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EU nod on NordLB recapitalization to clear way for Popolare di Bari rescue

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EU nod on NordLB recapitalization to clear way for Popolare di Bari rescue

EU approval for the €3.6 billion state-backed recapitalization of German public lender Norddeutsche Landesbank Girozentrale, or NordLB, may help clear the way for a €900 million capital injection for Italy's Banca Popolare di Bari SCpA.

The Italian bank ran into trouble as the economic recession and poor lending practices over the past few years left it with impaired losses amounting to a quarter of its total loan book, and it sought help.

Italy does not expect the European Commission to take an issue with the deal, Italy's Regional Affairs Minister Francesco Boccia said in a radio interview, cited by Reuters on Dec. 16.

He likened the scheme to the recapitalization of NordLB, which splits the capital injection between several parties including the German group's state owners and the country's savings banks' association DSGV. The latter will use money from its investor protection fund to support the transaction.

In a similar way, some of the funds for Popolare di Bari will come from Italy's deposit guarantee fund Fondo Interbancario di Tutela dei Depositi. State-owned lender Banca del Mezzogiorno - MedioCredito Centrale SpA will receive money from the state and use it to recapitalize the cooperative bank with help of the FITD. Up to €500 million will be provided by the deposit guarantee fund.

Pier Paolo Baretta, Italy's finance ministry undersecretary, also does not see "particular complications" in getting an EU nod for the Popolare di Bari recapitalization, he told Bloomberg News in an interview Dec. 16.

Controversy

The plan is controversial for many.

The Italian government stepping in to bail out a troubled private bank has never been acceptable under EU state aid rules, Evandro Menna, banking financial controller and risk manager at the Italian Financial Risk Manager Association said on Twitter. The only similar case that has passed EU approval so far has been NordLB, but that lender was state-owned prior to the recapitalization, he said.

The NordLB recapitalization itself faced strong criticism after the European Commission ruled it does not constitute state aid. Some commentators believe the approval calls into question the European bank resolution regime.

"[I]f we accept routinely the use of huge sums of public money to bail out failing banks, we create the expectation among investors that the state will step in, destroying the banking union and bringing back the sovereign-bank doom loop," Luis Garicano, a member of the Renew Europe liberal political group in the European Parliament, said on Twitter.

The so-called doom loop is when banks holding large quantities of home-country sovereign bonds get into trouble and weaken the sovereign itself in a vicious cycle.

Stefan Wenzel, a member of the Green Party in the regional parliament of the German state of Lower Saxony, also said the NordLB transaction is no reason to celebrate. The deal is the third large equity injection into the bank in 15 years and it still does not have a good business model, Wenzel said, Die Welt reported.

He has called for an urgent investigation of the causes of the crisis at the German bank. Having invested heavily in shipping loans before the crisis, NordLB suffered large losses and saw its core capital drop below the regulatory minimum as it was trying to reduce its rapidly souring legacy shipping loan book in recent years.

Double standards?

Despite the backlash, the EU decision stands and NordLB is expected to get the state funds by the end of the year.

Although there are differences in the Popolare di Bari and NordLB cases, the commission would be in a difficult position if it blocked the Italian bank's rescue soon after it approved that of the German lender.

EU support for NordLB has already triggered criticism about double standards.

"This decision is questionable and prone to be seen as purely political," Silvia Merler, head of research at Algebris Policy and Research Forum and former affiliate fellow at Brussels-based political think tank Bruegel said on Twitter. "This is the kind of stuff on which Italy should concentrate its political capital to pick a fight in Europe."

If impeded by the EU, the Popolare di Bari recapitalization may widen the rift between northern and southern EU member states which long have been at odds about setting up pan-European banking supervision and resolution system, the so-called banking union.

One of the key obstacles for completing the project so far was Germany's refusal to commit to the establishment of a common deposit guarantee scheme in the EU, calling first for a greater risk reduction in the EU banking system through the reduction of nonperforming loans in the bloc, almost a third of which is held by Italian banks.

Germany only recently warmed up to the creation of a EU deposit guarantee scheme. The banking union is seen as essential for the further integration of the EU banking market, which will make cross-border consolidation easier and is expected to drive investment into the European banking sector.