The Commission can now appeal to the European Court of Justice, the EU’s highest legal authority. But even if the judgment stands, it will be a Pyrrhic victory for the Italians. Creative use of the deposit guarantee scheme doesn’t magically solve the problems of a rescued bank. It simply forces healthier lenders (which contribute to the fund) to share the burden. Any such rescue depletes the scheme, which cannot fulfil its primary mission: To guarantee deposits of up to ^100,000. That makes it more likely that taxpayers will have to step in.
A short history of Italy’s recent banking troubles illustrates this point. After the EU blocked them, the Italian authorities found an imaginative way to let the guarantee fund intervene anyway in saving Tercas: They used a “voluntary” scheme that doesn’t count as state aid. But Banca Popolare di Bari SCpA, which rescued its rival with the help of the fund, now finds itself in need of a new capital injection.
Italy’s banking system has also chipped in to contribute to a separate rescue fund, Atlante, which took over Banca Popolare di Vicenza SpA and Veneto Banca SpA. Atlante failed to turn around the banks, which were eventually liquidated. Finally, the deposit scheme has now intervened to rescue Banca Carige, another troubled lender, by investing in a subordinated bond. Several participating banks, including Intesa Sanpaolo SpA have already written off the investment.
This sequence shows that asking industry funds to support troubled banks is not a free lunch. In fact, it rewards bondholders who have lent money to a mismanaged lender, at the expense of shareholders who’ve invested in a healthier rival. That’s hardly fair. The banking system will also seek to recoup some of costs from its customers, via higher charges. Plus the bigger the burden you place on healthier rivals, the higher the risk of contagion.
Letting regulators do what they want with national deposit guarantee schemes may give the authorities an extra degree of freedom in dealing with crises, but it won’t solve the fundamental problems. These have to do with the quality of the loan-books of certain banks and, most important, their ability to generate profit in a challenging economic and technological environment. When a bank can’t compete, far better to manage its orderly exit than chuck more money at it.
Indeed, broader use of these schemes would probably hinder a much-needed reform for European banks: Setting up a joint deposit guarantee across the eurozone. Several countries, including Germany, are opposed to that because they don’t want to subsidise weaker banks. But this looks a little rich. As the mooted merger between Deutsche Bank AG and Commerzbank AG shows, German lenders are as disaster-prone as anyone else.
Ironically, more expansive use of national guarantee funds by Italy or whomever would only make Berlin even more suspicious of setting up a joint one (something coveted by the Italians). Rome should be careful what it wishes for.
The writer is an economics columnist for La Repubblica and was a member of the editorial board of Financial Times