Italy’s Slow Motion Banking Sector Collapse

02 January 2017

Italy’s financial sector is at the middle of a storm following the recent drama of Britain’s withdrawing from the European Union (EU), the Italian banking sector tribulation threatens to become European’s next big head ache.  Following the recent referendum, Bank shares has fallen more than 30percent which has awaken fears about the coruity of the European Union (EU).

Here is a breakdown of Italy’s banking woes and it’s causes and consequences

  • Bank exposure

Not all Italian banks have the same level of exposure to non performing loans.  Monte dei paschi di siena, has been the center of the latest panic in the Italian banking sector.  As it is the third largest bank in the country and world’s oldest.  The share price of Monte dei paschi has dropped more than 50percent since Britain’s EU referendum and its credit default Swap spread. According to Mr codogno, the sharp decline in Italian banks stock after Britain’s withdrawal from EU makes it “even more difficult for banks to raise capital” making it more difficult for them to write-off bad debts in the near future.

  • Bad debt build-up

After the recent financial crisis, Italy’s banks incurred more bad debts than their counterparts did in other countries, as organizations and individuals found it difficult to repay their loans. In five years, the amount of non-performing loans held by the banks increased by 85 percent to €360bn in five years to 2015. In Italy, 17 percent of banks loans are sour that is about 10 times the level in the U.S, where even at the worst of their financial crisis in 2008-09, it was only 5percent among publicly traded banks in Europe, Italian money lenders account for half of the total bad debts.

  • Construction and real estate

The construction and real estate sector makes up most of the country’s bad debt and above 40 percent of corporate non-performing loans. Seven years after the financial crisis in Italy, property markets are yet to recover.  Price of houses in the country, fell 1.2 percent in the first quarter of 2016, the only major drop among EU countries. House prices in the country were rising at an average of 4percent over some period.  In 2014, there were 100,000 fewer construction firms in Italy compared with 2008, a decline of 16 per cent. This led to a decline in employment of almost 30percent. As a result of this, thousands of property related businesses folded up, bringing the already weak banking sector to it knees. In 12months, more than 70percent of the rise in gross corporate bad debt was accounted for by Real estate and construction sector.

Experts have argued that the crisis rocking the Italian banking sector could spread to the rest of Europe, and that rules limiting state aid to lenders should be considered to prevent greater crisis.  Germany has been leading a bloc in the EU that has been insisting that using public funds to recapitalize the insolvent Italian banks is not a good move by the Italian government, because such a move would break European Union state aid rules. Years of lax lending standards left Italian banks unprepared when an economic storm sent bankruptcies soaring a few years ago. At Banca Monte dei paschi di siena(SPA), Bad loans were so huge it assigned a team of 700 to deal with them and brought up a new unit to accommodate them. At a point, the bank put bad-credit unit up for sale, hoping for a speedy liquidation process by a foreign investor.
All this, threatens to cause a confidence catastrophe  in Italian banks, analysts say,  Although Italy has only a bank that is classified as globally significant under International banking regulations – unaccredited. Some analysts say bank stress worsened by Brexit could not only threaten Italy’s economy but also its general stability and potentially that of the European Union (EU).

Analyst had earlier predicted that the exit of Britain from the European Union could lead to a full blown banking crisis in the Italian banking sector. Europe’s banks were already retrenching before the UK vote, and market appears fearful. Many don’t have heavy enough capital buffers. Even before the vote, shares were valued at levels that signaled distress Australian tax office and being an uber driver.

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