Fluctuat etc …

by | 17 May 2018 | Sustainable Finance

There we are : the leaders of Italy’s two leading populist parties are going now to start to accuse investors of trying to “blackmail” (it’s the word they used yesterday) their efforts to form a government by selling Italian assets …

At the same time, in Brussels, the legislative bodies are talking about the best way to organize the bail-in of a failing bank by revising the Bank Recovery and Resolution Directive (BRRD). They should enter in the final run next autumn … for the tenth birthday of Lehman collapse. Ten years to address the issue ! In French, the word “resolution” also means “determination” …

As stated by European Treaties, the initiative came from the European Commission, who proposed a revision of BRRD in November 2016 as part of what is commonly called in Brussels the “Risk Reduction Measures” package. The council would like to agree on its own draft at the next Ecofin meeting, on May 25th, opening the way for usual trilogue negotiations with the European Commission and Parliament.

One of the issues at stake is to define what should be the minimum amount of “subordinated” debt maintained in the balance sheets of banks, in the wake of decisions taken by the G20 and the Financial Stability Board for systemic institutions at the global level. For banks, subordinated debt is an expensive way to finance themselves as the holders are supposed to be called immediately after the shareholders to absorb losses and want to be remunerated for that risk. But it’s also a guarantee that depositors will not suffer losses as these losses will have been absorbed by junior creditors first, the basic concept of the “bail-in”.

On the eve of last political arbitrations expected of Ministers, the debate is still about the level of subordination and the latitude left to the Resolution Authority to go beyond. But it also relates to the scope of the banks concerned by the requirements.

In the original council text, all banks under 75 billion euros of assets size would be exempted from the subordination thing (but not of the rest !). The press reveals this morning a leaked council version dated May 7th suggesting a higher threshold, set at 100 billion euros rather than 75 billion euros.

France and the Netherlands have already consolidated their banking sector. No exemption for them. Germany has small saving banks that would have fallen below this threshold in any case. Piraeus, the largest bank in Greece is definitely under the 75 billion threshold while Caixa Geral de Depositos, the largest Portuguese bank is a bit below 100 billion euros.

Italy will be obviously affected by the level which will be finally agreed on. In June 2017, thi country showed a clear reluctance to bail-in senior creditors for Banco Popolare di Vicenza and Veneto Banco (which by the way were together well under 75 billion euros of assets), while Spain was doing it with no reservation with Banco Popular.

The yield on the 10-year bond, hit 2.12 per cent yesterday, bringing the Italy-German Bond Spread at 143 basis points, lower than its long term average of 2.01%. It’s a proof that until now, markets don’t believe that the potential Five Star-League tie-up would pursue policies they announced … or they didn’t read the program !

Up to now then, everything is going right, apart Italy will not play the World Cup.

“Fluctuat nec mergitur” we say in Paris … Hopefully !

Iconography : Pottery from South Italy, 1250-1300 AC, © Corinth Museum (personal collection)