Italian Banks Face a Bailout Following a Surmounting Bad Loans

April 11
6:58 AM 2016

Since the beginning of this year, shares of Italian banks have shrunk to nearly half of its value, due to an alarming rate of their bad debts.This force the central bank to prepare a bailout plan.

Bad loans in Italy have accumulated to €359.7 billion ($410.4 billion), which is one-fifth of the total size of the country's economy. With the bad loans at that size, Italy is at the risk of a €4.95 billion ($5.65 billion) bailout to save its banking system. Daily Mail reported that Italian finance minister Pier Carlo Padoan in Rome called a meeting to arrange detail of the bailout plan on Sunday.

Among the bad loans in the Italian banks, the country's third largest bank, Monte dei Paschi di Siena are the worst. With a €50 billion ($57 billion) in bad loans the bank's share has plunged 81% in the past 12 months. In the risk-testing exercise conducted two years ago, the bank was recorded as the worst performer.

Analyst at Hamburg-based investment bank Berenberg Eoin Mullany said that the banking sector in Italy is facing a pivotal moment. He warned that rescue plan that involve depositors will cause a chain reaction that will affect the entire banking system of Europe.

On Monday, the largest banks in Italy will meet the Treasury and Banca D'Italia, the Italian central bank. The meeting will layout the detail plan to set up a government-backed fund to buy bad loans from the banks. The bailout plan is expected to stop the capital shortfall in Italian banks and to appease concerns of Italian banking system.

While precise mandate for the fund will be decided later, but it is possible to include recapitalization of weak banks and buying the non-performing loans. The bank will also be empowered to raise its value in the stock market. According to The Sunday Times, Italian banks advisers also suggested that two banks, Veneto Banca and Banca Popolare di Vicenza, would be forced to raise €2.5 billion ($ 2.8 billion) on the stock market in the coming weeks.

At the same time, Bank of Italy also launched a supervisory inspection in the Milan branch of the Bank of China in regard to the illicit money flows from Italy to China. Reuters reported the probe aims to seek relationship between the Chinese bank and defunct Chinese money transfer operator Money2Money, which dominated the market of Chinese remittance from Italy.

However, Bank of China said the inspection is a routine procedure every three to five years. The bank told Reuters, "Bank of China is providing full cooperation to the Italian Supervisory Authority."

As Italian banks face a €4.95 billion ($5.65 billion) bailout, Banca D'Italia takes all necessary measures to protect its financial system. The central bank will purchase bad loans from the troubled banks and prevent the capital outflow.

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