Italy’s Bank Bailout Fund“Atlas” Attempts to Keep Sky from Falling
On April 11th a collection of Italy’s strongest banks, asset managers, and insurers met in Rome in a meeting led by Prime Minister Matteo Renzi to create a €5 billion fund that will bail out Italy’s weakest banking institutions. An article in The Economist notes that Italy’s bank shares have lost an average of 31% since the start of the year. The long recession that Italy has been suffering for the last few years left its banking institutions vulnerable and damaged with $405 billion of bad debts. Two banks in particular, being Veneto Banca and Banco Popolare di Vicenza are in serious trouble with a recommendation by the ECB for them to both raise over $1 billion in extra capital.
These back-room bailout negotiations have been harshly criticized by both the banking sector and the general population due to the fact that they circumvented Parliament and due to their lack of transparency. However, in general the plan has been received positively due to the dire potential consequences of large scale bank defaults. The fact that a a recent European Central Bank stress test failed nine Italian banks, ranking the country by far the worst in the EU shows the importance for preventative action to be taken. When asked about the bailout Banca Popolare di Milano Chief Executive Giuseppe Castagna said,
It is a positive initiative for the system. We hope the announcement itself will soothe the market, so that a bigger portion of the fund can be used for bad debts.
Even though the €5 billion bailout fund is widely seen as a necessary move by the Italian banking sector to create solvency, there are a two main criticisms for such a strategy. The first main criticism is that bank bailouts can cause serious long-term harm due to the moral hazard. After the enormous bailout (TARP) by the United States government of the country’s largest banks and lenders in response to the 2008 Financial Crisis a similar complaint was heard. It is that the bailout of major banks will set a bad precedent for the future because banks will feel they can make risky loans knowing that if the loans go sour the government will be there to bail them out because they are “too big to fail.” The situation of bank bailouts payed for or organized by the federal government of a country raises many concerns about the separation of government and big business. Even though such a move may be necessary to protect the industry as a whole, bank bailouts can be seen as an example of cronyism because the government of a country is directly playing favorites to certain private industries.
A second criticism of the “Atlas” bailout plan is that it is undemocratic because it was coordinated without the consent of legislative branch, which is the branch of the government that is supposed to represent the will of the people. The ability of a Prime Minister to call meetings with private banks and arrange a bailout fund raises many eyebrows to the idea of an overreach of executive power. This is one of the inherent issues of democracy because adhering strictly to the ideals of democracy often sacrifice a large amount of efficiency, which would be the case in Italy’s situation. If the government took a referendum or waited for the bailout to be approved by Parliament, it could potentially put those banks with bad loans at serious risk of default.
Italy’s banking sector is currently dangerously fragile and the hope is that this Atlas bailout program will be able to provide a cushion in case the situation deteriorates, but the sector has long suffered from low profitability, weak governance and high costs so many are saying that such a fund might be too little too late. The government believes the long-term moral hazard of such a bailout creates is worth the short-term risk of a devastating default, and only time will tell whether Matteo Renzi will be the savior of the day or a man who waited too long to act.
