Bloomberg — The Most Serene Republic, as the area around Venice was known for a millennium, is now the troubled epicenter of a banking meltdown that’s threatening to derail one of globalization’s great success stories.
The Italian government on June 25 wound down stricken lenders Veneto Banca and Banca Popolare di Vicenza, with some of their assets and liabilities sold to Intesa Sanpaolo, Italy’s largest bank, for a nominal amount. In doing so, Rome committed to using around €17 billion of taxpayers’ money to take on the two banks’ bad loans – shielding not only depositors, but senior bondholders too, from losses.
Although Italy secured the European Commission’s approval, it is hard to avoid concluding the Single Resolution Board (SRB) – the EU agency responsible for dealing with bank crises – flunked arguably its first big test. After all, the winding up of the Veneto banks flies in the face of EU law, as established with the Bank Recovery & Resolution Directive (BRRD) whose main aim was to transfer the cost of bailing out a bank from taxpayers to shareholders and creditors.
The Italian government used a loophole – a public interest clause – which allowed it, with the permission of the EU Commission, to avoid wiping out senior bondholders.
Intesa Sanpaolo SpA, Italy’s second-largest bank, paid a symbolic sum to acquire the healthiest parts of the two Veneto lenders, but the state entity that’s absorbing the 18 billion euros of troubled debt the banks amassed, called SGA, isn’t fully operational yet. That has left left as many as 40,000 small and midsized companies and many of their 200,000 shareholders in the lurch—in many cases without access to financing, unable to do business.
As officials work on the legal framework that SGA needs to start operating, its managers are negotiating with national lenders including Intesa and Banca Ifis to start managing the loans, according to people familiar with the matter.
“The Veneto banks have been crucial for the creation and support of thousands of small companies, which are the backbone of the local economy,” said Luigi Zingales, a Padua-born professor at the University of Chicago’s Booth School of Business. “That model has now disappeared.”