Another bank bailout in the European Union

With reference to E.U. Commission Approves Billions in Aid for 2 Italian Banks by Jack Ewing on 25 June 2017 in the New York Times.

On Sunday, the European Commission took quick action when two small Italian banks, Banca Popolare di Vicenze and Veneto Banca, were heading towards bankruptcy. To avoid Italian residents losing confidence in the banking system the E.U. allowed the Italian government to bailout the two banks for billions.

The plan is 4.8 billion euros in cash and 12 billion in guarantees of depositors. The two banks only account for 2 percent of Italian deposits.

The reason to go this route is because the majority of the Italian banks are consisted of problem loans and very little capital. Fear if these two banks fail it will cause a panic. Italians might lose faith in the banking system and could cause people to withdraw their money and banks will shut down.

The investors of this bank in senior bonds will keep their investment, however, junior bond investors will lose theirs as well as shareholders.

Despite this large amount of bail for these two banks, the Italian government believes there is a good chance of repayment. This bailout will also be separating the good and bad assets and sold to Intesa Sanpaolo.

Although this plan is approved, it is up to the Italian government to fund this bailout. It is planned to come out of the 20 billion fund for the banking system of the Italian government. The fund is however controversial because of the claim the Italian government made that they will not spend taxpayers money to help banks in trouble.

If this goes as plan this 17 billion euro bailout will be the biggest bank bailout in Italy’s history. Prime Minister Paolo Gentiloni said this was a necessary bailout to protect depositors and savers.

Seeing Italy’s faltering bank system is a bringing up memories of the bailout Ireland received not too long ago after the financial crisis. The 64 billion bailout for the Irish banks only deepened the recession. Since it is coming out of Italy’s pockets and not the European Union, Ireland should not be affected financially. However, putting more regulations on banks with requirements on loans and a standard capital ratio can help banks avoid risk of bankruptcy and losing client’s money from risky business practices. This bailout is going to question the consistency of Europe’s bank regulations.

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