MNI SOURCES:Italy Targets Bank Derivatives To Pressure Germany

By Silvia Marchetti

     ROME(MNI) - Italy's government is pushing for changes to European rules on

how banks calculate the risk of assets on their balance sheets, in a move

designed to put pressure on Germany as Rome simultaneously seeks progress

towards a common eurozone deposit guarantee scheme and more leeway in curbing

its own banking system's non-performing loans, sources told MNI.

     Prompted by the governing populist-far-right coalition, the Chamber of

Deputies' finance committee has forwarded formal requests to the European

Central Bank to reconsider risk weighting calculations covering "opaque"

financial instruments.

     The ultimate goal is to cause trouble for Germany by targeting its "big

investment banks full of illiquid assets, in order to push Berlin to make more

concessions in setting up the banking union's common deposit scheme by the end

of this year," said a source within the populist 5-Stars Movement.

     "Big German lenders such as Deutsche Bank and Commerzbank are the most

stacked in Europe with risky Level 2 and Level 3 instruments, which we all know

are assets and liabilities not directly traded in active markets and therefore

difficult to evaluate. Derivatives pose a serious problem, much more than NPLs",

argued the source.

     Changes to risk-weighting calculations, set according to the European

Union's implementation of the international Basel III agreement, would

potentially force banks holding derivatives to hold more capital against them.

     --MORE FLEXIBLE NPL TIMELINE

     A top official of the League party said the time was ripe for a revision of

bank credit risk categories. Level 2 and 3 assets totalled roughly E6.8 trillion

across the eurozone, almost 12 times the level of eurozone banks' total net

NPLs, with most of these illiquid assets held in Germany, the official said.

     The Italian government is betting that upcoming European parliamentary

elections will see gains for populist parties and deliver a new European

Commission less "friendly" towards Berlin.

     Rome is also pushing for a more flexible timeline for the reduction of

Italian NPLs, and deems new rules on bad loans adopted last year by the European

Commission and the ECB to be "insufficient and counterproductive".

     "Italian banks have been forced to drastically curb their volumes of NPLs

practically overnight, at such a pace that they have been forced to dispose of

bad loans at below market prices with negative repercussions on profitability

levels," said the 5-Stars source.

     "Today we face a sort of discriminatory scheme whereby Italian banks, which

tend to lending to the real economy, are battered compared to German ones," the

source said.

     "What if the next major banking crisis happens in Germany? What if German

banks explode on heaps of derivatives?"

     Rome's parliament will use the ECB's ongoing Banking Industry Dialogue in

coming months as a forum to present its arguments. Italian officials also

complain that, while moves to end the practice of treating government debt as

risk-free have led nowhere, German fears over Italian banks' holdings of

government bonds persist unfairly.

     "At a European level this remains the main obstacle to the common deposit

scheme, though Germany will never admit it", said the League source.

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

[TOPICS: M$E$$$,M$G$$$,M$I$$$,M$X$$$,MC$$$$,MT$$$$,MX$$$$,MGX$$$]