October 9, 2018 / 1:24 PM / a month ago

UPDATE 1-Bank of Italy warns of capital woes for lenders if yields keep rising

(Adds details, quotes)

ROME, Oct 9 (Reuters) - Some Italian banks may be forced to tap investors for cash if the risk that premium domestic bonds pay over safer German Bunds rises above certain levels, a top central bank official warned.

Market concerns over the fiscal profligacy of Italy’s new anti-establishment government have driven the 10-year yield gap between Italy and Germany above 300 basis points, from 130 in mid-May before the new coalition’s spending plans first leaked.

“There are (spread) levels that may force some banks to tap markets (for cash),” Bank of Italy Deputy Director General Luigi Federico Signorini told a parliamentary hearing.

Filling capital shortfalls could prove difficult for Italian lenders, which have come under heavy pressure due to their large holdings of domestic government bonds.

Credit Suisse analysts said on Monday a widening of the yield differential between Italian and German bonds above 400 basis points would not be sustainable and would trigger capital increases.

Italian lenders have tapped markets in recent years to fund a restructuring after a deep recession.

But weak profitability and growing uncertainty over the country’s prospects could make it hard for them to lure investors despite extremely cheap market valuations.

Signorini also flagged the risk that banks face constraints in lending because the falling value of their government bond holdings erode their capital buffers.

“The falling value of the government bonds they hold impacts banks’ capital levels. Above a certain threshold, it may hamper their ability to provide credit to the economy,” he said.

Domestic bonds account on average for 10 percent of Italian banks’ overall assets. (Reporting by Giuseppe Fonte, writing by Valentina Za, Editing by William Maclean)

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