The Italian Banking Crisis- Is Monte dei Paschi too big to fail?

Italy is finding itself right in the middle of Europe’s banking crisis. Every bank has bad

loans from time to time. In Italy, the number of bad loans appears to have leveled off.

So why then are shares of Italian banks continuing to free fall? The reason is in part

because the bad loans held by the weakest Italian banks may need to be paid for by other

(stronger) Italian banks.

Last November, four small troubled Italian banks were merged and recapitalized,

turning four failing banks into one larger healthy bank. The bad loans were booked into

the new bank at just 20% of their face value, allowing the new bank to profit on the bad

loans. This fix came at no cost to taxpayers. Instead of using taxpayer funds, healthy

banks were forced to make contributions over the years into a “resolution fund.” This

fund was used to bail out the failing banks.

Historically, this system (fair or not) has been working in Italy. The trouble is

that the number of banks needing bailouts is exceeding the amount of money the healthy

banks can offer before they find themselves in financial trouble. This scenario is

repeating itself all over Europe.

The poster child for this concern is the world’s oldest bank, Italy’s Monte dei

Paschi di Siena (which happens to also be Italy’s third largest bank by asset size).

Although still considered “strong,” Monti dei Paschi has troubled loans of its own. Due

to the above-average supply of bad loans being sold in the marketplace, the prices offered

for these loans has fallen to around 30% of face value. Selling off all of those bad loans

would force Monti dei Paschi to reduce their face value from €46.9 Billion to €12.5

Billion. A reduction to their assets of this size is greater than the bank’s common tier one

equity (meaning that selling all these troubled loans today at 30% of face value would

extinguish the bank’s healthy equity position).

To make matters worse, ordinary Italian savers tend to hold lots of bank bonds.

Many of these individuals lost money when banks failed in the past. The outcry from

everyday savers caused the Italian government in December 2015 to create a new €100

Billion compensation fund, to prevent future bank failures by forcing other banks to


Monti dei Paschi is a great example of the American phrase Too Big to Fail. A

failure of the world’s oldest bank would cause ordinary investors to lose significant

savings in the form of bank bonds. At the same time, continuing to have healthier banks

fund failing banks is a solution that cannot last forever.

Many experts believe that Monti dei Paschi needs a merger. Two banks that have

recently been mentioned are UniCredit and UBI Banca. Reform and consolidation of

Italian banks is coming slowly, but Monti dei Paschi is the most pressing problem.

Failing to find a solution will cost all Italian banks dearly.

(WSJ, 1).


Italian Banks are all in it Together – and That’s the Problem.WSJ. 15 Febr 2016.


Investors Flee Italian Bank Stocks

2016 has not been the most promising year thus far for the world economy. Since China devalued its currency and continues to still see very little light for a turn around, almost all global economies have been feeling the repercussions, especially Italy. In December, Italy received a very underwhelming and disappointing stimulus program from the European Central Banks, which really catapulted the situation to where it is today. Italy has “lost over a quarter of its value” just in the first six weeks of the year. To explain how significant this is and to compare to other economies – S&P has lost 9% of its value, while Japan’s Nikkei 225 has only lost 15%. Banks are not the only economic problem in the country, but corporations are feeling it too, such as Telecom and Fiat. What makes this fall such a catastrophe is the fact that at the beginning of the year (and really since 2014), Italy was projected to be one of the top growing economies in the world largely due to “ultralow valuations, long-awaited pickup in domestic growth, and hopes that the new Prime Minister would bring structural reform.” Merrill Lynch and J.P. Morgan, just to name a few, projected that Italy’s banks would have an outstanding growth period this year, even up until 3 weeks ago it was seen as one of the most favorable equity markets.

But an economy that started at the top is now seen as one of the top worst performing developed markets, and everyone is asking, “is this a buying opportunity or a red flag to pull out?” Many investors have already decoded it’s not worth taking the risk and have started fleeing the Italian economy, which is only hurting it more. This economic instability is important for us all to look at because of the effects it will have on business. The article already mentions that the corporations are feeling the complexities, and businesses are close behind in seeing the domino effect hit them next. What does this mean for export of wine? Does this shape the way consumers will be marketed to by corporations when financially they are struggling? For most people, starting a business here does not seem like the most sound idea. Why would you put your new company, everything you have, into a country where there is no potential for growth and greater risk for loss. With Apple joining the Italian Business Family this year, many other corporations and especially start-ups were thinking about taking the leap to Italy – with the mentality that if it’s good enough for Apple, it could be good enough for us. However, will this economic downturn turn businesses away? Even more seriously, will current Italian businesses start looking elsewhere for a new home? We will keep watching the Italian banks, but more importantly, it’ll be vital for all of us to keep an eye on the global economy through its ebbs and flows.



Rush to the Renzit

Mafia Bosses Captured

As you may or may not know, Southern Italy is riddled with corruption, primarily due to the Italian mafia, which runs rampant throughout the different regions. The mafia has its claws dug deep into nearly every economic sector and has been faulted for increased poverty in Southern Italy.

Often times it appears that the mafia is winning in the war on crime, but on January 30, 2016 the Italian police delivered a huge blow to the ‘Ndrangheta criminal organization. The Italian police captured mobsters Giuseppe Ferraro, 47, and Giuseppe Crea, 37, in Calabria region (The Calabria region is the southernmost region of Italy, forming the toe of the infamous Italian boot) Friday, according to Italian news agency Ansa. These two men had been on the run for some time now. Ferraro was found guilty of murder and Mafia association decades ago, and had been a fugitive since 1998 and Crea was convicted of Mafia association and had been on the run for nine years. The Interior Minister Angelino Alfano gave a statement saying, “Today is another great day for everyone and for the country because justice has won,”.

The ‘Ndrangheta criminal organization is linked to drug trafficking in South and Central America, Canada and the United States. The ‘Ndrangheta was formed in the 1860s, and is involved in kidnappings, corruption, drug trafficking, gambling and murders, according to the FBI. Notably, the group has between 100-200 members in the United States, mostly in New York and Florida.