Italy spares senior creditors in local Veneto banks liquidation

Italy won its battle to protect senior creditors of two failed banks in the country’s northern Veneto region after convincing European Union authorities to allow the wind-down under local law.

The European Central Bank said late Friday that Banca Popolare di Vicenza SpA and Veneto Banca SpA had been declared failing or likely to fail. While this normally would have resulted in a winddown by the EU’s Single Resolution Board, the Brussels-based institution said separately that the procedure wouldn’t have been in the public interest in these cases.

The two lenders were given “time to present capital plans, but the banks had been unable to offer credible solutions going forward,” the ECB said.

With the use of public money in the liquidation yet to be decided, Italy was eager to avoid triggering the European bank resolution rules forged after the financial crisis and designed to ensure stakeholders rather than taxpayers meet the cost of cleaning up failed lenders. A rescue may see Intesa Sanpaolo SpA, Italy’s biggest bank by market capitalization, take on the good assets for a token price.

The Italian cabinet will meet this weekend to adopt “necessary measures and assure the full operations of the banks, with the protection of all depositors and senior bondholders,” according to a statement from the Finance Ministry.

In a separate statement, the European Commission said it is in constructive discussions with Italian authorities on draft proposals submitted by Italy for state support, and good progress is being made to find a solution soon.

The two banks were forced to ask the government for aid after they failed to raise capital from investors last year.

The decision to allow Italy to dispose of the two banks under insolvency law was key in shielding senior debt from losses. The EU’s Bank Recovery and Resolution Directive puts investors, including senior creditors, on the hook for losses to fund restructuring.