July 26, 2016
As we reported last week the Italian government wants to have a rescue plan for Monte dei Paschi di Siena ready before Friday, when the EBA will publish the results of a stress test widely expected to find a capital shortfall in MPS. However, while last week the reporting was of the Italian government's willingness to entertain bail-in at MPS after months of resistance, what we're seeing now is yet another attempt at a rescue without direct government involvement.
Yesterday the successor fund to Atlante, the private Italian bank rescue fund, was authorised and constituted under the name of Atlante 2 and with the sole purpose of participating in the market for nonperforming loans. The old Atlante is expected to contribute some €1.2bn or about two thirds of its remaining capital, according to Corriere della Sera. Atlante was originally billed as a fund for the NPL market but it ended up spending about 60% of its funds for the recapitalisation of Popolare di Vicenza and Veneto Banca thus bailing out their underwriters Unicredit and Intesa San Paolo.
The first promise of a roughly €500m capital contribution to Atlante 2 comes from Adepp, an association of quasi-public social insurance funds, reports La Repubblica. Another €500m are expected from the Sga (the remains of a public bad bank created in the late 1990s to restructure Banco di Napoli) and somewhat less - on account of its earlier contribution to Atlante - from the public bank Cassa Depositi e Prestiti. Unicredit and Intesa will contribute some €300m together, bringing their total contribution to Atlante and Atlante 2 to €1bn euros each. Other banks and insurance companies are also expected to contribute too, bringing the total fresh capital to between €2.5-3bn. With €4bn at its disposal Atlante 2 might be in the position to buy the junior tranche of a securitisation of €10bn of MPS' gross NPLs. Roughly this has a book value of 40% and might be securitised at 30%. This would leave Atlante 2 with €3bn to spare for future interventions.
The other problem to solve is the expected recapitalisation of MPS. La Repubblica writes that MPS' capital shortfall might be as large as €5-6bn depending on how the SSM values the NPLs compared to banks' internal model. Nevertheless, we should point out that there is a generalised misunderstanding that the stress test on Friday will include a recapitalisation requirement. In its latest communication on the stress test at the start of this month the EBA clarified:
the 2016 EU-wide stress test does not contain a pass fail threshold and is instead designed to be used as a crucial input into the SREP process in 2016; ... capital guidance does not constitute any form of binding capital requirements and is not expected to trigger the automatic restriction of the distribution and calculation of the maximum distributable amount (MDA);
To wit, the supervisory review and evaluation process (SREP) is the pillar 2 of the Basel accords and not part of the pillar 1 minimal regulatory capital requirements. And the stress test will inform the SREP later this year, but it is not the SREP.
That said, on the recapitalisation of MPS La Repubblica writes that Italy will guarantee a €3bn recapitalisation of MPS. Recall that the Commission's competition authority already authorised Italy to guarantee up to €150bn in newly issued bank liabilities, under the BRRD's exceptions to state aid triggering bail-in. This would require that MPS recapitalise itself by issuing €3bn of hybrid instruments that count towards regulatory capital requirements but are not common equity. Nothing is said of who is expected to buy these €3bn, even with an Italian state guarantee. In case the recapitalisation is not sufficient - either because less than the planned €3bn is successfully placed in the markets, or because the eventual capital requirements rise to up to €6bn, then the Italian government would bail in subordinated liabilities and - already with the Commission's blessing - compensate retail savers. One can expect lots of moral suasion on institutional investors, who would have an interest in avoiding a bail-in. Also on other Italian banks who could face contagion to the market for their own subordinated liabilities in case it all comes to bailing in MPS' creditors.
We also have stories on Erdogan's threats against the EU; on the alliance of Pasok and To Potami; on Theresa May's red lines; on the impact of the terror attacks on the French government; and on why we don't trust the eerie silence in Germany after the terror attacks.