Originally posted at Zero Hedge
With the world still napping in a post-Christmas daze, the ECB surprised Italian bank watchers on December 26 when it advised the insolvent, and nationalized, Monte dei Paschi that its capital shortfall had increased by 76% from €5 billion to €8.8 billion as a result of a deposit flight, aka “bank run”, that had accelerated and led to a deterioration in the bank’s liquidity.
The week before, Monte Paschi admitted, it had already suffered roughly €14 billion in deposit outflows, or 11%, in the first nine months of the year. And then, out of nowhere, the ECB said on Monday that Monte Paschi “was solvent but signaled the bank’s liquidity position had rapidly deteriorated between the end of November and December 21.”
Needless to say, Italy was furious at the ECB for unexpectedly admitting that the country’s banks are not only in a worse shape than presented at a time when the government requested the parliament’s approval to issue an additional €20 billion in new public debt to fund bank nationalizations, but that the bank run gripping at least one of Italy’s banks was substantially more aggressive than portrayed.
The anger culminated overnight when in unusually critical comments of the ECB, Italy’s economy minister Pier Carlo Padoan said in a newspaper interview the central bank’s new capital target was the result of a “very rigid stance” in its assessment of the bank’s risk profile. He bashed Draghi saying, that the European Central Bank”should have explained more clearly why it nearly doubled its estimated capital shortfall for the ailing Monte dei Paschi di Siena (BMPS.MI) bank, which is being bailed out by the state.”
“It would have been useful, if not kind, to have a bit more information from the ECB about the criteria that led to this assessment,” Padoan told financial daily Il Sole 24 Ore.
The ECB told the Italian treasury of its decision in a letter, which Padoan said was just five lines long and which has not been made public.
Confusion spread quickly, and as Reuters writes, “it irked the Rome government and has quickly turned into a political issue. A group of lawmakers from the ruling Democratic Party asked Padoan and Italy’s foreign minister on Wednesday to explain in parliament what had happened.”
In retrospect, Padoan should be grateful the ECB did not provide “more information”, because the reason for the capital shortfall is simple: an accelerating bank jog, or perhaps an all out run, affecting at least Monte Paschi and perhaps other banks. And the only thing that makes bank runs worse is the realization that one is taking place. So by keeping its mouth shut, the ECB prevented what may have been a far worse panic.
And, ironically, by protesting, Padoan only makes articles such as this one – which are happy to answer his questions and resolve his confusion – possible, and in turn raises concerns and fears among the Italian population about what else its government isn’t telling it…