February 24, 2017
It's been two months since Monte dei Paschi di Siena threw the towel in its attempt to raise €5bn in a rights issue. As a result, trading in MPS' stocks and bonds was suspended by the securities market regulator Consob, and it remains suspended to this day. One could be excused for expecting the situation to be considered as urgent by the competent authorities, but according to the Financial Times yesterday:
"The Single Supervisory Mechanism, the ECB’s supervisory wing, believes it is waiting for Brussels to agree a plan to restructure MPS and approve state aid. Yet Brussels, in turn, thinks it is waiting for the supervisors to agree a capital plan with MPS before it can finalise restructuring terms."
In other words, the ECB and the Commission's competition authorities both believe the other institution is the one in charge of the MPS brief. A source described the situation to the FT as "surreal". There have been the obligatory non-denial denials. An Italian Treasury official is quoted by Reuters that talks have just begun and will take a few weeks. The Commission's competition spokesman says they are working with Italy and the bank supervisor. According to the Financial Times "officials and bankers expect the state [aid?] deal to be finalised by May." We find it hard to write about all this with a straight face.
The situation described by the Financial Times beggars belief. We're supposed to believe that, to figure out whether MPS is solvent, the SSM depends on a state-aid determination by the Commission which could well take months. What, then, is the status of the Bank of Italy's communication of 29 December? This already explained in a fair amount of detail why the precautionary recapitalisation of MPS was supposed to be of €8.8bn rather than the €5bn of the failed market solution.
Let us sum up what we know. We have a bank with a net non-performing exposure of over €20bn. That's 13% of total assets. The SSM required MPS to come up with a business plan to dispose of a substantial fraction of this, contingent on completing a €5bn rights issue by year-end. This has failed. According to MPS' preliminary 2016 results, MPS' transitional core equity tier 1 ratio has dropped from 12% at the end of 2015 to 8% at the end of 2016, nearly 87% of this loss taking place since September. This is below the threshold of 10.75% set by the regulator. MPS' so-called liquidity coverage ratio dropped from 153% at the end of September to 108% at the end of December. This means MPS' liquidity buffer was a mere 8% above the regulatory minimum of covering its liquidity needs over 30 days. That's enough excess liquidity to last MPS two business days at year-end, having dropped precipitously since September. And this was two months ago. We have no doubt MPS is, as it claims, engaging in "ongoing actions to improve commercial funding and counterbalancing capacity". But, with the stock suspended, are we to believe commercial funding will be forthcoming? Rather, the bank reports that at the end of January it issued €7bn in state-guaranteed bonds, which it will keep to distribute to the market in the next few months or use as collateral for central bank liquidity.
Nobody seems to want to get their hands dirty with a bail-in or a bank resolution. Risk Magazine had a remarkable article last week on the generalised reluctance to apply the BRRD. They spoke to eight experts from national resolution authorities subject to the BRRD, and quote a single one (a Lithuanian central banker) in favour of applying the bail-in rules as written. The only other experts quoted in favour of actually resolving banks have no skin in the game - a resolution expert at an international bank in New York, another at a resolution authority outside the banking union. The problem really is that the BRRD was ahead of its time - as Risk puts it - in the sense that it was approved before banks had built up the necessary loss-absorbing capital buffers. Less charitably, we would say that the BRRD put the cart before the horses: first the bail-in obligation came into force, and then the regulator and the resolution authority started working on the minimum requirements for eligible liabilities (eligible for bail-in, that is). It will take years before most banks have resolution plans spelling out how much they need by way of MREL, and then years again before they can issue the necessary subordinated or convertible debt to meet these requirements. Investor appetite for these instruments is largely untested. And, in the meantime, the authorities in charge of supervision and resolution will be too afraid of the politics to actually do their job.
We also have stories on the Ecofin’s forthcoming discussions of NLPs; on the US stance on the IMF engagement in Greece; on Emmanuel Macron’s economic programme; on the FN’s effort to dispel fear about their Frexit plans; on Martin Schulz' solid advances in the polls; on the strength of the German fiscal surplus; on why Wilders' security breach has become a campaign issue; about an Ireland reunification clause in the Brexit deal; and on why Europe should not overreact to Trump.