Italy’s 3rd Largest Bank On The Ropes Again—– Capital Controls or Bail-Ins Next

Italian Bank Customers Pull Deposits

The CEO of Monte dei Paschi, Italy’s third largest bank, and the oldest surviving bank in the world, admits Customers Pulling Deposits as share prices sink.

Some Monte dei Paschi customers have been pulling savings out of the Italian bank, its chief executive said on Wednesday, as it faces a crisis over a mountain of bad loans that has wiped nearly 60 percent off its market value this year.

CEO Fabrizio Viola did not say how much money savers had withdrawn, or when the outflow began, though he said the fall in deposits was “limited” and that the bank could cope with it as he sought to reassure customers and investors.

Italian bank shares have lost 24 percent since the beginning of 2016 as investors, already rattled about global economic growth, have sold out of a sector with low profitability and about 200 billion euros ($218 billion) of loans that are unlikely to be repaid.

Monte Paschi – Italy’s third-biggest bank – has lost the most ground as it is perceived to be the most vulnerable; it has the highest level of bad loans as a proportion of assets and was the worst performer in a 2014 health check of euro zone lenders.

“Of course clients turning to our local branches are worried about what they read,” Viola said in a statement.

At present the size of the funding lost due to clients who decided to move part of their savings elsewhere is limited and anyway below levels seen during the previous crisis the bank faced in February 2013 which was overcome brilliantly.

Believability Standards

The problem with statements like “fall in deposits is limited” is that no one can possibly know if they are true. We can’t expect Viola to admit the problem is serious.

European Commission President Jean-Claude Juncker set the believability standard in 2011.

Juncker admitted “When it becomes serious, you have to lie“. At the time, he was Luxembourg prime minister.

It’s Serious! Share prices of Monte dei Paschi are down over 50%, the worst of any major Italian bank. Deposits are leaving, and the only statement we have is that withdrawals are “limited”.

Bail-ins have already hit other Italian banks.

In December, bail-ins at smaller Italian banks wiped out subordinate bondholders.

Sergio Picinotti, a 63-year-old unemployed man, lost his entire €40,000 nest egg in Banca Etruria. A friend at the bank said “Trust me, it will take the third world war to shut down Banca Etuuria,” said Picinotti.

Did a third world war just start?

Bad Bank Plan Stalls

On January 20, Bloomberg reported Italy’s Lending Recovery at Risk as Renzi Bad Bank Plan Stalls

With non-performing loans touching a record high of 201 billion euros ($219 billion) in November and delays in creating a bad bank even as the European Central Bank ups its scrutiny, lenders may be reluctant to make new loans.

So far, the ECB’s bond purchase program, known as quantitative easing, has shielded government bonds from the country’s banking woes, with the yield on 10-year debt stable at 1.56 percent compared with a euro-era high of 7.5 percent in November 2011. Italy pays just 101 basis points more than German bunds to borrow for a decade.

Italian bank stocks and bonds, however, have not been spared.

To further grease the wheels of the economy by speeding up disposals of non-performing loans and free up more resources for credit to companies and households, Italian Prime Minister Matteo Renzi’s government has been trying to win approval at the European level for the creation of a bad bank.

The plan has been delayed several times and investors fear recent quarrels between European Commission President Jean-Claude Juncker and Renzi over an alleged lack of budget flexibility won’t make things easier.

If there is a bail-in event this year, Italy is one of the countries where that is most likely to happen,” said Alberto Gallo, head of macro-credit research at Royal Bank of Scotland Group Plc.

“Many banks, deprived of a cheap source of funding such as subordinated bonds and having to repay the loans they got from ECB, may find themselves with a reduced liquidity at disposal to boost lending,” Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London, said by phone.

Gone are the days when concerns about NPLs [Non-Performing Loans]could be simply swept under the carpet,” said Wolfango Piccoli, managing director of Teneo Intelligence in London.

Europe Fears Bail-Ins

On January 11, I commented Europe Fears Bail-Ins: Capital Flight Intensifies in Italy, France, Spain; Are German Banks Safe?

