A maxi transparency operation that will try to give a jolt of confidence to the banking system to tie up the (fragile) threads of trust and restart the credit. On Wednesday the ECB released the document in which it announced an extensive analysis of the largest European banks (130 banks in the Eurozone, of which 15 are Italian, not only the big ones such as Unicredit and Intesa but also smaller and local institutions such as for example Creval, Popolare di Sondrio, Veneto Banca, to name just a few). The operation, a single in-depth assessment applied uniformly to all significant banks, is part of a process that will lead to the assumption of the single supervisory role by the ECB in November 2014, the first step in a broader project of Banking union (which also aims to establish a single resolution mechanism for banks).
If the analysis promises to be strict also in terms of toxic securities and leverage (which mainly afflict Nordic institutions) and to align itself with the more stringent criteria on the classification of loans used in Italy, the level of non-performing loans accumulated by our banks does not leave everyone alone. Bank of Italy estimates that institutions are saddled with 300 billion euros of non-performing loans. Economy Minister Saccomanni reassures “Italy has nothing to fear, the Italian banking system has proved to be among the most solid of all advanced economies despite a very long crisis that has brought other systems to their knees, it is certainly one of those better watch out".
The analysis will start in November and will last a year. And the results could lead to having to recapitalize banks that fail the test. And Draghi has already started pressing for governments to equip themselves with the necessary public resources before the analysis highlights the weaknesses of the budgets. For Draghi, imposing losses on creditors (as indicated by the European bail-in resolution that is to come into force) on all banks that fail the stress tests would be destabilizing for the markets (as he wrote in a letter to Competition Commissioner Joaquin Almunia). .
But, as we know, the ECB (as Draghi has repeatedly recalled) cannot solve all the problems and much also depends on the choices of the individual national systems. In the face of this mass of doubtful loans and economic prospects that promise to increase them, the hypothesis of the bad bank is always in the background. For some, the best way to restart credit is in fact to clean up the system of the burden of problem or problem credit. Non-performing loans, in fact, affect profitability and this affects the willingness of banks to provide credit (as the recent report by the Rosselli Foundation underlined).
THE BAD BANK HYPOTHESIS REMAINS IN THE BACKGROUND
“To be able to do their job, they must therefore be relieved of part of the bad debts that make it impossible” Romano Prodi wrote a few days ago in the pages of Il Messaggero, specifying that “it therefore becomes necessary, with the cooperation of private public bodies, give life to a structure which, by taking over part of the "bad" credits of the banks, allows the blood circulation of our economic body to be restored". The debate has been going on for some time also in the light of the experiences of other countries, where the bad bank has been declined each time in different times and in different ways. There was Spain which, thanks to aid from Brussels (and the choice to pay the political and social price), created the Sareb, the bad bank into which the by now toxic real estate credits were channeled, 50 billion euros assets from several troubled lenders, including Bankia.
As the Financial Times recently underlined, the bad bank was liked by the markets and stimulated the interest of international investors (from the Cerberus fund to Apollo). “We are starting to see private equity groups that didn't have offices in Spain who are now hiring Spaniards and opening offices in the country,” Alejandro Ortiz, partner at Linklaters in Spain, told the City of London newspaper. And he's restarting the Spanish banking system. While the country came out of the two-year recession with a third-quarter GDP of +0,1%. Also Ireland for his 70 and over billions of toxic loans he had already created a bad band, Nama, in 2009. After having taken over the toxic assets with a 56% discount, today Nama is generating profits even if the prospects, at the end of the ten years of life expected by 2020, look only to a breakeven on the investments made (originally it was thought to be able to obtain a profit of 1 billion). In China, instead, according to Bloomberg reports, the four state-level bad banks created in 1999 to clean up bankrupt banks of their unprofitable assets have managed to turn 1.400 trillion yuan ($229 billion) of toxic assets into profits . One of these, Cinda, is even preparing to go public with a $3 billion IPO in Hong Kong, after UBS and Standard Chartered have already bought shares. So today the country is thinking about a new round of bad banks, this time at the provincial level, as a solution to the prospects of growing toxic credits expected as a consequence of the economic stimulus program adopted against the crisis and in view of the greater financial deregulation towards which it's moving. Despite a GDP of 7,8% in the third quarter, Chinese banks tripled their bad debts.
