Is Italy’s Banking Problem Becoming Too Big to Solve?

They said it was contained, but it’s now hit the largest bank.

Ever since the European Commission and ECB jointly decided that Italy’s government could bend EU banking rules out of all recognition in order to bail out the country’s third largest bank, Monte dei Paschi di Siena, Europe’s financial stocks have been on a tear. But the good times were brought to a grinding halt Monday after Italy’s largest bank, Unicredit, which employs 55,000 people in 17 countries, announced losses for 2016 of €11.8 billion.

By the bank’s logic, it would have announced profits if it hadn’t had to write off €12.2 billion, including billions of euros of non-performing loans (NPLs) festering on its balance sheets.

But it got worse. In the registration document for its pending recapitalization, published on its website today, Unicredit also announced that its capital ratios at the end of 2016 might fall short of ECB requirements. It was enough to prompt a 5.45% slide in its shares. As detected in the ECB’s latest stress test, Unicredit already had the slimmest capital buffer of all Europe’s Global Systemically Important Banks (G-SIBs). And it just got slimmer.

The reality today is not comforting: . Somehow, Unicredit will need to raise €13 billion in new capital by the end of June. If successful, it would be the biggest capital expansion of Italian stock market history.

Earlier this month, the bank pushed through a 10:1 reverse stock split, cutting its shares outstanding by a factor of 10 and multiplying the share price by 10. So its shares today plunged 5.45% to €26.20 instead of to, say, €2.62. It makes the shares look more palatable, but it does absolutely nothing to the bank’s market capitalization, which is down to just €16.2 billion.

The bank is also planning to cut 14,000 jobs by 2019, close 944 of its 3,800 branches, and offload almost €18 billion of bad loans — a gargantuan ask even at the best of times. And for Unicredit and Italy as a whole, these are most certainly not the best of times

Continue reading the article at WOLF STREET

One thought on “Is Italy’s Banking Problem Becoming Too Big to Solve?

  1. FOLLOWING EXCHAMGE ORIGINALLY APPEARED ON “WOLF STREET”, where this article appeared.:

    RD Blakeslee
    Jan 31, 2017 at 11:22 am

    It seems to me that a worldwide bank collapse is possible.

    If it happens, will the wealthy elite suffer loss of wealth and perhaps even economic hardship along with the working class, for the first time since the 1930s?

    Will the increasing percentage of net worth of the wealthiest be reduced, relative to the poorest?

    Reply by Nicko
    Jan 31, 2017 at 11:31 am

    The wealthy will be just fine, provided their assets are diversified and locked away in safe-havens. For example, most good private banks are completely insulated from the global economy – which is just as it should be.

    Reply to Nicko by RD Blakeslee
    Jan 31, 2017 at 11:45 am

    I would like to know more about “private banks”.

    Can you give me a citation where I can read up on them?

    I am MOSTLY insulated from the global economy by means other than private banks, but wonder about complete isolation.

    Like

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