Italian Banking Crisis Was Provoked by Brussels, Bail-In Victims to Be Refunded

In late April, the Italian government issued guidelines for the reimbursement — up to an amount of €200,000 — of depositors and owners of subordinate bonds who were unlawfully “bailed-in” in the past years. The measure, which is to be financed with €1.5 billion over three years, applies to customers of two Veneto banks, Banca Popolare di Vicenza and Veneto Banca, liquidated in 2017, and four banks in central Italy — Banca Etruria, Carife, Banca Marche and Carichieti — liquidated in 2015.

The measure challenges current EU law, but was legitimized by a potentially key ruling ruling of the European Court of Justicehanded down on March 21. Indeed, the Court established that the European Commission had acted illegally by rejecting a bank bailout in Italy in 2015, thus forcing early bail-in procedures as the only alternative under EU law. That decision unleashed a bond crisis and was ultimately the cause of a 60% drop in capital value of the Italian banking system.

The Italian Banking Association has announced that pending an appeal by the Commission, it will ask for EU13 billion in damages from the Commission. The Italian government is considering a similar action as well.

To review the facts: In 2014, the Abruzzi regional bank Tercas was bailed out through the Interbanking Deposit Insurance Fund (FITD). A few months later, in 2015, the EU Commission (Commissioner for Competition Margrethe Vestager) ruled that the bailout was illegal and forced restitution of the funds. After that, the use of the FITD for bailouts was banned altogether, thus forcing the government to implement a bail-in in the case of the four banks mentioned above, Banca Etruria, Carife, Banca Marche and Carichieti.

The government liquidator at that time, Roberto Nicastro, explained in an interview with Corriere della Sera of March 22 that the Commission decision

“turned what could have been a limited crisis into a systemic crisis. The depreciation of the non-performing loans of the four banks down to 17% of their nominal value put pressure on the entire system, accelerating the crises of other financial institutions: from the Veneto banks to Monte dei Paschi…. The four banks were worth less than 1% of the entire banking sector in Italy. And yet, that episode blocked the issuance of bonds for the entire system in the following period.”

The European Court of Justice ruled on March 21 that a bailout by the FTID, a private fund financed by the Italian banks, was not “state aid” and was perfectly legal, thus invalidating the Commission’s decision. That ruling should set a precedent for the entire European Union.