Italy racing to rescue four small banks before rules change

* Four small Italian banks at risk of being wound down

* Italy planned rescue centred on deposit guarantee fund

* EU Commission opposes scheme due to state aid rules

* Italy keen to act before new bail-in rules in place

By Stefano Bernabei and Valentina Za

MILAN, Nov 11 (Reuters) - Italy is struggling to overcome opposition from European authorities to a rescue plan for four small banks before stricter rules for winding down lenders come in next year.

The lenders are not big enough to pose a systemic risk to the banking system, but Rome fears that under the new rules a rescue could entail losses on bonds sold to retail clients.

The concern among authorities is that this could scare small savers away from what is traditionally a key source of funding for Italian lenders, and possibly trigger bank runs.

“Italy’s banking world is concerned that holders of senior bank bonds, who are to a large extent retail investors, may take a hit,” said Andrea Resti, banking and finance professor at Milan’s Bocconi University.

Italian retail investors held 323 billion euros ($345 billion) of bank bonds at the end of 2013, far more than the 181 billion euros held in domestic government bonds, according to the Bank of Italy.

Regulations adopted after the 2008 financial crisis aim to shield taxpayers from costly bank bailouts, shifting the burden onto investors and depositors in a process known as “bail-in”.

Under the new rules coming in from January, bank shareholders and bondholders, as well as depositors with more than 100,000 euros in a lender’s accounts, will have to bear losses before any public money can be used to prop up a bank.

Italian authorities are keen to act before then to revive Banca Marche, Banca Popolare dell’Etruria, Cassa di Risparmio di Ferrara (CariFe) and Cassa di Risparmio della Provincia di Chieti (CariChieti), four banks put under special administration by the central bank as recession and inefficient management hit their balance sheets.

Under its current plan, Rome would use a fund financed by other private banks, whose original goal is to guarantee an individual’s deposits up to 100,000 euros.

The fund, Fondo Interbancario di Tutela dei Depositi (FITD), would then become the biggest shareholder in the banks by underwriting new shares at a cost of about 2 billion euros ($2.1 billion).


Brussels, however, says using the fund to recapitalise the banks is akin to state aid, because Italy’s banks are legally bound to contribute and therefore have no choice but to take part in the rescue of the four small lenders.

A top Bank of Italy official told parliament last month the Commission’s stance was “not easy to understand”, but Economy Minister Pier Carlo Padoan said on Tuesday the government acknowledged the view and was continuing to discuss the issue.

Two sources with knowledge of the matter said an alternative solution under consideration envisaged creating a separate section of the FITD fund to which lenders would contribute voluntarily.

FITD Chairman Salvatore Maccarone warned in a parliamentary hearing on Oct. 27 that unless a solution were found quickly, the four banks risked being dissolved, hurting confidence.

“If the situation cannot be resolved in the way we have imagined, these banks will collapse. The fallout would not just hit current account holders, but it would shake up the whole banking system,” Maccarone said.

He said because depositors and, more generally, creditors had always been shielded from losses, people believed that banks would always meet their obligations.

“If the certainty of such a safeguard disappeared, there would be a flight of deposits,” he said.

The government is expected to approve the European Union’s so-called Bank Recovery and Resolution Directive (BRRD) this week, which would mean the new bail-in rules would kick in next year.

Maccarone said the rescue fund wanted to act immediately after the approval so holders of the ailing banks’ junior debt - debt generally held by professional investors - could bear some of the losses in a burden sharing mechanism.

From January, however, the FITD fund could only be tapped once shares, all types of bond and deposits in the lenders over and above 100,000 euros have first taken a hit.