Is Another European Bail-in Around The Corner?


Source: Japantimes

15 Billion Euro. That’s the magical (and real) number the Italian bank Banca de Monte Paschi has to be worried about. 15 Billion Euro is the approximate amount its customers have withdrawn from their bank accounts since January.

As you can imagine, this puts a lot of stress and pressure on the bank, as, just like Lehman Brothers, it isn’t as much a solvency issue as much as it is a liquidity issue to keep the bank alive. Indeed, the bank has failed the stress test of the European Banking Authority (miserably), and is now being forced by the powers that be to immediately clean up its balance sheet to avoid any potential huge defaults.

The bank had already been saved twice by the Italian government, but remains in an incredibly bad shape, as the total amount of bad debt in Italy is almost reaching half a trillion Euro, but is facing more issues if it cannot raise more cash soon.


The original plan consisted of trying to offload a portfolio with bad loans into a separate entity, and subsequently raise an additional 5B EUR in an equity sale. This would be necessary to continue to meet the regulatory minimum level of capital to survive a crisis, as under the stress test scenario of the EBA, Banca Monte Paschi was the only bank ending with a negative capital ratio, so something really has to be done.

In fact, the situation is probably even worse now, as the continuous outflow of the consumer deposits will decrease the capital levels, considering the loan-to-deposit ratio will continue to increase, even though the total value of the loan book would be stabilizing. Cash is needed to avoid a vicious cycle: the more cash customers are withdrawing, the more precarious the financial situation of the bank becomes, forcing more customers to withdraw more cash. And we all know how this type of story usually ends…

Source: Bloomberg

Banca Monte Paschi does have a fancy and shiny new presentation, outlining its strategic plan to become a profitable bank again (oh irony), but two of the three pillars of this ‘re-vamp’ process will be very difficult to realize. Not only does the bank need to raise 5B EUR in equity (good luck with that, as the market capitalization is just half a billion right now), it’s also calling for almost 30B EUR in bad loans to be separated into a bad bank, for which it will need an additional 10B EUR, through senior debt, mezzanine loans and junior notes. Good luck with that as well.

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