Lessons learned from the world’s oldest bank

This time, Italy’s banks are struggling with non-performing loans that are unlikely to be resolved easily.

The media particularly love to focus on one Italian bank, Banca Monte dei Paschi di Siena (BMPS), because it is the third-largest bank in the country and the world’s oldest in continuous operation, at 544 years of age. Its collapse would undeniably be a huge historical moment in the global financial market.

BMPS recently received a demand from the European Banking Authority (EBA) that it cut the equivalent of US$11 billion (Bt385 billion) from its NPL portfolio or seek more funding to meet regulatory capital requirements. Otherwise, the bank would not pass the European Union’s stress test. 

This could put the whole Italian system at risk of a bank run. Scary, isn’t it?

Apart from the excitement generated by this news, I think what we need to understand more are the foundations of the problem and how to avoid repeating the bank’s mistakes.

Let’s start with the NPL issue. 

It is not only BMPS that is facing an NPL problem, the entire Italian banking system is saddled with no less than $400 billion worth of bad loans. Among the three biggest Italian banks, around 20-40 per cent of total loans are non-performing, which is too many not only in comparison with the European average of only 2-6 per cent, but by any standard. 

This is a result of the fact that nothing was done in Italy during the 2008 global financial crisis. 

Back then, Italian banks argued that they did not face an immediate need of bailouts like those in the United States, the United Kingdom, Spain, Ireland and elsewhere. They believed that the economic recovery would soon come, thus cutting their losses was not felt necessary at that time.

Unfortunately, economic recovery did not come as expected. Even worse, Italy faced an economic depression again from 2012-2014, and that was how the situation started getting ugly. 

The European Central Bank, this time, could inject new money to recapitalise troubled banks. However, under ECB rules, the money can go in only after junior bondholders and shareholders share the current losses through a bail-in. 

The Italian government is politically cornered.

It knows that such a bail-in could spark a political backlash because the people who would suffer the most are local investors, while a referendum on constitutional reform is awaiting, and could be held as soon as October. 

The situation is stuck at this point where the Italian government tries to protect local investors but European officials are not yet prepared to throw out the rulebook or even bend the rules to help Italian banks.

The share price of BMPS has dropped by 99 per cent since 2008. Meanwhile the talking should be concluded by around this Friday, July 29, the date by which the EBA requires a response from the government.

In the meantime, I think this story teaches us some important things that we should always remember. 

First, do not treat bad things optimistically. 

In the banking business, the optimal NPL level should be realistic, not optimistic. Indeed, in 2008, Italian banks’ NPL ratio was around 6 per cent, which was even at that time twice the rate in German, Spanish and French banks. Reducing NPLs should be the plan instead of paying no attention.

Second, monitor most closely the things you need. 

In the case of Italy, the economic depression should not be handled lightly, and both businesses and government must be alert to the data.

Third, do not expect better output from the same input and process. 

Could MBPS BMPS survive if it gets a bailout this time? History tells us that its two latest efforts to raise capital in 2014 and 2015 could not help it avoid the problem.

The result of the longest chain of faults committed by regulators, politicians and managers over a half-millennium cannot be rescued that easily.

Personally, I do not think BMPS is an innocent victim, as a corporate that cannot ensure the above three important key points is not a healthy business.

Thailand’s banking system once had an NPL rate of around 30 per cent, during our 1997 crisis. I am quite happy to say that our average NPL rate now is just 2.5 per cent, which means we are not near another crisis. However, we always need to be realistic, be well informed, and not repeat any failures.

 

Jitipol Puksamatanan is global economist and currency strategist at TMB Analytics. He can be reached at [email protected].

Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives.