MNI SOURCES: Italy Could Make Bond Risk Deal For Banking Union

By Silvia Marchetti

     ROME(MNI) - Italy could be prepared to make a potentially significant

compromise to overcome a deadlock over the introduction of common eurozone

insurance for bank deposits, and accept a scheme which would force banks to hold

capital against their sovereign bond holdings, a senior Italian government

official following negotiations on Europe's banking union told MNI.

     Italy might be prepared to accept concentration charges on banks' stores of

government debt, providing that progress is made towards a eurozone-wide bond,

or "safe asset", and on what Italy regards as ending overly-lenient treatment

for so-called "Level 2" and "Level 3" financial instruments on banks' books

which are not traded on active markets and are hard to value, the official said.

     His comments came after Italy forced a delay in reforms to the eurozone's

bailout fund, the European Stability Mechanism, and Finance Minister Roberto

Gualtieri said on Thursday that Italy would soon present proposals for

completing banking union.

     "We're still negotiating a comprehensive deal but there are grounds for

such a compromise," the official said. "Italy could make concessions and take

into account the introduction of concentration charges, so long as the caps

aren't too binding and there is no discrimination between sovereign debts across

the eurozone."

     --SAFE ASSET

     "This would stand as a significant concession Italy could make. However,

limiting bank sovereign exposure is not something which can be done overnight,"

said the official, saying Italy could agree "provided that there will soon be a

concrete debate on providing the eurozone with a safe asset, a debt issuance

instrument at EU-level."

     A safe asset would be key to guaranteeing an orderly diversification of

banks' portfolios if rules on sovereign holdings are modified, the source said.

     Italy has previously argued that banking regulations which penalise high

levels of non-performing loans go too easy on Level 2 and 3 assets, of which

German banks have significant holdings.

     German Finance Minister Olaf Scholz said in November that Berlin, which has

long blocked the creation of joint deposit insurance, could accept it if the

eurozone introduced risk-based concentration charges. Previously Germany had

argued for an end to zero risk weights for bonds, which allow banks to avoid

holding capital against their stocks of government debt altogether. This had

been fiercely resisted by countries including Italy, which feared that its

banks, with their heavy holdings of Italian debt, would be penalised.

     While the biggest party in governing coalition, the 5-Stars Movement, is

divided over concentration charges, their centre-left partners the Democratic

Party and Italia Viva party are in favour.

     --With Additional Reporting by David Thomas in Brussels

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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