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Italian banking summit envisages systemic support

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Italian banking summit envisages systemic support

David Brierley is a seniorwriter with S&P Global Market Intelligence. The views and opinionsexpressed in this piece are those of the author and do not necessarilyrepresent the views of SNL.

PalazzoChigi, the official residence of Italian Prime Minister Matteo Renzi, was thescene of a noteworthy bank summit April 5.

Accordingto Il Sole 24 Ore, Finance MinisterPier Carlo Padoan participated along with Bank of Italy Governor Ignazio Visco,the CEOs of Intesa SanpaoloSpA, UniCreditSpA, Unione di BancheItaliane SpA and Cassa depositi e prestiti SpA and a representative ofthe banking foundations. Renzi was present at the start.

"The[banking] system needs strengthening," Padoan explained April 6, addingthat it had nevertheless withstood "very well" the pressures ofrecession. Market volatility and share price falls partly sparked by impendingbank capital raises have clearly heightened concerns within the government andthe banks themselves.

Thedetails of the meeting have been leaked in varying ways, although it is clearaccording to Il Sole that a"systemic" solution is being sought to avoid "contagion effects."Reuters wrote that attendees discussed a state-supported fund that would bothacquire soured loans and inject capital into ailing banks.

Accordingto the Financial Times, a specialpurpose vehicle funded by the leading banks and state-owned Cassa depositi eprestiti could acquire unwanted stock from the proposed capital raises ofBanca Popolare di VicenzaSpA and Veneto BancaSCpA. Popolare di Vicenza is looking to raise up to €1.75 billionand Veneto Banca €1 billion, while Banco Popolare Società Cooperativa must also raise €1billion ahead of its merger with Banca Popolare di Milano Scarl.

Mediobancaanalysts wrote in a note cited by the FT onMarch 29 that the roles of Intesa Sanpaolo as underwriter of Veneto's capitalincrease and UniCredit as underwriter of Popolare di Vicenza's could revivesystemic risk. UniCredit has already shed over 40% of its market valueyear-to-date, and analysts fear that it could face a significant capitalrequirement if it became an important shareholder in Popolare di Vicenza. UniCredithas accordingly intimated that it might delay the rights issue, although thiswould slow the necessary strengthening of the banking sector.

Newsthat the plan discussed at Palazzo Chigi could relieve UniCredit of the risk ofowning part of Popolare di Vicenza unsurprisingly boosted its shares, yet themarket clearly remains concerned about the level of nonperforming loans withinthe Italian banking system and the timing of any aid program. The Popolare di Vicenzacapital raise is reportedly slated for April 18, implying a challenge toimplement any systemic plan in time.

Il Sole wrote that two privatevehicles are being envisaged. One would provide fresh capital and draw on theresources of the strongest banks, the banking foundations and perhaps insurers.Cassa depositi e prestiti might take some minority bank stakes, the newspapersaid, for example by buying Popolare di Vicenza shares during the rights issue.

Theother private vehicle would operate commercially in the bank NPL market,availing itself of the government guarantees proposed on the senior debttranches and bringing liquidity and capital to the NPL market. It would notoperate significantly differently, IlSole remarked, from ApolloGlobal Management LLC, which is bidding for a of while offering totake a 50% stake in the lender.

Thissignificant program underlines how much Italy's government and leading bankshave been mortified by share selling this year. The banking system has tostabilize in investors' minds, yet if this is to happen swiftly, much freshcapital will be required, in large part because of the heavy discounting ofNPLs. Given these constraints, government funds will be needed in some form,and Renzi will have to persuade other European government leaders to acceptthis.