Italy urges banks to merge, boost capital

ITALY’s economy minister on Sunday urged the country’s banks to grow and strengthen their capital, hoping to see the sort of mergers that a government reform of the sector has so far failed to produce.

In an bid to counter the fragmented nature of Italy’s banking system, where most banks are small and local, the government passed a law in March to make it easier for large cooperative lenders to be taken over.

As a result, banks have begun discussing defensive mergers but fears of losing local influence and top jobs have so far hindered progress. “We encourage banks to take advantage of existing opportunities so that they can ultimately become stronger and grow in size,” Economy Minister Pier Carlo Padoan told Reuters in an interview.

Speaking on the margins of the yearly Ambrosetti meeting of business leaders and politicians on the shores of Lake Como, Padoan acknowledged governance issues made mergers more complex.

But he said banks should see as “opportunities and not problems” the need for capital-raising and consolidation brought about by deeper global financial integration and the European Central Bank’s new role as the euro zone’s banking supervisor.

Italian banks have raised around 15 billion euros ($16.73 billion) from shareholders since early 2014 to strengthen their balance sheets, but bankers say new cash calls may be needed due to individual capital requirements the ECB will communicate in the coming weeks.

Padoan said Italy was still trying to win the European Union’s approval for measures to help banks shed problematic loans, which are nearly a fifth of the total after a three-year recession. “Hopefully as quickly as possible,” he said but added the market for non-performing loans appeared to be picking up.

The government has passed measures to speed up loan recoveries, but a more ambitious plan to offer a state guarantee to jump-start bad loan sales has run into difficulties in Brussels due to more stringent rules on state aid.

Italy’s public debt, the world’s fourth-largest, will decline from next year despite lower-than-expected inflation, Padoan said. “The speed of reduction is still under discussion,” he added, indicating that Rome is trying to win some leeway from the European Union on how quickly it cuts debt.

However, Italy will not breach EU commitments, he said. Prime Minister Matteo Renzi said at the Ambrosetti meeting on Saturday that the pace of debt reduction should be a matter for discussion as Italy needed to support its economy.

Padoan has said the government would likely revise upwards its forecast for a 0.7 per cent real growth this year after Italy’s gross domestic product expanded by 0.3 per cent in the second quarter and 0.4 per cent in the first.

But inflation is running well below the official forecast and this means that nominal growth – which is used to calculate the deficit-to-GDP and debt-to-GDP ratios under EU rules – could be weaker than expected. Padoan said it was too early to say if the stronger-than-forecast real growth would offset the weaker inflation.