BCCs: caught between economic crisis and bail-ins

March 1st 2016


Small-sized banks are facing new challenges posed not only by the effects on the balance sheets produced by the extended economic crisis, but also by the changes in the supervisory institutional set-up, by the evolution of prudential regulations and lastly by the repercussions and innovations of the resolution regime.

More than a year has gone by since the speech made at the Raiffeisen Confederation by the Head of Banking and Financial Supervision at Banca d'Italia, Carmelo Barbagallo, stressing the need for a reform on co-operative credit, as the tension on the financial markets and the prolonged unfavourable economic downturn could jeopardise the equity structure of small banks, rendering them unable to cope with the crisis situation. [1]

The approval by the Government of Decree No. 18 of 14 February 2016 has set in motion the process of structural change of the co-operative credit system in Italy. The proposal has yet to pass through the parliamentary procedure, a number of topics might therefore be renegotiated, however, adhesion to a banking group (with a parent company which has the form of a public limited company) appears as almost mandatory in order to face two critical factors imposed by the current context: the access to the capital market and the disposal of deteriorated loans.

Co-operative credit banks have always stood out owing to their levels of capitalisation higher than those of the principal banking groups. In 2014 the CET1 ratio of a sample of 301 Bccs was equal to 16% (Fig.1), a higher level both as compared to that of the 5 major Italian banking groups [2] (11.4%), and of other medium- (10.6%) and small-sized groups (10.4%). [3]

A significant capital endowment, that has always been chiefly underpinned by self-financing that, nevertheless, due to the ongoing crisis and low interest rates, is now in danger of not being adequately fostered by profitability. These past years have also been marked by a drop in credit quality, with an increase in the impact of non-performing loans (NPL) in the balance sheets of banks (at the local and non-local level alike) and the increased flow of value adjustments (that absorb an ever-increasing portion of the operating result). [4]
In 2014, the median NPL ratio of the 301 Bccs was slightly lower than the one of the national banking groups, however, the coverage level of the deteriorated positions was lower, namely a deviation from the major operators by more than 10 percentage points (Fig.2).

Fig. 1: CET1 ratio 2014 (%)
Fig. 2: NPL gross profit ratio and coverage ratio 2014 (%)
Source: processing conducted by Prometeia on budgetary data.

The pressure generated by the market and supervisory authorities for raising coverage levels does not allow for an optimistic outlook on the potential decrease in credit risk adjustments, at least not in the short term. Even more so, if the growing amount of non-performing loans in the balance sheets is considered. The disposal of non-performing loans is an imperative, that is given a legislative basis for the first time in the very Decree relative to the reform on co-operative credit, comprising, as is common knowledge, provisions aimed at alleviating the burden of non-performing exposure in the balance sheets of banks (State guarantee on securitisation transactions following the disposal of non-performing loans). 

In the co-operative sector, the formation of a group with a single holding (limited liability) company will contribute towards a centralised, coordinated and efficient management of the disposal or securitisation of non-performing loans. On this issue, though, the co-operative dimension has already proved its ability to act autonomously, as underscored by the disposal of non-performing loans carried out at the beginning of 2016, [5] as coordinated by the Iccrea group.

Aside from the difficulties posed by the economic context, Bccs are also confronted with a plethora of reforms on prudential regulations, that in recent months have gone hand in hand with bail ins, the much debated new resolution regime that has revolutionised the recovery management system. Traditionally, co-operative credit has always activated instruments within the category for managing crisis situations: aggregation with neighbouring banks, intervention by Banca Sviluppo. Also in this sense, the reform on the co-operative sector could be beneficial: the formation of a holding company should significantly reduce the risk of default, making it easier to locate the necessary resources for the bank recapitalisation scheme for all participating banks and ensuring a more accurate risk diversification.
In any case, the Bcc system currently already shows a sound solidity when up against harsh loss scenarios. Simulations of the application of bail-ins to the key Italian groups and to a sample of 301 Bccs conducted by Prometeia, emphasised that even in the event of severe losses, the protection offered to senior depositors and bondholders is in any case high: the latter would never be involved in the coverage of the losses incurred, but only (to a small extent) in the recapitalisation of a bank in crisis. [6]

[1] “Le banche locali e di credito cooperativo in prospettiva: vigilanza europea ed evoluzione normativa” (Local and co-operative credit banks viewed through the lens of European supervision and regulatory evolution), Carmelo Barbagallo, Head of Banking and Financial Supervision at Banca d'Italia, Bolzano 12 February 2015.

[2] Unicredit, Intesa SanPaolo, Monte dei Paschi, Banco Popolare and Ubi.

[3] The medium-sized groups are: Bper, CariParma, Iccrea, BP Milano, BP Vicenza, BP Sondrio, Veneto Banca; Credem, Carige, Credito Valtellinese. The small-sized groups are: Banca Sella, BP Bari, CR Asti, Banco Desio, CR Bolzano, CR Ravenna, CR Cesena, BP Ragusa and CR San Miniato.

[4] “Seminario istituzionale sulle tematiche relative alla riforma del sistema delle banche di credito cooperativo” (Institutional seminar on the themes relating to the reform on the co-operative credit banking system), a speech held by Carmelo Barbagallo (Head of Banking and Financial Supervision at Banca d’Italia) at the Senate of the Republic (15 October 2015).

[5] The disposal transaction concerned a package of gross non-performing loans amounting to 300 million EUR belonging to thirty odd Italian banks (including 28 Bccs). The buyer is the US fund, Bayview Fund Management.

[6]  See also http://www.prometeia.it/atlante/crisi-bancarie-bail-in.


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