* Italy’s public debt may not fall this year – BOI’s Visco
* Italian banks must cut costs including through layoffs
* Small banks’ problems can be acute, consolidation needed
(Releads with comments on bank bailout rules)
By Valentina Za
MILAN, May 31 Bank of Italy Governor Ignazio
Visco urged the European Union to backtrack on new rules aimed
at shielding taxpayers from having to prop up ailing banks,
arguing swift state bailouts can be profitable.
Italy’s banking system was shaken by the rescue of four
small lenders last November under tougher new EU rules on state
aid — wiping out the savings of hundreds of ordinary Italians
who had bought the banks’ shares and junior bonds.
This hurt confidence and triggered an outflow of deposits at
other weak banks when “bail-in” rules came fully into place in
January.
Visco, who has repeatedly called for bail-in rules to be
revised, said the possibility of using public money in bank
crises had been “virtually eliminated.”
To avoid a repeat of costly bank bailouts seen during the
financial crisis, public money can now be tapped to help banks
only after investors and large depositors bear losses.
But Visco said prompt public intervention could prevent the
destruction of wealth without necessarily generating losses for
the state, and could even generate profits.
“Greater scope for intervention of this sort, exceptional as
it may be, should be reinstated,” he said in a speech to the
Bank of Italy’s annual assembly in Rome.
He criticised the EU Commission for blocking Italy’s plan to
use a deposit guarantee fund financed by lenders to save the
four small banks without hitting retail investors.
“There is no reason to stigmatize as improper state aid
those initiatives that help to correct market failures without
undermining competition,” he said.
“A rigid interpretation of the regulations on state aid,
with little regard for financial stability, has also hindered
the plan for creating a company to manage Italian banks’
non-performing loans.”
Unlike Spain or Ireland, Italy did not move to help its
banks during the financial crisis, partly due to a public debt
burden running at more than 1.3 times its output.
But when a three-year recession saddled Italian banks with
360 billion euros in soured debts, the government found itself
with little room for manoeuvre.
Visco urged banks to swiftly cut costs, including through
layoffs, to prop up profits after booking more than 120 billion
euros in loan writedowns over the past four years.
As the impact of the recession eases, banks face new
challenges denting profits due to negative interest rates, the
need to reduce financial leverage and shrinking fees amid
progress in technology and increased competition.
“For many Italian banks it remains imperative to take steps
to contain costs, including staff costs, by adapting the quality
and quantity of personnel to new technological and market
developments,” Visco said.
For smaller banks problems stemming from the large stock of
bad loans, little diversified sources of income and
technological developments could be “acute” making rapid
consolidation necessary.
Turning to public finances, Visco also warned that Italy’s
public debt – the highest in the euro zone as a proportion of
national output after Greece’s – may not come down this year as
the government has targeted.
(Additional reporting by Gavin Jones in Rome; Editing by
Alexandra Hudson)