2 anecdotes perfectly illustrate why Italy's banking system is such an epic mess

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Italy's banking sector is in crisis.

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As the results of the European banking stress test - which could be a make or break moment for Italy's fragile financial institutions - draw nearer, it is worth looking at just why the country is in such a state right now.

The simple reason? The country's financial sector is plagued by an enormous surfeit of bad loans - basically loans given out by banks to people whose ability to pay those loans back is questionable and that as a result, have a high default rate.

It is estimated that the total stock of non-performing loans (NPLs) held by Italian banks is roughly €360 billion, and is now so great that the government was, in April, forced into rallying bank executives, insurers and investors to put €5 billion (£4.2 billion, $5.57 billion) behind a rescue fund for its weakest banks. The Atalante fund is designed to buy so-called bad loans from lenders and invest in their shares in the hope that the re-energized banks will lend more to businesses and spur growth.

That went some way to easing concerns about certain banks, but the fund is only worth only around 1.4% of the total NPL pile. Any way you look at it, Atalante - however well intentioned - isn't going to solve Italy's problems.

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In the past few days several great stories documenting the human impact of the banking crisis have appeared, containing within them some brilliant examples that shed anecdotal light on why Italy's financial system is in such a mess, and why the country's non-performing loan problem has spiralled out of control in recent years.

First there's this story from the Guardian about the struggles of the town of Vicenza in northern Italy, near Venice. Vicenza's local bank, Banca Popolare di Vicenza failed in an attempt to raise capital through an IPO earlier in 2016, and is one of the banks helped out by the Atalante fund - created to prop up the country's struggling banks.

The Guardian tells the story of a 43-year-old waiter, Francesco Bertolda, who was made eligible for financial assistance from BPV, what the paper says amounted to "loans for everything ranging from homes to cars and businesses." Bertolda, however was told he was only able to get this kind of assistance if he and his father - who was also seeking a loan - both bought shares in the bank worth a minimum of €6,000.

It is hard to gauge exactly what other conditions Bertolda had to fulfill in order to get his loan, but the idea that a loan from a major bank would be caveated on the purchase of shares in the same bank is pretty shocking.

Italian Prime Minister Matteo Renzi looks on during a meeting at the Capitol Hill in Rome, Italy, May 5, 2016.

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Italian Prime Minister Matteo Renzi has a tough task on his hands.

The second example of just why Italy's banks are in such a state appeared in the Financial Times on Tuesday.

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The FT's James Politi and Davide Ghiglione told the story of an Italian woman named Roberta Tonelli and her husband Claudio. Around 2006, the pair was granted a loan by Monte dei Paschi di Siena - the world's oldest bank, and perhaps more importantly, the bank at the centre of the Italian crisis.

Tonelli's loan amounted to €800,000 and was given so that the couple could buy a farmstay hotel in the Tuscan hills to live what she called a "calmer life."

Neither Tonelli nor her husband previously worked in the hospitality industry. She was a shoe saleswoman, and he was an unspecified "municipal worker." The bank basically gave a huge loan to someone to run a business they seemingly had no real qualification to do so.

As the FT article notes: "Ms Tonelli's inability to repay MPS is not just the unfortunate tale of a single credit gone awry. It is emblematic of the massive stock of gross non-performing loans - valued at about €360bn - weighing on Italy's banking system and the Italian economy since the recession."

What happens to the financial sector in Europe's fourth largest economy remains to be seen, but ridding the country of its NPL problem will be imperative to its future prosperity. The country's banks got themselves into their current mess by lending recklessly to unsuitable candidates, but it is now looking increasingly likely that politicians will have to step in.

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