Monte dei Paschi rescue cost jumps as deposits fall

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The ECB told Monte dei Paschi that its capital shortfall was €8.8 billion ($ 9.19 billion), far higher than the €5 billion expected when the Italian government organised a rescue of the country’s No. 3 lender last week. The higher amount reflects a serious decline in the bank’s financial health during the months in which Monte dei Paschi and the Italian government have struggled to find a solution to its problems.

Indeed, Monte dei Paschi said the central bank warned of a “rapid deterioration” of its liquidity position over just the past month. The bank has seen large outflows of deposits as it struggled in recent months to raise capital to meet an end-of-year deadline set by the ECB to shore up its balance sheet.

The need to raise €5 billion emerged from European stress-tests, released last summer, which found that the bank’s capital position would be severely compromised in an economic downturn. The ECB ordered Monte dei Paschi to raise that amount as part of a broader operation aimed at unloading nearly €30 billion in bad loans.

However, those stress tests were based on the bank’s financial situation at the end of 2015. Since then, Monte dei Paschi’s financial health has deteriorated further, as the Siena-based bank attempted to find a way to raise the necessary capital from private investors. Meanwhile, the Italian government was extremely reluctant to launch a rescue of the bank because any public bailout requires private investors – including tens of thousands of mom-and-pop investors who bought Monte dei Paschi’s bonds – to suffer losses.

Last week, the government finally approved the creation of a new €20 billion fund to help support Italy’s struggling banks, with the largest portion earmarked for Monte dei Paschi.

The new fund was expected to cover about €3 billion of the money Monte dei Paschi needed, following €2 billion in losses on the face value of some junior bonds held by institutional investors. The junior bonds would take losses in line with new European Union rules covering bank rescues which require that investors take at least some impact. Now, given the larger capital shortfall, the fund will likely have to use €6.5 billion to help Monte dei Paschi.

Early Tuesday, Italian regulator Consob ordered Monte dei Paschi’s shares to be suspended until further notice in light of the greater shortfall. The shares were also suspended on Friday after news of the planned government bailout.

In its statement Monday evening, the bank emphasised that it remains solvent. However, it also said that the ECB has notified the Italian government that its liquidity position has seen a “rapid deterioration” between November 30 and December 21. The bank’s one-month liquidity had fallen from €12.1 billion, or 7.6% of its total activities, to €7.7 billion, or 4.78% of its total activities.

The bank lost €20 billion deposits in the first nine months of the year and €2 billion since early December.

Monte dei Paschi’s greater capital shortfall means the new government fund will have less firepower to help a clutch of other Italian banks which are struggling with large bad loans, meagre profitability and thin capital cushions.

Write to Deborah Ball at deborah.ball@wsj.com

Tom Fairless contributed to this article, which was published by The Wall Street Journal

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