* Popolare Vicenza, Veneto Banca have requested state aid
* Italy wants to spare senior bonds, retail investors from
* EU authorities need to ensure credibility of banking rules
By Stefano Bernabei and Francesco Guarascio
ROME/BRUSSELS, March 22 Italy's plans to bail
out two regional banks pose a tough dilemma to European
regulators, who are still considering whether Monte dei Paschi
qualifies for state aid, three months after giving a preliminary
Banca Popolare di Vicenza and Veneto Banca said on Friday
they had requested a so-called precautionary recapitalisation by
the state - a mechanism that exploits an exception to European
rules meant to prevent the use of taxpayer money to save banks.
Italy is already seeking to use the scheme for its fourth
biggest bank Monte dei Paschi, where the state is
expected to inject 6.6 billion euros to fill an 8.8 billion euro
The rest of the money needed by the Tuscan bank is due to
come from holders of its junior debt, but retail investors in
its subordinated bonds will be compensated by the government, on
the grounds that they were mis-sold the securities.
Rome wants to replicate that framework to inject an
estimated 5 billion euros in the two unlisted Veneto-based
banks, already rescued once, last year, by government-sponsored,
privately funded bank bailout fund Atlante.
The government is keen to avoid imposing unpopular losses on
tens of thousands of ordinary Italians who put their savings in
the banks. It also wants to spare senior bond investors and big
current account holders - who would otherwise have to take a hit
under a strict interpretation of European bail-in rules.
Those rules say state aid can be allowed on a temporary
basis to banks that have failed regulatory stress tests but are
still deemed solvent, if refusal would risk seriously disturbing
the economy and financial stability of a member state.
The European Central Bank decided not to disclose the
outcome of stress tests on smaller banks - so there is a
question mark over the Veneto banks' exact state of health.
The ECB will have to assess whether they are viable and
determine the size of their capital shortfall, while the
European Commission will decide whether Italy's public support
for the two banks is in line with EU state aid rules.
Some analysts question whether the two banks can be
considered systemic, given that their combined assets are around
70 billion euros - less than half Monte dei Paschi's total.
Two sources familiar with Italy's position said Rome argues
in private that the two banks' failure would send shock waves
through the wider Italian financial industry. It would also
boost anti-euro political forces such as the 5-Star Movement at
the next national election, scheduled for 2018.
The Italian treasury declined to comment.
The ECB and the European Commission that governs the bloc
are under pressure not to allow Italy to sidestep the rules,
which critics say would undermine their credibility.
Germany, the euro zone's largest economy, raised concerns
about the Monte dei Paschi plan in December. After weeks of
negotiations, Italian Finance Minister Pier Carlo Padoan said on
Tuesday there was no date set for a final decision by European
regulators on whether it ticked all the boxes.
Asked whether the request for state aid by the Veneto banks
was stretching EU rules, an EU source said overuse of the
precautionary recapitalisation scheme could set an unhealthy
precedent for countries seeking to avoid winding down weak
"If the instrument is used often, and therefore loses its
extraordinary nature, as foreseen by the rules, that could be
interpreted as an attempt to avoid banking resolution," the
A European Commission spokesman said only that the
commission had ongoing contacts with Italy over its banking
sector. The ECB declined to comment.
A further problem for the Veneto lenders is that government
bailouts cannot cover losses already incurred or likely in the
near future - such as those stemming from bad loan writedowns.
In Italy, lenders are saddled with 360 billion euros of
gross problematic debts, a third of the euro zone's total.
The market is pricing in doubts over whether the two Veneto
banks fit the bill. Senior bonds in both lenders fell last week
on concerns they could be hit should the state aid scheme not
come to pass, although they partly rebounded this week.
As neither bank has published full-year results for 2016,
investors are in the dark about their real capital needs.
Based on the latest available figures for the first half of
last year, problematic loans at the two lenders after writedowns
totalled 10.2 billion euros at end-June, almost double their
combined equity capital of 5.7 billion euros.
Last October the head of Atlante, which owns more than 97
percent of each bank, said their cost-income ratio stood at
around 100 percent, a level which he said would make it
impossible for any bank to stand on its feet.
A source close to the two banks said they should just about
be able to offset expected loan loss charges by using their
existing capital, imposing losses on junior debt holders and
selling assets. The source however said this course of action
still needed to be discussed with regulators.
Spokespeople for both banks declined to comment.
With a criminal investigation underway over fraud
allegations, the banks are offering to settle with around
170,000 shareholders who were in many cases persuaded to buy
their shares in exchange for loans. The aim is to shield the
banks from future lawsuits and further losses.
The two lenders said initially they were aiming for an 80
percent take-up. As of Friday both stood at around 50 percent.
The source close to the two banks said that if they can
reach a take-up of 60-70 percent by the time the offer ends on
Wednesday, this should be enough to convince European
authorities that legal risks have been greatly reduced.
(additional reporting by Giselda Vagnoni in Rome and Valentina
Za in Milan, writing Silvia Aloisi, editing by Philippa