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--Higher Capital Requirements Likely To Stifle Italy's Recovery
--Firms, Banks, Team Up Against Stricter Regulation
--Treasury Attempts To Downplay Concerns
--Berlin May Be Behind Push For Tighter Regulation Ahead Bank Union Moves
By Silvia Marchetti
ROME (MNI) - Italy's nascent economic recovery could be harmed by new
tighter European Central Bank capital requirements on bad loans that may risk
hampering credit flows, stifling the recovery underway, unnerving Italian
legislators as well as the banking and industrial lobbies.
The bodies have asked Italian authorities to block the eventual adoption of
more rigorous regulation, currently under discussion by European officials.
Several officials are also concerned, telling Market News that Italy would
be hit hardest of all EU member states were the new rules to come into force,
due to the high stock of non-performing loans sitting on Italian lenders'
balance sheets and thus hampering lending.
"Italy would be hardest hit by such tighter, stricter regulation, with the
certainty of triggering a new credit crunch just when we are heading towards a
1.5% expected growth this year," Democrat deputy Giampaolo Galli, member of the
Lower House budget committee and a former director at Italy's leading industrial
lobby Confindustria, told MNI.
Galli argued that new regulations on non-performing loans, currently under
discussion within the Single Supervisory Mechanism (SSM), if introduced quickly
without a transition phase, would force lenders to increase capital buffer
requirements up to 100% as cover ratio for bad loans, draining resources to the
slowly recovering real economy.
"Or, in the best case scenario, the new rules would push banks to rapidly
get rid of NPLs at very low market costs with big losses for banks," warned
The outcome could put Italy's economic recovery at stake through weaker
credit flows to households and businesses wanting to invest, just when the
country is overcoming a long 'recession legacy', he explained.
For the first time, Italian firms and banks have teamed up against a
possible change in regulation. Italy's top industrial groups, along with the
ABI, Italy's bank lobby, have requested that any new rules must not be
introduced without prior debate at EU level and take into account the needs of
both firms and lenders.
The ABI has forwarded a letter to the Rome government demanding that
"financial stability requirements must not jeopardize the goals of growth and
competitiveness of the European economy".
Confindustria has pledged to move at EU level to pursue its arguments
against tighter capital requirements, complaining that their introduction would
go against the long-term monetary policy planning strategy of the ECB.
A Treasury source however downplayed the possibility that more stringent
rules may actually come into force, saying: "This is a very technical issue
which must be analysed at a technical level and discussed in the next couple of
weeks, but we are confident that we are doing our homework so there is no need
The official argued that the rate at which Italian banks were curbing the
massive stock of bad loans on their balance sheets was "impressive, roughly by a
quarter in the last couple of months, thanks to a restructuring of the financial
system and the rescue of several ailing banks."
Italy's government has frequently criticized the way the SSM analyses the
bad loan risk exposure of banks, arguing that different national financial
regulations in members states led to different readings, thus shedding doubt on
whether the ECB's approach so far to tackling non-performing loans in the euro
area is correct.
"We are aware that the need of reducing the stock of non-performing loans
is crucial, but we also believe Italy's situation is well under control," the
Treasury source told MNI.
According to Claudio Pucci, head of industrial group Unimpresa, "the new
ECB capital rules are not harmonized and ignore the single peculiarities of
individual member states, especially Italy, where loan recovery time is longer
than in other EU countries due to a sluggish legal system" which the ECB has
never taken into account when assessing the impact of NPLs.
On Monday, the ECB released its latest annual stress tests results showing
that European banks are, by-and-large, ready for the eventual higher rates
expected after a prolonged accommodative monetary policy phase which may soon
come to an end.
The central bank, noted Galli, is therefore putting excessive pressure on
lenders to do their job in speeding up the disposal of bad loans, in the same
way as it is happening in the US, but such a rush would drain the real economy
from accessing vital credit at a critical juncture.
The new bad loans regulation is strictly linked to ongoing talks on the
banking union progress. Member states are debating on how to move on with the
common deposit guarantee scheme and the public backstop in case of bank
defaults, envisaging a greater burden and risk sharing among peers.
Germany is currently against such a public backstop if lenders across the
union, especially in southern-indebted countries, don't dispose of their bad
loan overhang first.
According to a few Italian sources, the SSM's move might be the result of
strong "lobbying" from Berlin to boost the health of European banks before
further banking union steps are undertaken.
"Italy is the weakest link of the chain, if new capital rules are
implemented it will be very counter-productive for us," said Galli.
"But I hope it will not be the case also because on such matters, according
to European law, it should be the European parliament to have the say, not the
SSM," he argued, adding that the Single Supervisory Mechanism might be
overstepping its mandate in setting-out more rigorous capital rules.
--MNI London Bureau; tel: +44 203-586-2225; email: firstname.lastname@example.org