World Economy

Problems Undermine Trust in Italian Banking System

Problems Undermine Trust in Italian Banking SystemProblems Undermine Trust in Italian Banking System

State intervention to support Italian banks may be needed because of the risk that current difficulties could undermine trust in the nation’s financial industry, said Bank of Italy Governor Ignazio Visco.

“Given the risk that, in a context of high uncertainty, limited problems could undermine the trust in the banking system, a public intervention cannot be excluded,” Visco said in a speech on Friday at the Italian Banking Association’s annual meeting in Rome, Bloomberg reported.

Italian authorities are racing to shore up a financial system burdened by about €360 billion ($399 billion) of troubled loans, amid the ECB’s increasing pressure on Italian lenders to clean up their balance sheets and tackle troubled loans that are undermining lending. Prime Minister Matteo Renzi is exploring measures to support Banca Monte dei Paschi di Siena SpA and other weak banks after Britain’s vote to leave the European Union exacerbated a selloff in Italy’s lenders.

Speaking at the same event in Rome, Finance Minister Pier Carlo Padoan said market solutions could solve banks’ difficulties, adding that the government was working to make tools available if needed. He said any state intervention would have to be precautionary.

Visco, who is also a member of the European Central Bank’s Governing Council, said the Bank of Italy was working “together with the other authorities, with determination, to promote efficient market interventions” to support Italian banks.

  Respecting EU Rules

“European regulations provide for the possibility of precautionary public interventions also on capitalization, with reference to the results of stress tests,” Visco said. “The current situation, thick with risks for financial stability, requests the readying of a state backstop to activate in case of necessity, fully respecting EU rules.”

Italy is in talks with the European Commission on a plan to recapitalize Monte Paschi and other banks, according to people familiar with the matter. Talks are stuck on whether creditors should face losses if taxpayer funds are used. Italy favors a precautionary re-capitalization under the European Union’s bank-resolution rules, which allow governments to bolster lenders when capital gaps emerge in stress tests.

As the talks with the commission drag on, Dutch Finance Minister Jeroen Dijsselbloem, who is also chairman of the Eurogroup, told reporters in The Hague that Italian banks were not facing an immediate crisis. “At a certain point, you need to take the losses, take precautionary measures, that will cost money, and the bank, or banks, are going to have to do it,” Dijsselbloem said.