Italy keeps bad practices afloat

It is easy to write an indictment of the state-backed liquidations of Veneto Banca and Banca Popolare di Vicenza. It is equally hard, however, to see a better option; and rather than signalling the hopelessness of European banking union, it should be treated as a sign of how much more work urgently needs to be done.

The justification for a common European bank regulation and resolution framework is twofold: to help free banks across the continent from the overhang of crisis-era bad loans, and to cut the dangerous link between banks and sovereign states. The liquidation moves the good assets of the two banks, along with a €4.8bn slug of taxpayer cash, to a larger bank, Intesa Sanpaolo. The bad loans will be put into a “bad bank”, backed by a €12bn state guarantee. Senior debt holders and depositors will absorb no losses. The contrast with the recent liquidation of Spain’s Banco Popular — in which Santander absorbed Popular’s good and bad assets and went to the market for the cash needed to support them — is damning.

So while bad loans have been quarantined, the Italian state is in up to its neck. The nominal justification for Rome’s involvement under state-aid rules — that because the banks are being wound up, there are no competitive concerns — is wildly unconvincing. The clear message from the deal is that Italian banks, or at least certain favoured Italian banks, carry a state guarantee. The competitive implications are obvious.

Both Italian and European regulators can share the blame. The Italians sat on their hands while their banks issued junior debt and equity to retail investors. The recession made the nonperforming loan problem far worse. The banks should have been liquidated or consolidated years ago. And the European authorities could have intervened long before last week, when the Single Supervisory Mechanism declared the two banks likely to fail. London, June 27.