By Enrico Grazzini
Here’s some lessons from the banking crisis of Popolare di Vicenza and Veneto Banca, and the failures of the Italian government and European Banking Union interventions.
1) The Italian Government, the Bank of Italy and the Veneto Region (led by the Northern League) have shown themselves astonishingly incapable, first in monitoring and anticipating the crisis, and then managing it. They have lost very valuable time. The result is that the crisis of the two banks has deteriorated rapidly, the two banks have been forced to close, and the state has pledged and plundered billions more than expected, obviously using taxpayers’ money. In the end, the Venetian banks failed and their activities – the good ones – have been sold (given away?) for one euro to another private bank, Banca Intesa. While the state has shouldered all the negative and damaged activities. It’s hard to imagine how it could have gone any worse.
2) The Veneto banks should have been nationalised quickly and managed as public development banks to revive the national economy. The government, on the other hand, has dumped the losses on taxpayers and handed all the benefits and profits to Banca Intesa. The only positive aspect of the disaster caused by Minister Pier Carlo Padoan and his government, subordinate to the overwhelming and contradictory directives of the European Union and the ECB’s supervision, is that Banca Intesa – the sole beneficiary of the transaction – is the only big bank still in Italian hands. The other major, so-called national banks (such as Unicredit, UBI, etc.) are now largely foreign-owned. But this consolation prize is really poor.
3) All the weight of the crisis has been placed onto the shoulders of Italian taxpayers: the state pledged about 17 billion euros, a huge figure, spending that is equivalent to an Italian government budget. With this amount of money we could have boosted public investment and created millions of jobs. Thanks to the revival of the economy [resulting from this investment], we could also have cleaned up the Italian banking system, cancelling 350 billion euros in non-performing loans. Instead, we cannot be sure that another banking crisis will not break out.
4) The European Banking Union, which got off to a really bad start, is now moribund. The bail-in does not work and the European Union and the European Central Bank’s Supervisory Authority have caused delays and disasters with their confused and conflicting actions. Germany and the northern [EU] states will never accept putting their money into a single European fund to save banks and savers from other countries. The Banking Union has proven itself a danger, a bluff and an illusion. Yet it was to be the cornerstone of European integration.
5) Lastly, a strategic consideration: it is necessary to limit the power of private banks to create money from nothing. Private banks can make money out of nowhere (in the form of loans) and use it to help friends and risky financial adventures without having to invest in the real economy. By easily creating money from nothing, banks can speculate, throw money around, and then get saved with taxpayers’ money. We need a new and tight banking regulation to protect savers and to reboot the economy.
Let’s look in more detail at these points:
1) In spite of the liberal and anti-state beliefs, when a bank fails or is going to fail all over the world and at all times it is always the state that must intervene. Whoever protests against public intervention – without exception – either lies knowing they are lying or ignores history and does not understand reality. It is the most liberal governments who are involved in saving their “banks”. In Germany, the state intervened with 250 billion euros, in the US with 850 billion dollars (TARP), in the UK the state saved giants like Loyd, HBSC, Royal Bank of Scotland, Northern Rock with tens of billions of pounds, etc., etc.)
2) But there is a right and wrong ways to nationalize. True nationalization means that the state purchases a majority stake in the bank that is in crisis, become the main shareholder, fires executives who are incapable and / or corrupt, and manages the bank for domestic needs, not private profit.
3) False nationalization, on the contrary, is based on many other assumptions: the state puts taxpayers’ money to save private individuals to the exclusive benefit of these private individuals (that is, even those that might have caused bankruptcy). This is the famous socialization of losses and the privatization of profits. This is what the Italian government did by giving the two Venetian banks to Intesa for one euro and taking on all the burden of non-performing loans.
4) In this regard, in the case of the transfer of the two Veneto banks to Intesa, it is worth quoting Walter Galbiati from Repubblica: “Usually to strengthen the equity ratios, banks (see Unicredit) launch capital increases. In this case, Banca Intesa, in exchange for the effort to absorb the People of Vicenza and Veneto Banca, demanded that capital be strengthened by the state with taxpayers’ money. But then why were Banca Intesa’s shares issued to the state? With 5 billion euros, the Treasury would have become a shareholder with 10% of Banca Intesa, as it would become a stakeholder in the Veneto banks with a ‘precautionary recapitalization’ [an EU approved process whereby a state can invest in a solvent bank if its failure risks the entire banking system and subject to EU approval]. And it would remain a shareholder only for the time needed to repay the investment. In the United States, during the crisis triggered by Lehman Brothers, the state entered the banks to strengthen their capital and came out shortly afterwards with capital gains. On the other side of the ocean here we did not want to open up the capital to the state, but only asked to socialize the losses. “
5) The crisis of the two Venetian banks, and MPS, is mainly due to bad management of the managers and shareholders; the judiciary is investigating this. However, a great truth must be stressed: in general, the crisis of Italian banks is not borne out by the mad speculation on derivatives, as has happened in many other European countries, such as Germany and the UK. The Italian economic crisis, on the other hand, is born in general from the austerity that has been imposed on us by the European Union, financial markets, and ultimately by large international business banks that control about one-third of our public debt. Without the crazy and suicidal EU austerity policy, there would not be 360 billion bad credit for small and medium-sized businesses and households, and there would be no resulting banking crisis – apart from the individual criminal cases currently subject to investigations by the judiciary. Therefore, the EU’s and the eurozone’s economic policy holds the chief responsibility for the disaster in the national economy ( a 10% loss of GDP compared to 2007) and, in particular, the banking sector.
