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Monte dei Paschi shortfall hits €8bn, says ECB

The European Central Bank has said that Monte dei Paschi di Siena’s capital shortfall has risen to €8.8bn from €5bn, significantly increasing the price tag of the rescue of Italy’s third-largest lender by the government. 

In a statement released late on Monday, MPS also revealed that the ECB had warned that the bank’s liquidity had suffered a “rapid deterioration” over the past month, as it tried in vain to muster enough cash from private investors to avoid a state bailout

The worsening capital and liquidity position at MPS marks a new twist in a long-running saga surrounding the fate of world’s oldest bank, which has arguably emerged as the weakest link in the Italian and European banking system. 

Last week, the Italian government led by Paolo Gentiloni, the centre-left prime minister, approved the use of up to €20bn in public funds to help stabilise the most fragile financial institutions, which are saddled with non-performing loans dating from the country’s lengthy and deep recession. 

MPS is in line to be the first beneficiary of the decree, after it became clear last week that it could not meet an ECB-mandated deadline of December 31 to raise €5bn in capital from the private market, despite an aggressive effort mounted by investment bankers at JPMorgan and Mediobanca. 

But the Tuscan bank will now consume more of the Italian bank rescue money than previously thought: on Monday, the ECB sent a letter to the Italian finance ministry to inform it that MPS’s capital shortfall was now €8.8bn, compared to the €5bn it was estimated to need in the aftermath of July’s Europe-wide banking stress tests. 

Rome will not have to cover the entire capital shortfall, since more than €2bn of the funds are expected to come from a haircut to institutional holders of junior debt in MPS under new EU rules on “burden sharing” in bank bailouts.

But the higher price tag for MPS will potentially give it less leeway to cover possible rescues of other smaller regional Italian banks which have been suffering from similar problems, even though Italian officials have insisted that there is ample room in the €20bn already approved. 

One person close to the situation said that the higher capital shortfall was driven by the gloomier liquidity position at MPS.

Although the Tuscan bank is solvent, the ECB told the Italian finance ministry that its liquidity position had suffered from a “rapid deterioration” between November 30 and December 21, crucial weeks for its private capital raising effort. During that period, net liquidity at one month declined from €12.1bn, or 7.6 per cent of its activities, to €7.7bn, or 4.8 per cent of its activities. The Italian government is also providing liquidity guarantees to struggling banks under its €20bn rescue scheme.

One Italian official also said that once a government intervention was introduced, there was a change in the way capital shortfalls were calculated by the ECB, increasing the amount. 

Rome intends to structure the MPS rescue as a “precautionary recapitalisation”, which applies to banks which are still solvent but require capital to meet regulatory standards in the event of a deep recession. The scheme involves a much less drastic hit to investors in the bank than is the case under EU rules if a bank goes into resolution, when even depositors over €100,000 can be “bailed in”. 

Italian officials have tried hard to shield retail investors from suffering any fallout from MPS’s troubles.

Last week, the government said that retail holders of junior debt in a rescued bank would receive full reimbursement for their holding in the form of senior debt worth the same value. 

Mr Gentiloni and Matteo Renzi, the former prime minister who remains head of the ruling Democratic Party, are trying to stamp out any political fallout from the banking problems, ahead of likely elections in 2017.

But the MPS bailout has also faced a political backlash from some politicians and officials in Berlin who believe that the bank should be wound down instead.

Jens Weidmann, president of the Bundesbank, Germany’s central bank, said in an interview with Bild newspaper that the MPS bailout needed to be “carefully examined”. “State funds are only intended as a last resort, and that is why the bar is set high,” he said.

Via FT