Councils warned off banks despite signs of state support
0
Photo: European Parliament
Councils have been urged to continue diversifying away from banks despite moves by European governments to provide support under the new bail-in regime.
A report by ratings agency Standard & Poors this week said that although direct bail-outs by governments are now illegal, the Italian government has recently taken steps to help financial institutions.
It said that the Portuguese government is considering similar actions to accelerate the removal of problematic exposures in its system.
According to Giles Edwards, global ratings analyst at S&P, some banking systems are continuing to face issues, such as low structural profitability and high fragmentation.
He said: “In Italy, for example, some banks continue to suffer from weak asset quality and capitalization.
———————————————————————-
8th Local Authority Treasurers Investment Forum
———————————————————————-
“To address this, the government has had to find remedies that are politically and legally acceptable and yet effective at meaningfully improving banks’ financial health. This is a fine line to tread.”
David Green, client director at treasury adviser Arlingclose Limited, said: “The Bank Recovery and Resolution Directive and State Aid rules do leave governments with some options to assist failing banks before bailing in large depositors.
“But it would be a brave local authority that relied on Whitehall, or a foreign government, to bail them out with taxpayers’ money.
“Now that the resolution mechanisms are in place, political expediency will surely let management and millionaire investors pay for the bank failures instead.
“And if ‘millionaire’ includes a few local authorities who are still investing like nothing’s happened in the last ten years, that will just be called localism in action.”
David Whelan, managing director at treasury adviser Capita Asset Services, said: “While the regulations do provide some wriggle room for governments and/or authorities to provide support, there is no guarantee that even if such support was financially available, that it would be provided.
“Capita Asset Services’ local authority clients do not, and have never based their strategic investment decisions on what could be the whim of a government in power and associated authorities at a particular time in the future.
“The other key message is that the agency does not believe that non-capital instruments would be affected in the event of the provision of state aid that would lead to the write-down of a stressed entities’ liabilities.
“Such non-capital instruments include wholesale money market deposits. A further insight into the treatment of deposits comes from another rating agency, which has split ratings according to asset class, with deposits among the highest rated across financial institutions’ ratings.”
According to the S&P report, the Italian government has created a common structure to strengthen a network of rural cooperative banks – effectively creating an integrated banking group.
It is also pushing the remaining Popolari banks, which remain mutual, to transform into joint stock companies.
Italy is also reforming tax rules and changing laws to shorten the length of time before which banks are allowed to seize collateral such as property.
In February, the government reached agreement with the European Commission on its GACS mechanism, allowing banks to securitise their non-performing loans with the Italian government.
In April, the government also backed a large privately owned investment fund – Atlante – created to backstop the underwriting of upcoming rights issues and potentially acquire the most junior tranches of the GACS securitisations.
However, although S&P called the interventions “potentially” useful, it said that they are unlikely to radically improve the situation in the short term.
The report said: “While the Atlante recapitalization fund could strengthen weaker banks, this may be at the expense of weakening stronger banks, notably if they were required to increase their participation.”
