Like repentant smokers, Europe’s politicians have promised to quit bailing out banks. They’re finding the habit hard to break.
The Italian government wants to rescue three banks which are struggling under the weight of non-performing loans. The trade-offs, as always, are complicated: financial stability now against financial stability later; shielding taxpayers from the costs of a rescue against protecting small investors from heavy losses. Yet the right balance can’t mean saving every struggling bank every time.
Last December, Monte dei Paschi di Siena, Italy’s fourth largest bank by assets, applied for an injection of public money — a so-called precautionary recapitalization — and the European Central Bank and the European Commission are examining its request. Two smaller regional lenders, Veneto Banca and Banca Popolare di Vicenza, have followed suit, as a first step towards a possible merger.
Note that Italy is playing by the rules. The E.U.’s directive governing bank failures allows governments to inject fresh capital into a bank so long as it is solvent under normal circumstances and support is needed to prevent wider economic and financial disturbances. Precautionary recapitalization requires junior bondholders to face losses but, unlike a full-blown resolution, spares investors holding senior debt.
This post was published at bloomberg
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