Funding gap grows at Italian bank — ECB

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Italian lender Monte dei Paschi is facing a capital shortfall of €8.8bn (£7.5bn), higher than the €5bn previously estimated by the bank, the European Central Bank has said.

It comes after Italy approved a €20bn fund to prop up its embattled banking sector on December 23, the BBC reported on Wednesday.

Monte dei Paschi had asked for a capital injection to stay afloat.

It is carrying a mountain of bad loans made to customers who cannot afford to repay them.

In a statement from the bank, it confirmed it had officially asked the ECB to go ahead with a “precautionary recapitalisation”.

This will entail a forced conversion of the bank’s junior bonds – many of which are held by small investors – into shares.

It also permits the government to buy shares or bonds on market terms endorsed by the EU state aid officials.

In response, the ECB said it had calculated the capital it believed that the bank needed, based on an EU stress test of large lenders earlier this year.

Monte dei Paschi has formally requested a bailout from the Italian government – but it is far from a done deal.

The government is trying to present the plan as a “precautionary recapitalisation” rather than a full-blown rescue. It is an important distinction under the EU state aid law, which would enable it to limit the losses suffered by investors.

The ECB’s conclusion that MPS needs €8.8bn to boost its reserves, as opposed to the €5bn previously being discussed, creates yet another headache. However, with €20bn already set aside by the government to support the banking sector, it shouldn’t be too painful.

The ECB also says that MPS “remains solvent”, although its liquidity position is deteriorating rapidly. That might actually help the government’s argument that the bailout is, in fact, precautionary.

It said the bank was solvent, but noted its liquidity position had “deteriorated rapidly” between  November 30 and December 21.

“The bank has quickly started talks with the competent authorities to understand the methodologies underlying the ECB’s calculations and introduce the measures for a precautionary recapitalisation,” Monte dei Paschi said.

A spokesman for the ECB said, “We have been in continuous and constructive talks with the Italian authorities. We of course fully support the objective of the Italian authorities to further strengthen the Italian banking sector, in compliance with EU law.