The Strategist

The European Commission green-lights Monte dei Paschi’s rescue plan

06/02/2017 - 14:46

The Italian authorities are getting ready to recapitalize the Banca Monte dei Paschi di Siena SpA after the European Union and Italian officials have agreed on a draft plan that will include the further restructuring of the world's oldest bank, Bloomberg reports.

giuliaduepuntozero via flickr
giuliaduepuntozero via flickr
European Commissioner for Competition Margrethe Vestager and Italian Minister of Economics and Finance Pierre Carlo Padoan reached an agreement in principle on the restructuring plan for Monte Paschi, which, according to the statement, will open the way to preventive recapitalization. The deal that followed the "intense and constructive interaction" between Italy, the EU and the ECB still requires a formal approval.

Monte Paschi "will undergo a deep restructuring to ensure its viability, including by cleaning its balance sheet from non-performing loans", said Vestager. "I hope this will allow MPS to focus on lending to Italian enterprises and supporting the Italian economy", she said.

Earlier, Monte Paschi was forced to seek help from the government of Italy, after in December the bank was unable to attract additional capital from investors. The European Central Bank said that the Italian bank should close the capital deficit of € 8.8 billion. According to the Bank of Italy’s calculations, the government will provide about € 6.6 billion, and the remaining lack of capital will be closed at the expense of creditors.

The agreement sets a precedent in how governments can help troubled financial institutions without resorting to bank rescue rules adopted after the financial crisis. According to EU legislation, the need for "emergency public financial support" usually means that the bank is failing and must be closed. The only exception is temporary state assistance for eliminating the capital deficit identified in the stress tests, if a number of conditions are met.

Before Monte Paschi receives state aid, the ECB must confirm that Monte Paschi is solvent and meets capital requirements, and Italy should receive a confirmation from private investors that they will acquire a portfolio of non-performing loans.

Monte Paschi is in talks with the funds, including Credito Fondiario SpA and Fortress Investment Group LLC, about investing in risky securitization tranches, which are backed by loans with a nominal value of up to € 30 billion, sources said last month. Atlante II, a private investment fund created with the participation of the state for investments in non-performing loans, is expected to purchase the largest part of such tranches.

Now the EU has to agree the final restructuring plan for Monte Paschi with Italy. Italy will need to officially notify the EU of the plan, including plans for restructuring obligations. Then, the EU will proceed to the final approval for recapitalization. 

Salaries of top management of Monte Paschi will be limited and will not be more than 10 times higher than the average salary of bank employees. This is one of the measures "to significantly improve the efficiency" of the bank's activities.