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The banking industry hasn’t given Italy many reasons to celebrate. The country has stumbled from crisis to crisis, as it fought a rearguard action against the EU’s rules for handling failing lenders.
The EU judges gave Rome a rare moment of joy. The bloc’s general court, its second-highest tribunal, ruled that the 2014 rescue of Banca Tercas SpA by the Italian deposit guarantee scheme didn’t break the law. Italian politicians and regulators feel vindicated. They’ve long argued that deposit insurance funds should be used not just to compensate savers, but also to help struggling banks – a position the European Commission has opposed.
The case has implications that go well beyond a tiny lender in Abruzzo, one of Italy’s smallest regions. Many in Rome believe they could have acted faster to save other struggling banks by using this tool – for example, the four small banks that were resolved in 2015.
The Commission can now appeal to the European Court of Justice, the EU’s highest legal authority. But even if the judgment stands, it will be a Pyrrhic victory for the Italians. A creative use of the deposit guarantee scheme doesn’t magically solve the problems of a rescued bank. It simply forces healthier lenders to share the burden. Any such rescue depletes the scheme, which cannot fulfill its primary mission: To guarantee deposits of up to €100,000. That makes it more likely that taxpayers will have to step in.
A short history of Italy’s recent banking troubles illustrates this point. After the EU blocked them, the Italian authorities found an imaginative way to let the guarantee fund intervene anyway in saving Tercas: They used a “voluntary†scheme that doesn’t count as state aid. But Banca Popolare di Bari SCpA, which rescued its rival with the help of the fund, now finds itself in need of a new capital injection.
Italy’s banking system has also chipped in to contribute to a separate rescue fund, Atlante, which took over Banca Popolare di Vicenza and Veneto Banca. Atlante failed to turn around banks, which were liquidated. Finally, the deposit scheme now intervened to rescue Banca Carige by investing in a subordinated bond.
This sequence shows that asking industry funds to support troubled banks is not a free lunch. In fact, it rewards bondholders who have lent money to a mismanaged lender, at expense of shareholders who’ve invested in a healthier rival. That’s hardly fair. The banking system will also seek to recoup some of costs from its customers, via higher charges.
Letting regulators do what they want with national deposit guarantee schemes may give the authorities an extra degree of freedom in dealing with crises, but it won’t solve the fundamental problems. These have to do with the quality of the loan-books of certain banks and, most important, their ability to generate profit in a challenging economic and technological environment. When a bank can’t compete, far better to manage its orderly exit than chuck more money at it.
Indeed, a broader use of these schemes would probably hinder a much-needed reform for European banks: Setting up a joint deposit guarantee across euro zone. Several countries, including Germany, are opposed to that because they don’t want to subsidise weaker banks. As mooted merger between Deutsche Bank and Commerzbank shows, German lenders are as disaster-prone as anyone else.
Ironically, a more expansive use of national guarantee funds by Italy or whomever would only make Berlin even more suspicious of setting up a joint one. Rome should be careful what it wishes for.
—Bloomberg