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Report: Italy to renew state guarantee scheme to help banks reduce NPLs

Italy plans to renew its state guarantee scheme for up to three years, in a bid to help local banks reduce their nonperforming loans, Reuters reported, citing a draft law decree.

The Guarantee on Securitization of Bank Nonperforming Loans, or GACS, scheme, has been a key factor in the acceleration in the reduction of Italian banks' soured loans. Under the scheme, NPLs are packaged and used as collateral for securities issued and sold off by special purpose vehicles. Furthermore, the scheme, which expired March 6, allowed the Italian state to provide a guarantee for the most senior and low-risk tranche of issued securities, whereas the most junior and high-risk tranche of securities were sold by the special purpose vehicles to investors.

Italian central bank data showed a year-over-year decline of 34% in Italian banks' gross bad loans to €100.2 billion at the end of 2018, primarily due to securitization sales.

Under the draft decree, the scheme will be renewed with tightened rules, including a higher credit rating threshold on the senior tranche of securitization notes that can be covered by the GACS scheme and more protection for some investors.

Italy can introduce the new scheme for an initial two years, following approval from the European Commission, with the possibility of an additional one-year extension, according to the document seen by the newswire.

The draft decree is expected to be discussed at a March 20 cabinet meeting, two Italian government sources said, according to the report. The decree is also said to include measures aimed at ensuring that a no-deal U.K. exit from the EU does not cause business disruption for Italian and British lenders.