6) The European institutions and policies have severely added to the current crisis of Italian banks. The crisis management of the two Veneto banks by the ECB’s Supervisory Authority and the EU Commission has been ruinous and unsuccessful: first, the two banks have been declared systemically important, then it was declared that they were not; first they were declared solvent but in a crisis of liquidity, then it was stated that they were insolvent and in practice bankrupt; first they were forbidden state aid and instead required private contributions, then no, etc., etc. In practice, the crisis management by the ECB and the EU has been arbitrary and failed to play by the rules. And it greatly aggravated the bankruptcy of the two banks, causing them to fail.
7) Bail-in and burden-sharing rules decided at European level under the Single Crisis Resolution Mechanism have proved to be simply inapplicable. The Italian governments and the Bank of Italy should never have accepted the European bail-in rules. Under the bank’s internal rescue (bail-in) a banking crisis is tackled and resolved through the direct “internal” involvement of its shareholders, bondholders, and depositors: they are obliged to pay for a bank crisis. The problem is, however, that the crisis is provoked, in all cases, by corrupt and / or incapable executives and managers. Under the bail-in, the state can only intervene to save a failed bank after individuals (including small innocent bondholders and current account holders with more than 100,000 euros in deposit) have lost their money. This is on the pretext of not penalizing taxpayers who, in the final analysis, finance public rescue interventions. But the problem is that the bail-in comes as a complete antithesis to the protection of citizens’ savings. And ignores that the state is the only institution that has enough resources to save a bank. In the end, taxpayers still pay the bill, along with the humble savers.
8) The Banking Union has failed in the face of the crisis of the two Venetian banks. Not only has the Supervisory System run by the ECB (the first pillar of the Banking Union) failed, not only the bail-in rules have proved inapplicable, and therefore the Single Resolution Mechanism did not work (second pillar). But the Common European Deposit Guarantee Fund is very unlikely to be digested by the Germans and the nations of northern Europe because they would be forced to finance the bankruptcies of Italian banks and the Mediterranean countries. So the third pillar of the Banking Union is very unlikely to see the light of day either. But without the single fund, the Banking Union remains not only incomplete but becomes a set of rules that are counter-productive, wrong and inapplicable. European standards make the management of banking crises more difficult instead of addressing them and solving them.
9) In short, Italian participation in the eurozone is once again a heavily negative experience. The euro and the rules of the eurozone do not help us, but oppress and hinder our economy. Italian banks in crisis and our national savings become easy prey to foreign institutional investors and speculative funds (such as Vanguard, Norges Bank and Blackrock) and competing foreign banks.
10) A more general strategic consideration: a new direction needs to be taken to limit the banks power to make money out of nothing and to speculate, thereby endangering depositors’ savings. Banks create money by lending. Thanks to the fractional reserve mechanism, banks are not simple intermediaries between savers and borrowers but make money by making money: for each new loan of a certain amount, they record this sum in their balance sheets to a liability and the same amount as an asset. Then the money created from nothing goes to friends and into real estate / financial speculation. Strong banking regulation should be strictly regulated and narrowed, firstly by separating saving from speculative banking . Banks must first serve the real economy and development, and not pursue high profit targets through financial speculation, putting others’ money at risk, savers money. The state must intervene and, if necessary, issue its own currency, such as the fiscal currency . Otherwise, new crises are inevitable.
1) Repubblica “Bank Intesa, lo Stato ricapitalizza, ma non diventa socio,” by Walter Galbiati, June 27, 2017
2) See, for example, the Financial Times columnist Martin Wolf, (2014). “Strip private banks of their power to create money”, Financial Times.
3) See eBook edited by MicroMega: “Per una moneta fiscale gratuita. Come uscire dall’austerità senza spaccare l’euro” by Biagio Bossone, Marco Cattaneo, Enrico Grazzini and Stefano Sylos Labini, with the preface of Luciano Gallino downloadable free on Micromega’s site (July 4, 2017) For an earlier explainer by Grazzini, translated into English see https://revolting-europe.com/2015/02/15/a-new-fiscal-currency-to-tackle-the-eurocrisis-from-greece-to-italy/
Translation by Revolting Europe