Two Italian Banks Died Last Night - European Banking Crisis Continues

Veneto Banca and Banca Popolare di Vicenza both closed for business on Friday for their last time. It's quite handy to make these decisions late on Friday to avoid bank runs and pitchforks at the teller window. They will be wound down, the subordinate bond holders and stockholders will take the brunt of the loss.

The saga for these two banks began in 2014 when they were identified by the ECB's Office of Banking Supervision for having capital shortfalls due to non performing loans. In 2016, the two banks were given a bailout from the Italian governments "bad bank fund" which totaled $3.5 Billion euros. Yet their conditions continued to deteriorate.

Just weeks ago, the European Commission demanded that both banks raise $1.25 Billion eruos each to solidify their balance sheets and they found no investors. The final decision came in on Friday, close both banks and wind them down. Protecting depositors and senior bond holders in the process. Below is part of the statement released by the Office of Banking Supervision on why they decided to go ahead and wind up the banks.

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"they were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.”

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The failure of these two Italian banks comes directly on the heels of Spain's Banco Popular, which faced the same treatment as Veneto Banca and Banca Popolare di Vicenza, closure and being wound down. Popular was purchased at the last minute by Spain's largest bank, Banco Santander, for $1 euro.

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Spain’s Ministry of the Economy revealed that by 3 pm Tuesday, Popular was no longer able to contain the deposit outflow. “It had exhausted all its lines of liquidity, both ordinary and extraordinary.” It had run out of collateral to cover any further lines of emergency liquidity.

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It would appear that the ECB has shied away from bailing-in these midsize banks with depositors funds. Rather the regulators are forcing the sale of insolvent banks or failing to secure a buyer, shutting down operations and liquidating the assets.

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Questions still linger for other Italian banks that are struggling to survive. Banco Monte dei Peschi di Siena(MPS), which the ECB failed to rule insolvent, just "liquidity challenged." Sounds like the ECB is parsing words to save systemically important banks and let the smaller to midsize banks fold. Due to MPS's size, if it were deemed that they were likely to fail and ordered to wind down, it would risk creating a contagion across the Italian banking sector. A contagion can take many forms: bank runs, sale of bank stocks and bonds, which would tear into an already failing sector, which no entity would have enough dry powder to stop.

Many of Italy's banks face similar challenges to the two that were closed on Friday, overcoming a portfolio of non performing loans and mismanagement. Both of which had TR ratios of over 200%, leaving another 22 banks that are in serious trouble.

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Of Italy’s 500 banks, 113 are at risk (with a “Texas Ratio” of 100 or more) and 24 are seriously in trouble (with a TR of over 200%).

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Only time will tell how much longer these "zombie banks" can continue teetering before the ECB determines that they are likely to fail and closes them for good. Now is not the time to hold bank stock and junior bonds in Italy. As confidence in these institutions erodes further, they will have a difficult time raising fresh investment to meet their capital requirements. Within three weeks, three mid-sized, southern European banks have failed and two did not survive.

The crisis is real, which bank will be next?

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Image source: 1, 2

http://wolfstreet.com/2017/06/07/bail-in-era-for-europe-banking-crisis-spain-italy/

http://www.zerohedge.com/news/2017-06-24/two-italian-zombie-banks-toppled-friday-night