Too small to fail

7 April 2017 By Neil Unmack Follow @unmack1

The EU’s willingness to let Italy bail out sickly banks looks a retreat from post-crisis reforms on bank failure. Investors might conclude that senior creditors will always be saved. A key change since the financial crisis – abolishing implicit subsidies – is being muddied.

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Banca Popolare di Vicenza and Veneto Banca said on April 4 they qualified for a government bailout, and would need 6.4 billion euros between them.

BPV said it would need 3.3 billion euros, and qualified for a so-called “precautionary recapitalisation” because it met a minimum capital threshold. Veneto Banca said its capital shortfall was 3.1 billion euros.

Europe’s Bank Recovery and Resolution Directive enables banks to be deemed failing, or likely to fail, and hence placed into resolution when they take government funds. The clause allows exceptions if the funds are used “to remedy a serious disturbance in the economy of a member state and preserve financial stability”

In addition, government funds can only be used if a bank is deemed solvent, and limited to injections necessary to address a capital shortfall established in stress-test exercises.

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