It's not a solvency crisis, it's a liquidity crisis. Now where have we heard that before? As the world's oldest surviving bank, Monte dei Paschi di Sienna, lurches towards a state bail-out, the European Central Bank (ECB) has told it that it needs €8.8 billion in new capital, well above its own initial estimates. However the ECB added that it believed that Monte dei Paschi remains solvent - in other words it is a viable institution, but needs more capital in its balance sheet to safeguard its position. Some key lessons from Ireland's experience shows that the Italian authorities need to move quickly.
1. Get to the bottom of it quickly:
One of the big problems of the Irish banking crisis was continual denial by the banks of the extent of their problems -and the inability of the government and regulators to get to the bottom of it. Remember the mantra about it being only a liquidity crisis? And remember the PWC report after the September 2008 bail-out which said Anglo still had enough capital? All this caused long delay in dealing with the Irish crisis and increased its costs.
And delay in dealing with a banking crisis is toxic. At the time, as the bad news here seeped abou the Irish banks gradually out, it became clear how quickly liquidity problems could put question marks against the fundamental solvency of institutions. As soon as depositors lose faith and start withdrawing funds, things quickly go from bad to worse.
Monte dei Paschi is now seeing deposits starting to seep out. Depositors have been withdrawing funds and the ECB, having estimated that the bank needed €5 billion in additional capital in the summer, now says it needs €8.8 billion.At the moment the plan is for what is called a precautionary recapitalisation under which the State would pay in most of the money and around €2 billion would be recouped from junior bondholders. Action is needed quickly before further despoits disappear.
2. Don’t try and bail out a bank if it is bust:
There are a muttered warnings from Germany that Monte dei Paschi should only be bailed out if it is solvent - and otherwise should be wound up. This would be a nightmare for the Italian government, involving wider losses from bondholders and depositors under new EU rules - and inevitably casting doubt on the wider sector.
However the lesson from Ireland is that reality must be faced up to quickly. Attempts to pretend that Anglo and Irish Nationwide had a future did not help our cause.The Italian government must either persuade the markets that Monte dei Paschi has a future - or accept that it hasn't.
3. Deal with the wider fall-out:
The markets will also be asking whether there is a systemic problem with the Italian banks, saddled with €360 billion of non-performing loans, equivalent to 20 per cent of their loan books . The question, of course, is just how “bad” these loans are. It took more than two painful years to get to the bottom of the hole in the loan books of Irish banks, though of course during that period a massive collapse in property prices and the wider economy had made things much worse.
A lesson from Ireland is that if one bank is in serious trouble, other are also likely to be facing difficulties. There are all operating in the same market, after all.A number of other smaller regional Italian banks are seen as likely to need a share of the €20 billion which the government recently set aside for recapitalisation of the sector. Is this enough? And is the government able to push the sector to undertake badly needed reforms and cost-cutting in a financial system with too many branches and a history of weak governance?
We saw here from late 2008 on how quickly trouble can spread across the banking sector, once it comes into the international spotlight. Italian banks may not be facing the economic carnage which their Irish counterparts experienced, but they are not in a good place.
