MNI SOURCES: Italy Officials Concern Over ECB BRRD Proposal

--Covered Deposits Freeze Could Eventually Trigger Bank Run 

--Italy Officials See Financial Stability, Savers Trust At Stake

By Silvia Marchetti

     ROME (MNI) - The European Central Bank's proposed revision of banking

crisis management rules could cause financial instability with the potential of

triggering of future bank runs, several Italian officials have told Market News.

     The Rome government fears that if the Bank Recovery and Resolution

Directive (BRRD) were modified to include the possibility, in extreme and worst

case scenarios, that authorities may also temporarily "freeze" covered deposits

below E100,000. This, they worry, could impact the trust of Italian in banks and

lead to liquidity shortages. 

     "If this proposal ever turned into something concrete, it would be very

alarming as there would be no safe deposits where citizens can keep their money.

Even if it is applied as a mere precautionary measure in worst case scenarios of

bank defaults, it would cause a major confidence shock to the entire financial

system," warned Democrat deputy Giampaolo Galli, a member of the Lower House

budget committee. 

     According to an ECB discussion paper forwarded to the European Parliament

and European Council on November 8, the scope is to guarantee the broadest

possible action to safeguard liquidity in banks "likely to fail" through a sort

of pre-resolution moratorium that would include also covered deposits. 

     The freeze would not be total, however: savers would be given limited

access to their accounts, but just to cover daily needs and in small amounts. 

     "So far, bail-in rules have applied to shareholders, bond holders and

deposit holders above E100,000. Eliminating the exemption of deposits below

E100,000 -- even if for a limited period of time -- is very risky. Savers

consider covered deposits as 'untouchable', but once their trust is shattered,

it's obvious they'll rush to ATMs to withdraw as much cash as possible," said a

senior government source.   

     Despite being taken aback by the ECB's proposal, the officials expressed

scepticism that it could ever find "fertile ground for development" across the

whole of the union. 

     The outcome of such a revision would likely have a boomerang effect,

according to Nicola Borri, a professor of financial management at Rome-based

LUISS University.

     "It could trigger the opposing, perverse risk of causing a liquidity

shortage rather than preventing it. If the covered deposits momentary freeze has

the goal of increasing liquidity in a critical moment, a possible bank run would

lead to a liquidity haemorrhage," said Borri. 

     For sure, these are not the kind of BRRD revisions the Italian government

seeks.

     Changes to the directive, which came into effect in January, can be made in

2018. The Bank of Italy and Rome's government have repeatedly criticised the

"abrupt" introduction of the new European banking rules, calling for a

transition period that would safeguard savers who obliviously subscribed to

bonds issues prior to 2016. 

     A Treasury source declined to comment, saying that for now it was just an

ECB proposal, with no certainty of becoming law. 

     Concerns in Rome are tied to the nature of Italy's financial system. 

     "We must bear in mind that the majority of Italian savers keep their cash

in banks close to their homes, in small accounts and that the number of new

deposits keeps rising," the government source said.

     Italians still trust their own lenders, despite recent bank failures, and

are not yet too keen on investing their money in funds and other financial

products that seem intangible, he noted.

     Several financial operators consider the ECB proposal to be far-fetched at

present but acknowledged that going forward, it is "unavoidable" that no account

could ever eventually be "off-limits" and "sacred".

     A senior Milan banker argued that covered deposits are protected by Italy's

Interbank Deposit Protection Fund which has limited resources and therefore a

limited scope of intervention.

     "We need to make a distinction between systemic, big banks and small banks.

As long as we face the default of a small bank, the money can be found. But if

we need tackle the failure of a major bank, it's impossible," he said. 

     Borri argued that not even the Italian state could afford to step in due to

the high level of public debtny major bank rescue backed by public resources

would turn into a destabilising "bomb" for the country's under pressure

finances. 

     According to Cosimo Calabrese, executive adviser at Finanza & Futuro, the

advisory arm of Deutsche Bank Italia, despite the ECB proposal being "unlikely

to be approved and implemented in Europe" there remains "a concrete risk that

the E100,000 deposit safety cap will be reduced in the long run".

     In his view, an attempt to favour investments that may benefit the ongoing

recovery and support businesses may be behind the ECB's proposal.

     "Italians have always lacked a real investment culture, but things lately

are changing. The financial situation is continually mutating, going forward

savers will no longer have safe havens for their money and must thus start to

get familiar with the need to diversify their portfolios," he said.

     Calabrese pointed out that tax-free individual savings accounts aimed at

funding Italian companies were gaining ground in Italy, together with a more

widespread investment awareness linked to the upcoming implementation of the

MiFID II. 

     "As far as financial advising goes, the UK and the US are way ahead of

Italy and many other European countries, but we'll eventually get there too,"

added Calabrese. 

     According to Borri, the real problem is the absence of a common deposit

guarantee scheme at EU level, the missing 'third pillar' necessary to complete

the pan-bloc banking union. 

     "It is inevitable that without this scheme no accounts can be 100% safe in

Europe in the future. Risk sharing is paramount, but it must go hand in hand

with risk reduction by member states" so to curb excessive bad loans and

government bonds sitting on lenders' balance sheets, he said. 

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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