December 15, 2016    3 minute read

The Role Of The State In Saving Banks

Banking Bailouts    December 15, 2016    3 minute read

The Role Of The State In Saving Banks

The priority of the new Italian government is Monte dei Paschi di Siena (MPS). This case exemplifies once again the difficulties in finding a solution to banks’ instability, looking for increasing capital in anaemic markets and struggling with the management of non-performing loans through securitisation with an uncertain outcome. State aid would be a possible solution for saving MPS.

The New Regulation Changing The Game

Since 2008 cases of state aids to banks have been numerous. But after the BRRD (Bank Recovery and Resolution Directive) established the regulation of bail-ins for every state, aid became very difficult. It is important to underline that in Italy there are not as many state aids as there are in other European countries. Besides that, Italy participates in the ESM fund (European Stability Mechanism), contributing 3-4% of its GDP without exploiting the fund’s advantages.

In the history of the crisis, the public support has always been a determining factor of political interventions in the bank failures. It is important not to underestimate the risk of a pervasive socialisation of intermediaries’ losses, and all roads to prevent moral hazard must be pursued. But the role of the state in ensuring the solvency of banks and related payment system cannot be eliminated.

At a European Community level, in the period between 2008 and 2014, before the introduction of bail-ins, states were authorised to grant aid to their banks for almost €5,000bn. Five countries have granted over €500bn each, led by the United Kingdom with over €750bn and Germany with €650bn. For Italy, the authorisation was only for €102bn, same as Greece.

Total amounts (billion) of state aid approved, EU-28 (2008-2014)


(Source: European Commission)

State Aid Interventions

As seen in the previous table, the Italian banking system is strongly influenced by the absence of state aids. In fact, while other countries were restructuring their systems the Italian banks confirmed their structural weaknesses. In Germany, banks received from the state at least €230bn for Landesbank and Sparkasse. Another case is Commerzbank, which received €10bn in 2009.

In Austria, state aids weren’t so strong, but Vienna nationalised Hypo Alpe Adria with an intervention of €5.5bn and created a bad bank for NPL restoration. In 2012 the public fund for Banking Restructuring (FROB) in Spain participated with a 45% in the bad bank constitution. In order to save the Spanish system, it was crucial that the ESM fund participated with €40bn. In 2009 Ireland created the NAMA (National Asset Management Agency) in response to real estate crisis.

The Signaling Effect

Only 40% of approved state aid was used (€1,900bn). The gap between the state aid approved and the state aid used is explained as the result of public intervention, a sort of “signalling effect”. In fact, in the initial quantification of state aid, the price of the market speculation is included in the absence of a safe and stable system. In Italy, this sounds very familiar.

When a state announces a public aid, it limits speculation and gives a signal of certainty, safety and transparency about the solution of the problem. Italy needs stability to rescue its banking system and solve its weaknesses (caused by bad management). There is evidence that the state government aid would play an important role in solving the problem as soon as possible in order to avoid volatility and market pressures.

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