Friday, 1 July 2016

European Commission Authorized Italian Government to Support Banks

In World Economy News 01/07/2016

European Commission.jpg
The European Commission on Sunday authorized Italy to use government guarantees to create a precautionary liquidity support program for their banks, a spokeswoman for the European Union’s executive arm said, adding that the program was approved under the bloc’s “extraordinary crisis rules for state aid.”
The liquidity support program includes up to ?150 billion ($166 billion) in government guarantees, said an EU official.
The commission spokeswoman declined to comment on the amount of guarantees that were authorized, but said that the budget requested by the Italian government had been found to be proportionate. The Italian economy ministry declined to comment.
The spokeswoman said only solvent banks would qualify for the liquidity support program, which has been authorized until the end of the year.
“There is no expectation that the need to use this scheme should arise,” the spokeswoman said.
The decision, which was taken on Sunday and hasn’t previously been disclosed, appears to be a first indication of governments moving to shore up banks in the wake of market turbulence following the Brexit referendum in the U.K.
“As this decision and other precedents demonstrate there are a number of solutions that can be put in place in full compliance with EU rules to address market turbulence,” the spokeswoman said.
Britain’s vote to leave the EU has sparked a sharp sell-off in banking stocks followed by intense volatility this week. That has exacerbated already existing troubles in the Italian banking sector.
Italian banks have lost more than half of their market capitalization since the beginning of the year, as investors fret about the lenders’ huge exposure to bad loans. That compares to an average decline of less than one third for European lenders.
Some Italian banks have seen their shares drop by some 75%.
A person familiar with the Italian government plans said the cabinet of Prime Minister Matteo Renzi hoped to use a liquidity backstop to contain investor panic, which could result in a run on deposit and affect banks’ liquidity.
The other leg of an intervention plan considered by the government is a direct capital injection for the country’s banking system that could add up to ?40 billion in capital to the banking sector, according to Italian officials. Italian lenders are struggling under the weight of ?360 billion in bad loans, chronically poor profitability amid record-low interest rates, thin capital buffers and high costs.

Source: Dow Jones