To Rebuild Lost Trust in Italian Banks, Rescued Banks Propose Deal

As to Italian banks try to raise billions of dollars to cover bad loans , they have proposed a deal to settle shareholder lawsuits.

Even as the deal could dent confidence even further, it is the latest episode in Italy’s long battle to clean up its banking system,

More than 600 million euros ($634.92 million) were offered to its shareholder of by the two banks – Banco Popolare di Vicenza and Veneto Banca, two banks rescued by the Italian bailout fund Atlante.

” Maria Paola Toschi, global market strategist at JPMorgan Asset Management, said the banks would “re-pay shares at a pre-defined value in next few months, avoiding the risk of uncertain evolution of huge claims by shareholders and clients,” even though shareholders have yet to approve the deal.

Both the banks have combined bad loans to the tune of 17 billion euros and last October, the European Central Bank demanded that both the banks cut their bad loans.

Both banks may need to raise about 2.5 billion euros in fresh capital, according to Toschi.

“This situation is a big obstacle for recreating interest for new shareholders to invest and underwrite capital increases. Investors are not willing to put in money due to the uncertainty on the eventual impact of these claims in terms of costs and losses on profits and on the net worth,” Toschi added.

When trying to improve the state of the Italian banking system, tThis has been a recurrent theme.

After the Italian bank – Monte dei Paschi di Siena,  failed to attract enough private capital to boost its balance sheet the Italian government had to step in to help the oldest lender in the world recently.

Since the financial crisis due to the high level of bad loans across all institutions, the Italian banking system has been a problem for the third-largest euro zone economy. Customers’ confidence on the system has also been affected by the several attempts to deal with each one of them.

Toshi said that local clients withdrew money, leading to deposits plunging by 30 percent, in the cases of Banco Popolare di Vicenza and Veneto Banca.

“These two small banks are not the next big problem. They are the latest symptoms of the slow-burning non-performing loan crisis that Italy will have to tackle,” Erik Jones, professor of international political economy at Johns Hopkins University, said.

Representing one of the highest in the Euro area, Italy’s non-performing loans represent 18 percent of loans according to the International Monetary Fund.

Moreover, set to continue impacting the political scene are the ongoing problems with the banking system. Italy is expected to hold elections this year and after the resignation of Prime Minister Matteo Renzi, the country is being governed by an interim government.

Further support for anti-establishment and anti-euro parties could be sparked by further issues with the banks and potential big losses for shareholders.

“This all depends upon how much more pain the shareholders of the bank are willing to take. I am sure it will generate significant complaints,” Jones added.

(Adapted from CNBC)

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Categories: Economy & Finance

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