Italy will pay up to 17 billion euros ($19 billion) to break up two insolvent Venetian banks, which have posed a threat to the country’s banking system, the government announced on Sunday.
The Italian government is making 5.2 billion euros ($5.8 billion) of resources immediately available to keep two banks in business.
Premier Paolo Gentiloni defended the swift action by the government as vital for ensuring Italy’s slow economic recovery isn’t derailed by a “disorderly” failure of Veneto Banca and Banca Popolare di Vicenza.
Rome spent the weekend drafting an emergency decree to liquidate the two banks, which collapsed after years of mismanagement and poor lending.
“If banks are unprofitable, it is better to let them exit the market than keep them artificially alive with precautionary recapitalisation”, Finance Ministry spokeswoman Friederike von Tiesenhausen said, stressing that she could not comment on individual cases.
Confirming a Reuters report, Bank of Italy’s Deputy Governor Fabio Panetta said at the same briefing that a group of investment funds had expressed an interest for the two banks in recent weeks but their offer was rejected by the EU Commission.
The decree must be approved by midnight on Sunday, in time for the reopening of bank branches and markets on Monday.
Both face bankruptcy and European authorities had urged Italy to devise a rescue framework, selling off their good assets and transferring toxic assets to a “bad bank”, essentially financed by Rome.
The move was made shortly after the European Central Bank declared on June 23 that the two banks were either failing or likely to fail.
According to Bloomberg, the government tried for months to rescue the two banks, but its efforts ended on June 23 when the ECB turned the matter over to the Single Resolution Board in Brussels for disposal.
“This is a major step in the direction of a cleaner Italian banking sector”.
A Banca Popolare di Vicenza sign is seen in Rome, Italy, March 29, 2017.
The deal allows Italy to solve the banks’ problems on its own terms, rather than under European rules which could have been tougher on investors than taxpayers.
European Union bank bailout rules require investors (shareholders and bondholders) – rather than taxpayers – to shoulder the burden of any rescue.
Italian financial institutions have agreed to set up a €5 billion fund to shore up weaker banks, in a state-orchestrated plan to avoid a crisis in the eurozone’s fourth-biggest banking sector.