MNI: Tighter MREL Rules May Hit Italy Bank Funding Costs: BOI

By Silvia Marchetti

     ROME (MNI) - Tighter bank capital rules currently under discussion at the

European level could negatively impact Italian lenders' funding costs, hampering

the flow of credit to the real economy, a Bank of Italy source told MNI.

     The new bail-in rules on Minimum Requirement for own funds and Eligible

Liabilities (MREL) risks triggering a credit crunch at a delicate moment for

Italy's economy, just as it is finally gaining some modest upward traction. The

source warned the impact could be worse if the regulatory switch is introduced

abruptly.

     "Our concern is that the new MREL bail-in regulations, if implemented

abruptly and overnight, will impact on Italian lenders' funding costs and on

credit flows to the real economy. If banks are required to put aside larger

capital requirements to stave-off future crises, that translates into less money

available to fund firms and households' needs," said the source.

     According to the BOI's latest Financial Stability Report, about half of

total Italian bank bonds will mature by 2020. If the requirements for

liabilities eligible for bail-in make it necessary for banks to issue new large

volumes of bonds on the wholesale market, the yields demanded by investors could

increase significantly, with negative effects on the average cost of funding

and, by extension, on credit availability.

     --RULES NEEDED, TIMING PARAMOUNT

     "We agree that these new capital requirements, which will act as buffer

against future potential bank default risks, are paramount and are a pillar of

the new post-crisis banking reform package which we fully endorse. We are simply

questioning the issues tied to the details and timing of the MREL introduction,"

said the official.

     Europe's Bank Recovery and Resolution Directive (BRRD) sets a minimum

requirement for own funds and eligible liabilities for bail-in to ensure that,

in the event of resolution, every bank will be autonomous in weathering the

default by absorbing losses and reconstituting capital through sufficient own

funds and other liabilities.

     Italian small and medium size banks, currently facing the toughest

challenges in self-funding and accessing credit markets, would be hardest hit by

the new rules, although the whole financial system could face a credit overhaul

adjustment.

     --DIFFICULT FOR ITALIAN BANKS

     The source noted that the imminent introduction of the MREL rules would not

be an "easy switch" for Italy's banks, which have already made huge efforts in

cleaning their balance sheets of a large volume of non-performing loans (NPLs)

and are now called upon to further reduce exposure.

     "The weeks ahead will be crucial for negotiations at a European level. The

ongoing debate to finalize the definition of the MREL must take into account all

aspects of the new regulation and its impact on each member state's financial

system, all of which tend to differ and such differences need be properly

acknowledged and weighed," said the source.

     The real issue at stake is not whether the new MREL rules could be

particularly "demanding", but how they are introduced. That is why a "transition

period" would be highly recommended to give lenders an adequate time frame to

adapt to the new scheme, said the official, especially since the precise costs

of the MREL on funding volumes and costs are still unclear.

     The BOI estimates that, to date, Italy's significant banks may face an

aggregate shortfall of eligible liabilities of between E30 billion and E60

billion.

     Despite the Italian banking system being in a better shape to face a

regulatory change than in the years following the financial crisis, progress

made in boosting capital and profitability should not be squandered, the source

said.

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

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