Banca Monte dei Paschi di Siena SpA is on track to receive a state recapitalization after European Union and Italian officials agreed on a draft plan that will include further restructuring of the world’s oldest bank.
EU Competition Commissioner Margrethe Vestager and Italian Finance Minister Pier Carlo Padoan reached “an agreement in principle’’ on Monte Paschi’s restructuring plan, which will pave the way for a precautionary recapitalization, according to a website statement. The deal, which follows “intensive and constructive contacts’’ between Italy, the EU, and the European Central Bank, still requires formal approval.
Monte Paschi “will undergo deep restructuring to ensure its viability, including by cleaning its balance sheet from nonperforming loans,’’ Vestager said in the statement. “I hope this will enable MPS to focus on lending to the Italian businesses and support the Italian economy.’’
Monte Paschi was forced to turn to Italy for aid after it failed to raise extra capital from investors in December. The ECB said then it needed to secure $9.9 billion to bolster its balance sheet. The government would contribute about $7.40 billion, according to a Bank of Italy calculation, with the rest covered by creditors.
The agreement sets a precedent in how governments can help struggling financial institutions without triggering bank resolution rules forged in the wake of the financial crisis. EU law stipulates that the need for “extraordinary public financial support’’ normally means a bank is failing and should be wound down. An exception is made for temporary state aid to address a capital shortfall identified in a stress test if a number of conditions are met.
Before Monte Paschi can receive the rescue, the ECB must confirm that the Monte Paschi is solvent and meets capital requirements and Italy must get confirmation from private investors that they will purchase the non-performing loans portfolio.
Monte Paschi is in discussions with funds including Credito Fondiario SpA and Fortress Investment Group LLC about investing in the riskiest tranches of the securitization, which is backed by loans with a face value of up to $33.65 billion, people said last month. Atlante II, the private investment fund set up with the help of the state to invest in nonperforming loans, is expected to buy the largest portion of the same tranches, they said.
An official for the Italian Treasury said it is very satisfied with the agreement. Monte Paschi representatives couldn’t immediately be reached for comment.
The EU will now work with Italy on details of Monte Paschi’s final restructuring plan. Italy will need to formally notify the EU of the plan, including commitments and plans on the restructuring.
Monte Paschi’s senior management will have their salary capped at 10 times the average salary of bank workers as part of measures “to substantially increase its efficiency.’’
