Commission and ECB in stand-off over Monte dei Paschi

The European Commission and the European Central Bank are at odds over the capital plans of Monte dei Paschi di Siena, throwing doubt on details of the state rescue of Italy's oldest and most troubled bank.

Rome’s proposal to recapitalise MPS has been in limbo since December because the ECB, which is the bank’s supervisor, and the European Commission, which polices state aid, have different views on their responsibilities and the merits of taxpayer bailouts.

The two-month stand-off leaves fundamental questions over the rescue proposals, including the level of state support allowed, the amount of losses creditors will suffer, and the depth of restructuring needed to make the bank viable.

Senior euro zone officials and bankers warn it could take several months to resolve the protracted bank saga, which has damaged confidence in Italy’s financial sector and tested rules implemented by the EU after the financial crisis.

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The Single Supervisory Mechanism, the ECB’s supervisory wing, has said it is waiting for the commission to agree a plan to restructure MPS and approve state aid. Yet the commission, in turn, thinks it is waiting for the supervisors to agree a capital plan with MPS before it can finalise restructuring terms.

One person involved in the process called the situation “surreal”.

Capital gap

So-called “precautionary recapitalisation” of solvent banks is allowed under EU rules but can cover only the capital gap identified in the most stringent scenario of a stress test, which regulators carry out periodically to assess the health of banks in the bloc.

This approach avoids tougher EU requirements that 8 per cent of a struggling bank’s liabilities – including senior creditors – be wiped out before taxpayer funds can be used.

The ECB and the commission’s differences relate to the Frankfurt supervisors’ view that MPS needs about €8.8 billion in capital.The EU side sees it as essential to have a more detailed plan from the Single Supervisory Mechanism, which would set out levels of expected losses and explain how capital needs were calculated in order to approve legal use of state support.

That is because EU state aid rules require incurred or expected losses to be covered by money bailed-in from creditors or private funds, not by a taxpayer intervention.

Germany is particularly concerned that soft treatment of MPS would set a legal precedent that undermines post-crisis EU rules designed to end taxpayer bailouts.

In December the SSM controversially rejected MPS’s plea for more time to deliver on a €5 billion plan to raise fresh capital. Instead, it increased the amount of capital the lender needed to raise to €8.8 billion.

While supervisors’ December threat to MPS won it credibility, critics say its subsequent lack of action on the lender has raised fresh doubts over its reputation.

Biggest test

“The biggest test [facing the SSM] is clearly Italy,” said Nicolas Véron, a senior fellow at Bruegel, a think tank in Brussels. “A corner was turned with the refusal to extend the MPS plan, but things have been very slow since then . . . If we don’t see something soon, there will be a big question mark.”

A document on the Bank of Italy’s website sets out the reasoning behind the new €8.8 billion figure, including detailed information on how much the Italian state could contribute to the capital raising and how much must come from retail depositors under the terms of the EU’s bail-in rules.

Underlying the differences between Frankfurt and Brussels are divergent philosophies on state aid.The ECB,with the job of maintaining financial stability,wants to secure the health of the lender regardless of cost to the taxpayer. For the commission, the size of taxpayer support matters, and any perception of special treatment for MPS will lead to protests from lenders elsewhere in the bloc.

"Often there is a little bit of a dispute between the commission and the ECB about what measures the ECB can take," said Andreas von Bonin, a partner at the Brussels office of law firm Freshfields. "There is also a philosophical issue, because the ECB is less averse to state aid than [the commission's competition arm]. One example was what we had with the Greek restructuring . . . the ECB was a lot more critical of measures the Greek banks wanted to take on their own."

Italy has yet to submit a restructuring plan for MPS to the commission or a formal application for the use of state aid.

An Italian official said talks were on track. Italy had a productive meeting with Brussels to start settling details of the precautionary recap 10 days ago, this person said. Officials and bankers expect the state deal to be finalised by May.

Copyright The Financial Times Limited 2017