Here’s a table from that post, with Target2 Balances in billions of euros.

Country Symbol Target2 Balance Comment
Spain ES -241.8 Worst Negative Since 2012
Italy IT -229.6 Worst Negative Ever
Greece GR -97.3 Least Negative Since 2015 Q1
ECB ECB -73.8 Worst Negative Ever
France FR -73.5 Worst Negative Since 2011
Germany DE 592.5 Highest Since 2012
Luxembourg LU 140.4 Highest Ever
Netherlands NL 49.4 Highest Since September 2015
Finland FI 31.8 Highest Since August 2015
Cyprus CY 2.4 Second Highest Ever

Lack of Trust

Target2 is a measure of capital flight between eurozone countries. For example: A depositor in a Greek, Spanish, or Italian bank does not trust their bank so the depositor opens up a new account and transfers the balance to a bank in Germany, the Netherlands, or Luxembourg instead.

The recipient banks then park the money at the ECB at negative interest rates instead of  buying Greek, Spanish, or Italian bonds.

Money parked at the ECB at a negative rate of 0.3% hit a new high at the beginning of 2016.

Brilliant Comeback Details

Viola claims there was a crisis in February of 2013 that was “overcome brilliantly”.

How many times does one want to bet on that roll of the dice?

Let’s explore Viola’s brilliant comeback idea from the perspective of Target2 balances for Italy (in billions of euros).

Date Italy Target2 Imbalance
2008 22.9
2009 54.8
2010 3.4
2011 -191.4
2012 -255.1
2013 -229.1
2014 Q2 -149.4
2014 Q3 -197.4
2014 Q4 -208.9
2015 Q1 -191.5
2015 June -188.6
2015 July -195.2
2015 Aug -214.6
2015 Sep -235.7
2015 Oct -223.9
2015 Nov -229.6
2015 Dec ?

Between 2008 and 2010, Italian banks had capital inflows.

Things went to hell in a hurry starting 2011. By the end of 2012, target2 liabilities of Italian banks hit €255.1 billion. By second quarter of 2014, those imbalances shrank to €149.4 billion.

“Brilliance” Explained

Did Viola do something to spur confidence in Italian banks?


What caused the improvement?

  1. On July 26, 2012, ECB president Mario Draghi made this Famous Statement: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.



The ECB and the financial markets liked that power grab by Matteo Renzi who then became Italy’s prime minister.

Money that had fled Italian banks, poured back in, for a while. That honeymoon is clearly over. Care to bet on another “brilliant” comeback?

Not a single fundamental problem with Italy, the ECB, the euro, or Europe in general has been fixed.

Capital Controls or Bail-Ins Next?

In December, only bondholders were at risk. Starting 2016, depositors are at risk, but allegedly only on amounts that exceed €100,000.

Don’t kid yourself into believing smaller deposits are safe. There are other problems, like capital controls. Greece and Cyprus both have them.

Capital Controls in Greece

In 2015, the ECB imposed Capital Controls on Bank Accounts limiting withdrawals to €1,800 a month.

On October 19, 2015, Bloomberg proclaimed A Quick End to Greek Capital Controls? Economists Don’t Think So.

Even if your money is not stolen, you may not have access to it for quite some time.

Why Take Chances?

Viola said the fall in deposits was “limited”.

I ask “Why Take Chances?”

Renzi wants to create a “bad bank”. Under new rules, effective 2016, bondholders and depositors are liable for any losses transferred to the “bad bank”.

Why is the ECB reluctant to approve a bad bank for Italy? Could it be the losses will be massive?

Get Out Now!

Don’t be seen Standing in Line hoping for your money when withdrawals are ‘limited’ via capital controls or outright confiscated by bail-ins.

Avoid the rush. Get out now.

Where? Think carefully.

For further discussion, please see Europe Fears Bail-Ins: Capital Flight Intensifies in Italy, France, Spain; Are German Banks Safe?

Mike “Mish” Shedlock