Only two weeks into his new job as the eurozone’s single banking supervisor, Andrea Enria is already at the sharp end of rebukes from Italy’s populist government.

In mid-January, Monte dei Paschi di Siena, now majority state-owned, announced details from the December draft version of its annual supervisory review and evaluation process (SREP). This included an unexpected European Central Bank (ECB) recommendation to bring coverage of its bad-debt pile up to 100% within seven years – something the market thought only stronger banks would have to do.

For Italy’s deputy prime minister Matteo Salvini, the ECB might have been exerting unfair pressure on the country. «The new attack by the ECB supervisor on the Italian banking system and Monte dei Paschi shows once again that the banking union … not only does not make our financial system more stable, but it causes instability,» says Salvini, according to Reuters.

Italy has Europe’s biggest non-performing-loan (NPL) pile, but this coverage policy is eurozone-wide – and, anyway, Italian bank stocks soon recovered. The large and mid-tier Italian banks all issued statements denying a «significant» or «material» impact on their financial forecasts, even though the ECB is also pushing them to reach 100% NPL coverage earlier than many investors imagined.

Gross bad debt in Italy alone still amounts to about €200 billion, after all, with average coverage ratios ranging from about 45% to 60%, according to UBS.

Moving towards provisioning 100% of existing NPLs will cost Italian banks on average about 47 basis points of capital annually for the next two years alone, with the total cost (€63 billion) about three times more than for the laxer targets the market had assumed, according to Giovanni Razzoli, banks analyst at Equita in Milan. «There will be an increase in banks’ coverage from these requests,” he says. «The banks are trying to downplay the situation, but the impact on some is quite significant».

Original Story:Euromoney | Dominic O’Neill
Photo: FreeImages.com/ Matic Zupancic
Edition:Prime Yield