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Italian banks in crisis as stress tests loom

The upcoming stress tests on Europe’s banks could further highlight a crisis in the Italian banking system, and further dent investor sentiment.

Italian banks, long struggling under the weight of loans that have gone bad, remain under the spotlight. The Italian banking system never resorted to a so-called ‘bad bank’ that would house those non-performing loans, as happened in other countries. That has come to haunt the system, as the continued deterioration of the Italian economy has led to an explosion in bad loans and they’ve reached levels never seen before.

Despite the measures taken by the government in recent months, which involved the creation of the Atlas fund and an acceleration of real estate collateral redemptions, investors remain very concerned about the lack of liquidity in the banking system. Banca Monte dei Paschi di Siena, the oldest banking institution in the world, remains in the eye of the storm, and Italian market regulator Consob had to impose a ban on short selling in recent days as the stock plunged.

The issue is very delicate and urgent, and ongoing discussions are under way between Rome and Brussels to decide on the next steps that put the system on a sounder footing. A capital increase and the creation of an ad hoc fund to buy non-performing loans are possible solutions. Although European directives allow the Italian government to act to safeguard the banks in exceptional circumstances, the European Commission wants to prevent any operations that could be regarded as state aid as this is prohibited by European regulations.

Time is, however, is running out. The European Banking Authority will release its latest stress tests on 51 European banks on 29 July. Although there will be no passes and fails as there are no dividing thresholds, the results could highlight critical issues that could further dent already precarious investor sentiment. 

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