Banking crisis in Italy

Rome, Brussels and Frankfurt are currently negotiating how to deal with the Italian problem non-performing bank loans. Since 2014, the new Bank Resolution and Recovery Directive (BRRD) sets out the procedure for such scenarios. Banks may only be recapitalised after owners and creditors have participated in the losses (“bail-in”).

cep financial expert Van Roosebeke: “This problem can be solved within the BRRD Directive. The directive allows for exceptions of the bail-in obligation for private persons and small and medium-sized enterprises. Interesting is actually another point: if private bondholders of Italian banks were excluded from bail-in, this would amount to an expansion of the existing scope of protection of the deposit guarantee system.

The Italian government would probably justify such an exclusion with the argument of misselling. Banks should never have sold their subordinated bonds to retail customers because they were too risky. Interestingly, the European directive on investor-compensation schemes (Directive 97/9/EC) does not provide for compensation for misselling. Since 2010, several attempts of the European commission to expand the scope of protection of the directive failed due to the resistance of the member states. It remains to be seen whether this will change.”