The government in Italy has been forced to bailout two banks in Venice, a move that will cost 5.2bn euros.
Italy Government Bails Out Two Banks to Protect Savers
This comes just two days following a warning by the European Central Bank that Banca Popolare di Vicenza and Veneto Banca were at the brink of failing.
The ‘good’ assets of the banks will now be under the ownership of the Intesa Sanpaolo banking group.
Paolo Gentiloni, the Italian Prime Minister emphasized that the rescue was necessary to protect consumers and to maintain the banking system’s health.
The employees and operations of the two bank branches will be part of Intesa starting this week. This move is geared toward preventing a possible run on deposits that could have impacted other banks in the country.
According to Pier Carlo Padoan, the Economy Minister, Rome would further offer guarantees worth 12bn euros for any losses Intesa may incur from bad and risky loans.
He added, “Those who are critical of this move should give us a better alternative because I cannot see it.”
The European Commission has approved Rome’s plan, which will avoid a bailout under European rules, which are potentially tougher.
Margaret Vestager, the competition commissioner of the European Union said by letting Italy use state assistance, the country would mitigate economic instability in the Veneto region.”
She further pointed out that these measures would also eliminate 18bn euros in bad loans and enables the consolidation of the banking sector in the country.
Intesas, which is the largest retail bank in Italy, has already bought the good assets of both banks in a symbolic move.
According to financial analysts at Messina, “The Intesa Sanpaolo offer is the only significant offer submitted at the government auction. The banks’ crisis would have significant implications for the banking system in Italy.”
If the two banks had collapsed, up to 4,000 people would have lost their jobs, according to reports by La Repubblica newspaper.
This recent rescue is the latest move in an effort to fix the Italian banking system, which is grappling with bad loans worth an estimated 350 euros, a third of the total bad debt in the Eurozone.
At the start of June, the European Commission and the Italian government agreed on a bailout for Monte dei Paschi di Siena (MPS), which included large cost cuts, a pay cap for top executives and investors incurred losses too.
This agreement came after months of talks over the fate of the oldest bank and the largest lender in Italy, which performed poorly in the European stress tests conducted last year.
In December 2016, Monte dei Paschi had to request state help to cover an 8.8 billion euros capital shortfall following investors’ refusal to inject more funds into the struggling bank.