Italy’s “Bad Banks,” Created to Save the Financial System, Are Themselves on Verge of Collapse

“The €20 billion the government has set aside is starting to look like small beer.”

Officially dubbed “Bad Banks” — not to be confused with the plain-vanilla bad banks that brought the global financial system to the brink of meltdown — are all the rage these days, particularly in bad-loan-infested Europe. And if the European Central Bank gets its way, their numbers could be set to expand even further. On Friday, ECB Vice President Vitor Constancio called for the creation of a whole new class of government-backed bad banks to help buy some of the €1 trillion in unpaid loans that have weighed on Eurozone banks since the financial crisis.

Here’s how it would work: the already deeply indebted governments in question would issue a load of new debt in order to buy up, supposedly at a heavy discount, billions of euros worth of toxic loans festering on the balance sheets of the banks. In other words, unless you’re a senior banker working for an insolvent bank, or an investor with sizable holdings of slowly putrefying bank shares or bonds, these taxpayer-funded bad banks are by nature a bad idea.

Inevitably, the taxpayer-funded bill keeps rising as the losses stack up, until it can rise no further, putting the bad bank in question under unbearable strain. That’s precisely what’s happening in Italy where it emerged last week that Unicredit, the country’s biggest bank and only G-SIB (global systemically important bank), has significantly written down its investment in one of Italy’s two deeply opaque, part-privately owned bad banks, Atlante I

Continue reading the article at WOLF STREET

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