The Italian government has agreed to inject EUR5.40 billion of taxpayer funds into Banca Monte dei Paschi di Siena (BMDPF 15.65), in a move that comes just a week after Italy decided to spend up to EUR17 billion to liquidate Veneto Banca and Banca Popolare di Vincenza.
Banca Monte dei Paschi di Siena's difficulties have not been a secret, just like the Italian government's desire to backstop the world's oldest bank. The agreement, which was announced yesterday evening by Finance Minister Pier Carlo Padoan, will require BMPS to undergo restructuring that will include the closing of 600 out of 2000 of the bank's branches and the firing of about 5,500 employees. BMPS officials hope that these efforts will produce a return on equity of more than 10.0% by 2021. Common Equity Tier 1 Ratio is expected to reach 14.7% by 2021.
With the rescue of BMPS coming just days after the decision to diffuse two other troubled banks, Italy is showing the desire to use easy market conditions (record high stock prices and near-record low yields) to tackle a problem that has been festering below the surface for years. While the recent efforts deserve recognition, it is worth remembering that a lot more work remains to be done, considering non-performing loans at major Italian banks totaled more than EUR250 billion at the end of 2016.
The European Bank Recovery and Resolution Directive requires that depositors and large creditors of banks are bailed in before taxpayer funds can be used. However, the approach can be modified if national regulators have concerns about risks to systemic stability. With bad loans appearing on the balance sheets of most major Italian banks, forcing one bank into a bail in could cause investors to reduce their debt and equity holdings in other banks that face a similar situation.