May 2, 2017    6 minute read

Struggling Venetian Banks and Managing the Ire of Financial Media

Entering A Liquidity Black Hole    May 2, 2017    6 minute read

Struggling Venetian Banks and Managing the Ire of Financial Media

The daily volume of news being produced is enormous and sometimes that news delivers conflicting and diverging information. Often newspapers simply aim to be on “top of the pile” and consequently give a false picture of what is going on. This is very transparent in the case of banking in Europe.

EU leaders in Brussels are working hard to solve all forms of major banking issues through regulations’ modification (Basel III, Solvency I) but also through new criteria for establishing capital requirements and risk assessment. Examples of new obligations to keep liquidity risk under control are the Liquidity coverage ratio (LCR) and the Net Stable Funding Rate (NSFR). The first ratio is given by the division of high-quality liquid assets and net cash outflows over the following 30 days. The second one is the result of the split between the available stable funding and the mandatory stable funding.

It is expected that the NSFR requirement will enter into play by the 1st of January 2018. On the one hand, the ECB is trying to kick-start the economy by pushing banks to make more loans, but on the other hand, banks have more risk restrictions that have an impact on the provision of loans.

Recently, with the Tltro-2 operation, Italian banks have forfeited $62.8bn, despite the numerous opinions contrary to the granting of additional funding. Banks are often seen as tools to consistently enrich the same people with public money, but this is not always true. They are critical to the economy, and without their presence, we would still be in recession.

Going Back to the Core Problem

Thus the apparent dilemma: a bank cannot be let to fail because the resulting macroeconomic damage would be at least 20 to 40 times the money needed to recover losses, but, there is a collision with the policy of austerity and liberalism. However, state aid should not be allowed because it would falsify free competition and, secondly, there is the opinion that managers should not continue to receive millionaire bonuses despite disastrous management.

Public opinion has very much shared this last thought, and newspaper news has only kept on letting the discontent grow by representing a flatly ‘wrong’ picture and leveraging on what is the biggest citizens’ matter of concern in times of crisis, their money.

Newspapers do not explain the financial interdependence, the financial exposures and the ties that banks have with the real economy. Banks can be considered the linkage between the financial world and the real economy. If one of these links were to break, the damage it would cause to the whole system would be enormous. Particularly at a time when liquidity has become the most important financial instrument after the Credit Crunch. History can witness this reality; the Lehman Brother case has taught us a lot.

Despite this, it is not fair that public money is used (to a small extent) to fund manager remuneration. For this reason, the regulations are changing, but, as it is known, there are many ways to bypass the law especially on a financial level.

The Banking Situation In Italy

Turning to the matter of Venetian banks, the mountain of issues seems to be too much. There are too many shareholders, customers, and too many territorial issues. Atlante has invested billions, and probably more resources will be disbursed. The liquidation hypothesis would cause billions of losses and thousands of jobs would go into smoke, damaging the entire territory. Moreover, Penati will hardly allow the Atlante investment to be reset and with it all the lenders’ interests. The approximately $5bn needed to restore the parameters of asset security are nothing if compared to the billions needed to depreciate the shock that would result at the macroeconomic level. Obviously, these two institutions cannot be maintained with public resources forever, but they must be given the opportunity to return to competitiveness. The solution is to merge and conduct precautionary recapitalization (or a similar form of state aid aiming at overcoming the state aid ban).

News Can Kill Banks: Long and Short Term

What is not allowing the restoration of trust is the information made publicly aware. There is an increasing volume of news with statements lacking context and statements with their language modified to give off bad impressions. This is highlighted in the case of Northern Rock and the statement made by Robert Peston, the British Broadcasting Corporation (BBC) chief economist. Indeed, the information must be defended, but it cannot influence the situation of a bank or institution to such an extent since it is not only damaging the bank but also the entire economy. Thus, a reform in communication would be desirable.

In the case of the two Venetian banks, a real liquidity black hole was created by the ECB’s imposition in blocking the treasury share acquisition reserve. The news has led to a form of herd behaviour. In these situations, everyone wants to carry out the same kind of negotiations simultaneously. This led irreversibly to a liquidity black hole, and in this case, it was due to crowded exits. If this had happened to Unicredit, Intesa or any other bank, would it have been possible to re-establish the situation only with these banks’ strengths? Looking at the past, and in particular, at some other similar cases, the answer to the question would be a no.

When the merger takes place, and public intervention will have been carried out, the risk which we will have to confront with will be the same spiral that involved Northern Rock. If no solution will be found or if the new bank does not return to competitiveness, after the billions needed to recapitalize it and to recover the losses (less than the macroeconomic damage of a bail in hypothesis), the state will be forced to hand over the new bank for a much smaller amount than the invested capital.

Bailing In

Bail in is a tool to intimidate managers and executives; its implementation is very difficult unless a plan is put in place to amortise the damages for the economy that would result from a liquidation hypothesis, such as the redeployment of employees in other institutions.

The European Union and in particular the ECB are working hard to boost the economy and to find a solution to these issues. Certainly, as Mario Draghi conveyed: “The euro has saved us from the crisis”, without all the institutions and bodies that monitor and study the economy right now, at this time, we would have had a public debt that we would not have been able to pay off.

A Long Road Ahead

Nevertheless, the structural problems of the Italian and European economy are still numerous. Cyclical crises are hard to contrast, and the whole system needs to be rethought from the point of view of its logic to ensure greater stability, efficiency and partly also development.

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