Carige Rescue Raises Concerns

ECB saves an Italian bank from bankruptcy.

During the first few days of 2019, the European Central Bank took control of a troubled Italian bank, Banca Carige. It was an unprecedented step, highlighting the ongoing troubles of the country’s financial system, distressed by a sputtering economy.

Carige—a midsize bank and Italy’s tenth-largest lender—failed to fill a capital hole, leading to the appointment of three temporary administrators and three members of an oversight committee. The Malacalza family, a billionaire shareholder group that owns a third of the bank, didn’t approve an emergency capital call for €400 million ($459 million), causing the bank to miss the ECB deadline to shore up its financial health or find an acquirer.

The ECB’s move addresses concerns that the crisis could prompt a flight of deposits. A few days after Unicredit reportedly showed interest in buying the lender (with state support), the government set up a €1.3 billion fund to support Carige. Political leaders expressed intentions to nationalize the bank, even if it might break European rules.

Italian banks are not new to these crises. Two years ago, Banca Monte dei Paschi, Italy’s third-largest lender by assets, was rescued in an ECB-approved, state-backed precautionary capitalization. Intesa Sanpaolo, Italy’s biggest retail bank and Unicredit’s main competitor, took the good assets of Veneto Banca and Popolare di Vicenza in 2017 at the symbolic price of one euro, following €5 billion of public funding. Analysts expect the situation to get worse before improving, with more small and midsize banks likely to show issues in coming months.

Still, “Banca Carige’s problems are not the start of another banking crisis in Italy,” says Lorenzo Codogno at LC Macro Advisors. He says the problem is a few critically ill banks that could fall apart under certain conditions. “There are a few other leftovers, not adequately addressed over the past few years,” he says, “which may emerge shortly.”

“Luckily,” he continues, “the banks involved are small enough not to cause a substantial systemic issue, nor a massive problem for public finances.”