UBS Chief Executive Sergio Ermotti believes that the recent state bailout of Italian banks was unavoidable due to new rules on “bail-ins” from European authorities which would have affected retail investors in the country.
“No, it (the state bailout) should not happen that way but it was almost inevitable considering the fact that bail-in-able bonds, so highly risky bonds … were placed with retail investors,” he told CNBC last Thursday in an exclusive interview.
A bail-in is seen as an alternative to a bailout – the use of state funds to help out an ailing bank. A bail-in is the rescue of a financial institution by making its creditors and depositors take a loss on their holdings. The European Union drew up new rules which opted for the use of bail-ins after many years of state bailouts since the euro zone sovereign debt crisis which had left the taxpayer on the hook.
However, this new regime carries big political risks, especially in Italy where bonds of banking institutions are a popular asset for retail investors.
“I think that was a wrong decision to allow this (the bail-in rules) to happen a few years ago. So it was almost inevitable, but politically speaking, and socially speaking (it) was not acceptable in my point of view to have retail bondholders to be bailed in,” Ermotti added.
Despite the new EU rules – known as the Bank Recovery and Resolution Directive – Brussels allowed Italy’s government to bailout Monte dei Paschi with public funds earlier this month.
This controversial move came around 10 days after Italy again received support from the European Commission for its pledge of a state guarantee of up to 17 billion euros ($19.4 billion) as part of a plan to dismantle two troubled Venetian banks.
The use of taxpayer money to resolve problems and therein protect retail bondholders in all three banks has been highly contentious given it flies in the face of the European Commission’s commitment to avoid bailouts and all of the recent legislation.
UBS’ Ermotti suggested the debacle could have been avoided if high-risk bonds had not been passed on to retail investors a few years ago.
“It’s very important to be very careful in this process when you place the bonds to be sure that people understand the risks they are taking and, in my point of view, those kind of instruments should never be placed with retail investors,” Ermotti said.
Italy’s banking sector has been struggling for years under the weight of a mountain of bad debt, and defenders of the state aid say the government’s and the European Commission’s broader aim of lowering systemic risk validates the decision.