The 183 Strings Tying Italian Banks to the European Banking Authority | bambinoides.com " />

The 183 Strings Tying Italian Banks to the European Banking Authority

There is a specter haunting Europe. It is the ghost of the credit crunch. Everyone sees it, everyone fears it, everyone denounces it, but few are aware that it has an ideologist behind it. That there is a sort of Karl Marx of the credit crunch, that is to say, a person responsible for its prescriptive implantation. But, above all, people are unaware that last October 21st, this person issued a “Manifesto” consisting of 183 technical regulations, which, rather than help to recover, may risk strangling the economy.

The European Banking Authority (EBA) is a regulatory agency of the European Union headquartered in London, United Kingdom. Its activities include conducting stress tests on European banks to increase transparency in the European financial system and identifying weaknesses in banks' capital structures. The EBA was established on 1 January 2011, upon which date it inherited all of the tasks and responsibilities of the Committee of European Banking Supervisors (CEBS). The EBA has the power to overrule national regulators if they fail to properly regulate their banks. The EBA is able to prevent regulatory arbitrage and should allow banks to compete fairly throughout the EU. The EBA will prevent a race to the bottom because banks established in jurisdictions with less regulation will no longer be at a competitive advantage compared to banks based in jurisdictions with more regulations as all banks will henceforth have to comply with the higher pan European standard.

The European Banking Authority (EBA) is a regulatory agency of the European Union headquartered in London, United Kingdom. Its activities include conducting stress tests on European banks to increase transparency in the European financial system and identifying weaknesses in banks’ capital structures. The EBA was established on 1 January 2011, upon which date it inherited all of the tasks and responsibilities of the Committee of European Banking Supervisors (CEBS).
The EBA has the power to overrule national regulators if they fail to properly regulate their banks. The EBA is able to prevent regulatory arbitrage and should allow banks to compete fairly throughout the EU. The EBA will prevent a race to the bottom because banks established in jurisdictions with less regulation will no longer be at a competitive advantage compared to banks based in jurisdictions with more regulations as all banks will henceforth have to comply with the higher pan European standard.

There is a European central banker that, for three years, has been emitting norms that have induced Italian financial institutions to draconian choices with dramatic repercussions on citizens and businesses. The irony is that he is not German or Dutch. No, he is of Italian nationality and comes from our central bank, and should therefore be aware of the impact that his choices are having on our banks and even more so on our businesses. We are speaking of Andrea Enria, President of the European Banking Authority (EBA), the banking oversight authority for the euro zone.

Just over two years ago, basically overnight, the EBA forced euro zone banks to more than double their liquid assets, setting into motion a mechanism that has choked credit distribution in our country like never before.

Now, the authority presided by Andrea Enria, which is tasked with emanating the guiding principles for the future of European vigilance, is about to pull the rope further, risking to not only put many Italian banks in grave difficulties, but also definitively close the tap on credit to businesses. And once again, with very little warning.

“It’s the type of thing that calls for a red alert,” comments a banker that wishes to remain anonymous.

The most potentially devastating impact will come from two regulations that risk dramatically increasing the number of clients in default, freezing the distribution of credit and bringing the country’s real economy to a paralysis.

Rule 179, in fact, prevents an institution from intervening in support of a client in need more than once. Otherwise, it will have to automatically classify the client as non-performing, thereby declaring his credit in default, and make new provisions.

Rule 155 is equally devastating, as it introduces equally inflexible norms on limit excesses. Until today, exceeding a limit for more than 90 days only generated a default rating if it was in excess of a pre-established threshold, the so-called “materiality threshold”, which is equal to five percent of the client’s total line of credit. Now, however, any excess that lasts more than 90 days, even if it consists of a single euro, in the case that it pertains to a credit line equal to or bigger than 20 percent of the total of entrustment, will force the bank to declare the client in default on all lines of credit.

Together, these two measures have the potential to mangle banks’ budgets and consequently push them into an ulterior credit crunch.

