The liquidation of two Italian banks, Veneto Banca and Banca Popolare, this week puts increasing pressure on other banks in the Eurozone to reduce their holdings of bad loans, according to Fitch Ratings.

It remains to be seen however, whether securitization will play a significant role. Two large deals planned by UniCredit and Banca Monte dei Paschi di Siena have yet to launch, underscoring how difficult it is to either sell these loans or bundle them into collateral for bonds. If either is able to close deals in the near future, Fitch expects other banks may be more inclined to pursue the securitization route as a means to lessen their stocks of NPLs.

Bloomberg News

Veneto Banca and Banca Popolare have some of the worst ratios of nonperforming loans to gross assets in Europe, as does Spanish Banco Popolar Espanol, which was put into resolution by EU regulators this month.

Fitch noted that by the end of 2016, 12 of Italy’s banks had more than double the NPL to gross loan ratios of the weighted average (5.1%) reported by the European Banking Authority. (Some large Greek and Cypriot banks have worse ratios.)
It said that the contrasting treatment of Banco Popular Espanol, which was put into resolution, and Veneto Banca and Banca Popolare di Vicenza, which were liquidated, raises questions about the application of the EU's Bank Recovery and Resolution Directive (BRRD).

Implemented in early 2015, the BRRD requires banks to prepare detailed recovery plans in the event of distress and increases the ability of the government to restructure failing banks. It is intended to shield taxpayers from bearing the costs associated with failing banks, and instead putting that burden on creditors.

However, the Italian government wanted to avoid bailing in the banks’ senior bondholder debt as many of its retail investors hold that debt.

According to Fitch, the Italian government transferred senior bondholders to Intesa Sanpaolo along with the banks’ performing assets. NPLs along with subordinated debts and equities were kept at Banca Veneto and Banca Popolare di Vicenza.
By doing this, senior bondholders are protected from losses, and the government is paying €5.2 billion in cash and guaranteeing the bank €12 billion.

Fitch believes the EU’s treatment of failing banks will be less ambiguous once it implements its MREL in 2022. The MREL is the EU’s minimum requirement for own funds and eligible liabilities. For now, insolvent banks in the European Union are being updated to enable them to issue non-preferred senior debt.

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