Italian authorities said Sunday they were prepared to spend as much as EUR17 billion ($19 billion) as part of the shutdown of two regional banks, in a deal that will transfer the lenders' best assets to Intesa Sanpaolo SpA for a nominal sum.
Veneto Banca and Banca Popolare di Vicenza, are midsize lenders in the Veneto, Italy's prosperous north east. Both have been flailing for several years despite efforts to shore up their capital and restore their health.
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On Friday evening, the European Central Bank declared that the pair were set to fail, having "repeatedly breached supervisory capital requirements."
That set the stage for the government intervention over the weekend, which will involve splitting Veneto Banca and Banca Popolare di Vicenza into good and bad assets.
The government passed a decree Sunday that will effectively sell the good part of the two banks to Intesa, Italy's second-largest and best-capitalized bank. Intesa said last week that it would be willing to buy the best assets for a token price of EUR1 as long as the government assumed responsibility for liquidating the banks' large portfolio of sour loans.
The EUR17 billion includes the cost of Rome's responsibility for the bad loans, along with items such as covering legal exposure, restructuring of the remaining bank and paying for the expense of personnel issues associated with splitting the two banks into a good one and a bad one.
The EUR17 billion consists of EUR5.2 billion to Intesa and up to another EUR12 billion in state guarantees, including those protecting Intesa from any negative impact to its capital ratios resulting from the acquisition.
At a press conference Sunday, Prime Minister Paolo Gentiloni said that the two banks will open for business regularly on Monday. The banks' situation "reached a point that required a rescue in order to avoid the risk of a disorderly failure," he said.
Italy obtained European Union permission to deal with the Veneto banks using national insolvency laws, thus avoiding inflicting losses on senior bondholders.
Intesa's offer to buy the good bank resulting from this operation was the only "significant" offer, according to an Italian government official.
The case of the Veneto banks is yet another example of Italy wriggling out of strict EU rules built after the financial crisis to prevent taxpayers from footing the bill in the event of the collapse of such institutions as banks.
When the EU authority in charge of winding down the bloc's failing banks -- the Single Resolution Board -- decided it wouldn't take the case, it handed all power over to Italian authorities.
The SRB said Friday night it wouldn't take action because neither of the banks would have "a significant adverse impact on financial stability."
So the two banks will be closed down under national insolvency procedures, and the painful process of EU bail-in -- under which junior and senior bondholders absorb the losses -- is averted. In Italy, a majority of bonds are in the hands of mom and pop investors.
Italian authorities tried in March to use another exception in EU rules to prop up the two Veneto banks. Under so-called precautionary recapitalization, Italy could have injected state money into the ailing lenders, but the commission didn't approve the plans.
Stress tests in 2014 found a multibillion-euro capital shortfall at Veneto Banca and Banca Popolare di Vicenza. A EUR3.5 billion capital investment by a government-orchestrated banking fund failed to fill that gap.
The two Veneto banks reflect the weakness in Italy's banking sector, which is struggling to digest about EUR200 billion in bad loans and has suffered from low profitability and insufficient capital for years. The two banks have a combined capital shortfall of about EUR6.4 billion. In March, they requested government help to stay afloat.
The government is set in the coming weeks to take control of Banca Monte dei Paschi di Siena, Italy's No. 4 bank and one whose problems have threatened the larger stability of Italy's banking system. Rome also had to shut down four small lenders.
--Julia-Ambra Verlaine contributed to this article.
Write to Deborah Ball at email@example.com
(END) Dow Jones Newswires
June 25, 2017 15:39 ET (19:39 GMT)