But how is it possible that in an economic outlook in which we desperately feel the need for the increased offer of financial stimuli (like Bernanke’s), the European authority is in fact fueling an ulterior economic contraction on the entire continent? “Enria seems not to realize, or care about, the repercussions that his measures have on our country, the Banca d’Italia and the government are too weak and have too many past responsibilities to make Italian reasons heard in Frankfurt or Brussels, and the ‘strong’ Euope has neither the immediate interest nor the far-sightedness to listen to them”, the banker replies.

Let us analyze this point by point. Let us start from Enria: despite coming from our central bank, the EBA President is more of a Marx than a Lenin: that is to say, he has studied the problems, but he has never faced them by working in the field with clients.

As pertains to the very great responsibilities of bankers and the inadequacies of past vigilance, they are made evident by instances such as the Monte dei Paschi di Siena and Carige incidents. Or the lesser known one regarding the Banca delle Marche, where for years, administrators granted senseless loans without any vigilance countermeasures ever having been employed. Until the bubble burst and Banca d’Italia forced it to bring to light depreciations on deteriorated loans for 1,041 million euros on the 2012 annual budget, and another 500 something million on the 2013 quarterly budget.

“It is doubtless that in Italy, partly because of the mingling of the political and economic worlds, both locally and nationally, there was more ex-post patching than vigilance. That is why Frankfurt’s vigilance is welcomed,” our interlocutor continues. “But what is happening here is not the creation of the premises for a more severe and detached vigilance. There is, instead, the mechanical introduction of rules that penalize credit and are in fact encouraging banks to do more of what everybody is accusing them of doing: buying state bonds.”

To the Sole 24 Ore, it seems that Banca d’Italia tried to raise some oppositions, but did not have the strength to make itself heard. The government was, instead, absent.

But the EBA’s restrictive “recommendations” hold true for everyone, not just Italy. Why, then, are other countries keeping quiet? The main reason is that the impact of these regulations varies depending on the context. And it is felt more in the southern belt of Europe, the one that is weaker—both economically and politically—and to which Italy belongs.

“With clients who are considered good in the medium-long term, but who are experiencing temporary difficulties, it is normal, in Italy, to renegotiate credit lines two, three, even four times. Just like being in excess for more than 90 days is quite common, especially during these times when the public administration is not paying,” the banker explains. “In countries like Germany, this has instead always been very rare, independent of the state of the economy—which is certainly better than ours. In Italy, a significant portion of lines of credit are “until revocation,” meaning without expiration dates; whereas in Germany and in North European countries in general, there are always deadlines. And the deadlines are all respected, partly because of social norms. If you do not respect the deadlines, you become a pariah.” In sum, we are faced with another potential perfect storm: those who emanate rules are too rigid; those who suffer the most devastating consequences do not count; and those who count, because they are not affected, only think about their immediate interests.

“We are talking about indiscriminate measures that do not help to foster a healthy vigilance, that is, discovering who is doing well and who is not. Automatisms are introduced that constitute a de facto renouncement of vigilance,” the banker continues with enthusiasm. “It is true that in Italy, vigilance was not carried out stringently, but should we now accept financial and economic suicide because we have thus far given proof of decreased reliability?”

Since last December, the ECB has been acquiring data, through national central banks, on the credit portfolios based on these new criteria. And in mid March, Banca d’Italia and the ECB will commence their joint inspections for the so-called Asset Quality Review (AQR), that is, a due diligence aimed at analyzing the value of assets in budgets. And for those who might not respect the asset coefficients required by the new classifications, there are heavy provisions in store.

The problem is that, according to what Il Sole 24 Ore has ascertained, Italian banks have not at all revised the classification of their credits according to the new evaluation criteria.

“Our banks do not have methods for the flagging, or signaling, that Enria’s characteristics demand: Italian systems do not discern excesses that are under the materiality threshold, or renewed loans. It is therefore quite difficult to reclassify their commitments according to these characteristics. And I do not know how or how much of this has been done.”

This means that within a couple of months, when the inspectors will have completed their due diligence, some banks may be forced to reclassify many of the credits considered trustworthy as non-performing. With the consequent need to make further provisions.

In sum, we risk responding to the errors and damages of the past with other mistakes, which could cause consequences that are even worse. And once again, these will not be restricted to banks, but will spread to the entire Italian productive system.

“It’s the type of thing that calls for a red alert,”

Source: ilsole24ore.com | Claudio Gatti 


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