(Bloomberg Opinion) -- Andrea Enria has a passion for running, but Europe’s top banking supervisor is making pretty slow going in tackling Italy’s Banca Carige SpA. The chairman of the European Central Bank’s Single Supervisory Mechanism is just watching quietly as Rome scrambles to put together a new rescue plan for the ailing mid-sized lender.
The ECB is wrong to stand on the sidelines; it should demand a fresh review of the bank’s asset quality. Since the establishment of the SSM in 2014 to oversee the euro zone’s banks, it has often waited too long before acting. Better to send in the inspectors now to Carige rather than wait until its losses spiral out of control.
The Italian bank has been under administration since the beginning of the year after Malacalza Investimenti, its biggest shareholder, blocked a crucial capital increase. Carige survives thanks to lifelines from the rest of the country’s lenders and the Rome government. Italy’s Interbank Deposit Guarantee Fund (provided by the banking industry) has issued a 320 million euro ($363 million) convertible bond to prop up Carige. Meanwhile, the state has offered liquidity guarantees, allowing the the troubled bank to raise funds on the market at a reasonable price.
These stopgap measures are meant to give the bank’s management time to find a buyer. But the interest isn’t there. Blackrock Inc., an investment management giant, and the private equity firm Varde Partners walked away after expressing an interest. A rescue plan backed by Apollo Global Management, another private equity firm, was rejected by the interbank fund because the investment would have been too small.
Carige is now back at the drawing board as ever more creative solutions are considered. The Italian newspaper Il Sole 24 Ore reports that the interbank fund may convert its bonds into shares, while a few state-owned credit institutions could provide the rest of the needed capital. The latter may include Credito Sportivo, which traditionally funds sporting infrastructure across Italy. Difficult times indeed. The Carige bill is growing by the day. Originally, the bank was eyeing a capital raise of 630 million euros, but this could now exceed 700 million euros, according to media reports.
The risk is that this rescue – if it ever occurs – ends up as the latest stopgap measure that merely delays the inevitable. As my colleague Elisa Martinuzzi has written, Carige is burdened by staggering costs – 94% of its income at the end of 2018 – and poor business prospects. With the darkening economic and financial environment in Italy, investors are in for a rough ride.
The ECB has been extraordinarily patient since putting the bank under administration at the start of January. Perhaps supervisors feared that taking more formal action would discourage private investors. But after nearly six months of dithering there appears to be no credible private solution in sight.
The Italian government has said it would be willing to inject money directly into the bank via a so-called “precautionary recapitalization.” This would be difficult to swallow, though, for the ruling populist Five Star Movement, which rose to power by vowing not to give any more money to the banks. The European Commission’s antitrust arm might also balk. Brussels has already stopped Italy from bailing out two mid-sized lenders, Banca Popolare di Vicenza SpA and Veneto Banca SpA, whose combined size exceeded Carige.
This could explain why the Italian authorities appear keen on finding an alternative solution. But it shouldn’t prevent the ECB from doing its job. The first step toward a possible precautionary recapitalization is an asset quality review to measure the losses the bank has incurred or is likely to incur in the near future. Enria should should just get on with doing this, which would let him determine the bank’s real situation.
Italy has form in prolonging the agony of its banks to avoid imposing losses on investors. But the SSM was created to help avoid excessive forbearance for Europe’s lenders, which then leads to mounting losses. As a marathon runner, Enria knows good supervisors should at times pace themselves rather than sprint. That isn’t an excuse for standing still.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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