ECB and Italy's bank rescue fund head clash over bailout rules

LONDON (Reuters) - The European Central Bank and the head of Italy’s bank rescue fund clashed on Monday over the European Union’s tough conditions on state aid for troubled banks.

The headquarters of the European Central Bank (ECB) are pictured in Frankfurt, Germany September 8, 2016. REUTERS/Ralph Orlowski/File Photo

Speaking at the same conference in London, one of the ECB’s most senior supervisors said EU states should follow the bloc’s rules when it comes to dealing with problem banks while the head of Italy’s Atlante fund called the resolution process “absurd”.

Reuters reported last week that state support could be part of a deal to put Italy’s Monte dei Paschi di Siena bank onto a stronger footing.

Since the 2007-09 financial crisis, the EU has adopted rules that make state aid a last resort when it comes to helping troubled banks.

“There are European rules and those rules have to be followed,” Ignazio Angeloni, a board member of the ECB’s banking supervisory unit told Reuters on the sidelines of a conference organized by Imperial College’s business school.

The rules, known as the bank recovery and resolution directive, set out “modalities” that must be followed in order to “understand what can be done”.

Angeloni also spoke more broadly about bad loans on the books of banks, a problem which is most concentrated in the euro zone in countries like Italy, Portugal, Spain and Greece.

“We don’t want the problem to be underestimated and procrastinated (about),” he said when asked what the ECB’s “timing tolerance” was for the issues to be tackled.

“In the past we have seen that the procrastination has been dreadful,” Angeloni added, although he acknowledged that non-performing loans (NPLs) cannot always be cleansed quickly. “On NPLs there is a trade off between speed and value,” he said.

Speaking afterwards, the head of Italy’s Atlante bank rescue fund, Alessandro Penati, said the main problem for banks was their poor return on equity. He also laid out a long list of grievances about the euro zone and ECB’s regulatory set up.

“What is absolutely wrong is the resolution mechanism we have in place,” he said during a panel discussion. “The faster you clean out an NPL, the faster you are slammed with a capital increase, everyone knows that.”

Penati also said there was no way to value all the different kinds of bad loans Italy’s strained lenders have on their books, and argued that the welfare system should be used to cushion what he expects to be 60,000 redundancies as part of the restructuring of the sector.

“The end of the resolution process, what’s the outcome? You are going to use taxpayer money to subsidize the bank to take over the bank going into resolution. The system is really absurd,” Penati said.

“Why not put public money into helping banks restructure themselves? That seems to be a smart way of using public money.”

Editing by Catherine Evans