Italy's banks lobby for softer capital regime

MILAN - Italian banks are discreetlylobbying European regulators for a softer regime on plugging a15 billion euro capital shortfall now that tensions oversovereign debt has eased, according to regulatory and bankingsources.
 
Their plea, based on the argument that Italian bond yieldsare lower than when banks were forced to mark-to-market theirsovereign debt holdings, has so far fallen on deaf ears, and time is running out for a change of heart. 

Italian lenders have been up in arms ever since the EuropeanBanking Authority's region-wide recapitalisation exercise lastDecember found a combined capital gap of around 15 billion eurosfor UniCredit, Banca Monte dei Paschi di Siena, Banco Popolare and UBI. 

EBA calculated the shortfall based on a requirement for allEuropean banks to have a core Tier 1 of at least 9 percent byJune 2012 and an "exceptional and temporary" sovereign debtbuffer for holders of distressed government paper - which wasthe case for Italian banks.
  
While UniCredit plugged nearly all its capital gap through a7.5 billion euros rights issue in January, smaller peers likeMonte dei Paschi, Italy's No.3 bank, are struggling to meettheir targets.  
Since the start of the year, Italian government bond priceshave partially recovered as fears about the future of the singlecurrency bloc eased, cheap funds from the European Central Bank(EBA) offset a funding squeeze, and the arrival of Mario Monti'stechnocrat government helped restore market confidence.
 
Italian regulatory and banking sources say the narrowing ofthe spread between Italian and German 10-year bonds wouldwarrant a review of the EBA capital buffers, which were based onbond prices in September.
 
At Monday's close, the spread between 10-year Italiangovernment bonds over equivalent German Bunds was 309 basispoints, compared to around 370 points at the end of September.
 
But Italy has failed to persuade other European nations topush for a softening of the requirements, the sources said.
  
"As far as Italy is concerned, there would be room for areassessment of the capital buffer set by the EBA" said aregulatory source, who requested anonymity because of thesensitivity of the issue.  
"But there is not much interest in Europe for that. Themajority of European countries does not want to reopen thediscussion on this matter."
 
Intense lobbying by Italian lenders, which feel the EBA calculations are unfairly penalising them, was under way in therun-up to an informal meeting of European finance ministers onMarch 30-31, a banking source said.
  
"The only chance for us is to have strong political backingfrom the ministers" the banking source said. 

EBA's board of supervisors also meets to review progress onthe stress test recapitalisation plans on April 3-4, providing apossible fresh opportunity for Italy to argue its case.

But an official familiar with EBA thinking did not expectthe sovereign debt buffers to be revisited in the near term.  
 
Different picture  

If the mark-to-market exercise on Italian government bondswere held now, Italian banks and analysts say, the picture wouldlook very different.
 
"The reduction in the spread is bringing us towards asituation of normality. The conditions which were in place inSeptember are no longer there, " Giuseppe Mussari, head of theItalian banking association which has threatened to take the EBA to court over the stress tests, said earlier this month.
  
A report by Mediobanca analysts said that in the case ofMonte dei Paschi, the 3.3 billion euros capital shortfallidentified by the EBA in December was entirely related by themarking-to-market of its government bond holdings, and wouldhalve to 1.6 billion euros if current bond prices were used. 
In UBI's case, the gap would be reduced by 30 percent.
 
EBA Chairman Andrea Enria has said that if the drop insovereign debt yields proved to be "structural and lasting", theauthority could consider reviewing the capital buffers.
 
EBA however would not make that decision on its own, butjointly with the European Systemic Risk Board (ESRB), which ischaired by ECB President Mario Draghi.
  
In its latest outlook last week, the ESRB said Europe'seconomy had stabilised compared with the most acute phase of thedebt crisis but warned against sounding a premature all-clear.
 
It said the environment of uncertainty and fragility insegments of the EU financial system persisted and that anegative feedback loop between bank funding, sovereign debt andmeagre growth remained the top risk to the system. 

"To announce a revision of the recapitalisation exercise nowwould be too dangerous" said an Italian source with knowledgeof the debate within the EBA. "There would be a risk ofdestabilising the markets," the source said.
 
The EBA requirements are not binding and national centralbanks could in theory contradict its assessment.
 
But some national regulators feel that even raising theissue unilaterally could backfire as markets might see that as asign the banks involved are too weak to meet the EBA targets,one of the Italian sources said. 
"The general attitude is: Let sleeping dogs lie" the source said.