The bad bank is also gaining supporters in Greece among systemically large banks: Two bankers at Piraeus and National recently told Reuters that they plan to separate weak assets from the rest. Finally, in the next two weeks the Minister of British finance George Osborne will decide whether to break up Royal Bank of Scotland and move the bad assets to a bad bank. In this case the financial world does not seem so enthusiastic. The pilgrimage of investors has begun against the project which for some will destroy value for the bank, causing 15 billion in capital losses and depriving Rbs of the possibility of benefiting from an improvement in the outlook for its toxic assets. In the end, there are those who believe that Osborne will opt for a compromise, i.e. create a bad bank unit within the RBS bank.
BECAUSE THE BAD BANK IS NOT ENOUGH IN ITALY
The problem for Italy is that there is no shortage of contraindications. In the first place, even the bad bank needs money. “In Italy the bad bank can only work in theory. There are several questions to ask: who puts the money into it? Are we willing to place ourselves under ECB protection as Spain did? Shall we make a bad bank or sectoral bad banks?” says Adriano Bianchi, managing director of Alvarez&Marsal, the American company that managed the bank bailouts on behalf of the Spanish government, participated in the creation of the Irish bad bank Nama and in Chapter 11 of Lehman Brothers. And he adds. "Even if the state had the money, I don't know if we would go from the frying pan to the fire". Between Spain and Italy, for example, there is one substantial difference: the Spanish banks mostly had to get rid of toxic securities in the real estate sector, while in Italy the problems are loans to companies. “It is one thing to create a bad bank as a sort of warehouse of real estate assets, another is to manage many companies – explains Bianchi – Bad banks have worked quite well in those countries where the bulk of the problems were concentrated by sector, for example in Spain real estate, as well as in Ireland. The fact that it was real estate had a considerable advantage: although it will take years to dispose of it, here the value does not deteriorate over time. On the contrary, in a very diversified world where the goodwill is given by the company that continues to operate, the bad bank has a few more problems to be implemented”. In a nutshell, in order not to destroy its value, the company must continue in business, it cannot wait to be sold to other investors by the bad bank, which in the end is not a bank but an asset manager (and in any case , the bad bank alone is not enough, in order for it to work, other legal and cultural aspects should also be addressed, which differentiate the Italian situation, for example, from the US scenario where the famous Chapter 11 exists).
On the other hand also for the IMF bad bank doesn't seem like the way to go. In Washington, as recently emerged during a mission of the Fund to Italy, one would look more favorably on the expansion of a private market for “distressed” debt. A solution that also appeals to several Italian bankers, including Alessandro Profumo, the president of Monte dei Paschi di Siena. Although some analysts believe that Italy's inability to set a rule on how to handle the weakness of the banks is a cause for concern.
"The crisis in the banking system is the indicator of a country that is finding it difficult to deal with the world”says Bianchi, for whom one must first of all ask what is a sustainable industrial plan for the banking system. "If we say that exports are the key to recovery - explains Bianchi - then we have to support it, let's ask ourselves how many Italian banks are able to support companies in the markets that count, such as Hong Kong". So a new M&A season awaits us to consolidate a system fragmented into small and medium-sized institutions? Likely. But not like in the past. Today the road passes abroad, in those areas where there is growth, to compensate for the difficult economic situation of the domestic market. "Which Italian bank can realistically propose itself as a consolidator today?" asks Bianchi who launches a provocation: "One could think of a Chinese bank that incorporates our popular banks, to play the popular Chinese why not?". Or Africa, which is a candidate to become the new emerging frontier: "Perhaps Italian institutions could qualify here to go and buy other banks".
