Italy criticises ECB over Monte Paschi capital decision

MILAN/FRANKFURT (Reuters) - Italy's economy minister has said the European Central Bank should have explained more clearly why it nearly doubled its estimate of the capital shortfall for the ailing bank Monte dei Paschi di Siena BMPS.MI, which is being bailed out by the state.

In unusually critical comments of the euro zone’s banking supervisor, Pier Carlo Padoan told a newspaper that the ECB’s new capital target was the result of a “very rigid stance” in its assessment of the bank’s risk profile.

“It would have been useful, if not kind, to have a bit more information from the ECB about the criteria that led to this assessment,” Padoan told the financial newspaper Il Sole 24 Ore.

Monte dei Paschi, Italy’s third biggest lender and the world’s oldest, said on Monday the ECB had estimated its capital shortfall at 8.8 billion euros (7.5 billion pounds), compared with a 5 billion-euro gap previously indicated by the bank.

The higher capital requirement substantially increases the cost of the bank’s rescue by the government after it failed to raise the 5 billion euros on the market.

The Bank of Italy said in a statement later on Thursday that based on its own calculations the Treasury may have to put up around 6.6 billion euros to salvage the lender, including 2 billion euros to compensate around 40,000 retail bond holders.

The size of the state intervention has raised concern that Italy’s newly created 20-billion-euro bank bailout fund may not have enough money for other weak banks. The government says the fund is sufficient.

The rest of the money Monte dei Paschi needs will come from the forced conversion of its subordinated bonds into shares, in line with European rules on bank crises. The lender fared the worst in EU-wide banking stress tests published in July.

Padoan said he expected the capital increase to take place in two to three months.

A logo of Monte dei Paschi di Siena bank is seen on the ground in Siena, Italy, November 5, 2014. REUTERS/Giampiero Sposito/File Photo

The ECB told the Italian treasury of its decision in a letter, which Padoan said was just five lines long and which has not been made public.

It irked the Rome government and has quickly turned into a political issue. A group of lawmakers from the ruling Democratic Party asked Padoan and Italy’s foreign minister on Wednesday to explain in parliament what had happened.

“I was a bit surprised to receive the news, out of the blue and on Christmas day,” Prime Minister Paolo Gentiloni told a press conference.

“It’s important that the reasons behind this assessment are shared and that there is a dialogue because we need to handle this issue together ... We will stick to our guns.”

The ECB has declined to comment on its rationale for the larger capital shortfall.

The Bank of Italy said in its statement that Monte dei Paschi’s estimate of a 5 billion euros capital gap was based on the results of the stress test, conducted on end-2015 data, and included assumptions such as the sale of its whole portfolio of defaulting loans - a key part of its plan to raise money privately.

Given that plan’s failure and the bank’s worsening balance sheet over the past year, the central bank said the 8.8 billion euro capital requirement was justified by the need to reach an 8 percent Common Equity Tier 1 (CET 1) ratio - a key measure of financial strength - in an adverse scenario.

A source said the ECB had wanted to ensure that Monte dei Paschi had enough capital to safely meet that requirement, so it would be able to restore investor and customer confidence. The source also said the ECB had offered to explain its stance to both the Italian treasury and Monte dei Paschi.

At 8 percent under the adverse scenario, Monte dei Paschi would still be below the average of the ECB’s stress test, in which banks would see their CET 1 ratio fall to 9.4 percent from 13.2 percent.

The 8 percent threshold in the adverse scenario was also a requirement the ECB set for ailing Greek banks in a 2015 review.

Padoan said the exact amount of capital Monte dei Paschi will have to raise will be determined once it presents a new business plan to the ECB and the European Commission, but he played down the bank’s problems.

“The bank is in optimal condition and will have great success,” he said.

($1 = 0.9566 euros)

Additional reporting by Giulia Segreti and Agnieszka Flak in Milan and Giselda Vagnoni in Rome; Editing by Adrian Croft, Larry King