definition of the automatic rules that penalize banks today?
IRONS – The EBA must apply the rules and respond to the guidelines of the EU political authorities. Undoubtedly, when the German-French directorate expresses itself strongly towards the solution of recapitalization and the top management of the Commission and Ecofin align themselves with this, this approach will have to be applied. I think it would be the task of our national authorities to point out the illogicality of recapitalizing banks against the risk of default of their sovereign debt. For example, if the recapitalization of banks were to pass only with respect to the risk of sovereign default with the exception of their own country, the banks with the greatest recapitalization needs would certainly not be the Italian ones, which have invested very little in Greek, Irish, Portuguese and Spanish bonds . But I fear that the current political weakness of Italy and the other PIIGS renders them virtually voiceless in the present circumstances.
FIRSTONLINE – What room is there to soften the rules announced by the EBA on the recapitalization of Italian banks?
IRONS – The only possibility I see is the modification that makes the recapitalization asymmetrical in the sense described above: each national banking system hedges against the risk of sovereign default vis-à-vis other countries (where it makes sense to assume that that risk is the result of independent investment choices) but not the risk of default of its sovereign (where the systemic risk falls on the banks inevitably not for autonomous choices but simply for a "domicile effect").
FIRSTONLINE – Is the enemy of Italian banks the EBA or the Italian sovereign risk and its bad political management?
IRONS – As I said, the EBA cannot be blamed for having to apply the rules defined within the EU. It is the definition of such rules that suffers from a logical flaw. With regard to Italy's sovereign risk, our government has made countless mistakes. First he minimized the problem arguing that Italy was not involved in the crisis or was suffering it much less than the others, when in reality the decline in Italian GDP in 2008-10 was the greatest among the major European countries. Then, last July, when the speculative attack on our public debt really arrived, it seemed like we were at the fair of irresponsibility: the prime minister and the minister of the economy thought it best to quarrel publicly; the majority has ventured into maneuvers after maneuvers which, like Penelope's canvas, were repeatedly written during the day and undone at night; not to mention what happened the other day when the prime minister, fresh from the last minute recovery of EU support for Italy obtained the day before, let himself be misunderstood in a disastrous declaration against the euro. The parliamentary majority is never enough to guarantee good politics but perhaps we are going beyond the usual and acceptable.
