Alarm bells have gone off ahead of the results of European stress tests, due to be released at the end of July that will reportedly reveal Italian capital needs. Because of the concerns investors are staying away from the recapitalization of the country’s banks.
According to the IMF, Banca Monte dei Paschi di Siena has over $400 billion (€360 billion) of non-performing loans. Experts expect the bank to become the worst performer with the risk of its failure likely to shake the Italian banking system.
The bank has already been bailed out twice, but is likely to need a third multibillion euro cash injection from the government.
EU regulations ban member states from using public money to support failed banks. If Italy follows the rules imposed by Brussels, several national banks will become insolvent.
The collapse of Italy’s oldest bank is likely to jeopardize the political fortunes of Italy’s Prime Minister Matteo Renzi, who is now facing the hardest challenge of his tenure.
The post-Brexit turmoil, sparked a massive selloff of banks stocks in Europe, and left Monte dei Paschi trading at less than one-tenth of book value.
The downfall of the world’s oldest bank, Banca Monte dei Paschi di Siena, in one chart! pic.twitter.com/Gm5ljxD8AM
— jeroen blokland (@jsblokland) July 9, 2016
The bank, which was founded in 1472, is not failing according to the Wall Street Journal. It only needs capital not to fall below the minimum requirements of the stress test.
— RT (@RT_com) July 6, 2016
In this case, European law allows governments to use tax payer money for a ‘precautionary recapitalization’ under strict conditions. The step can be taken if a bank is seen as solvent, with no chance to raise money privately as well as to use the capital to patch recent or future losses.