June 7, 2018 / 2:22 PM / a month ago

League senator says Italy must freeze cooperative bank reform

ROME (Reuters) - Italy should halt its reform of small cooperative lenders, a prominent senator in the ruling coalition said on Thursday, arguing that EU rules punished domestic banks for their high bad loans while overlooking risks at German rivals.

Alberto Bagnai, a senator from the right-wing League, told Reuters the cooperative bank reform would increase an “asymmetry” in euro zone banking whereby Italian lenders were under closer ECB scrutiny than German peers, resulting in tighter credit for Italy’s small businesses.

“Until the regulatory asymmetry is removed, we think it wiser not to proceed further with this reform,” he said.

Rome’s new anti-establishment government plans to review changes to mutual and cooperative banks which were passed by the previous administration to try to streamline governance and improve lenders’ ability to tap investors for capital if needed.

The 2016 reform drawn up by former prime minister Matteo Renzi will force hundreds of small cooperative banks to merge into two large groups in a process expected to be completed early next year. They will then fall under the direct oversight of the European Central Bank.

Bagnai, who is widely tipped to be named an under-secretary in the new administration, wants the reform to be frozen for 18 months.

The ECB declined to comment.

Bagnai calculates the reform would reduce the share of Italy’s lending market supervised domestically to no more than 13 percent against Germany’s 44 percent.

“If the Single Supervisory Mechanism is a good idea, German resistance to put its banking system under its supervision is puzzling,” he said.

EUROSCEPTIC

Bagnai, an economics professor at Chieti and Pescara University and one of Italy’s best-known eurosceptic economists, was recruited by League leader Matteo Salvini to run for parliament ahead of the March 4 election.

He said the League wanted a discussion within the EU over the need for Italy to maintain small banks which are close to their local communities, in the way Germany does. “We are confident of finding a constructive attitude on this,” he added.

Italy’s banking system has undergone radical changes since the ECB took on supervision of larger European banks in November 2014.

Popular anger mounted during a string of banking crises handled under new EU rules that inflict losses on investors before tapping public money. They wiped out the savings of thousands of ordinary Italians who held their local banks’ stocks and bonds.

In a further blow to small shareholders, Italian banks have been forced to raise billions of euros in capital to comply with the ECB’s demand that they write down problem loans and sell them off.

Bagnai criticised the “contradiction” between the ECB’s ultra-expansionary monetary policy, which he said increased market risks, and an “extremely tight” approach on lending.

“So we have loose monetary policy but tight credit policy. This is a disaster for our country, whose economy still has to fully recover, and there are already signs that the recovery is losing momentum,” he said.

Statistics agency ISTAT said on Thursday that its monthly leading indicator pointed to a slowdown in growth, while retail sales data for April showed the steepest annual decline for more than five years.

Italian banks have often complained that European regulators do not pay sufficient attention to complex financial instruments held by German and French banks, while focusing on the threat posed by loans that turned sour due to a deep recession.

“European authorities insist on credit risk, but neglect market risk,” Bagnai said.

“Non-performing loans were a consequence, not a cause, of the crisis ... but the asymmetric European surveillance considers only non-performing loans.”

The 2016 reform stipulated that the small lenders being grouped would retain majority ownership of the holding companies of their respective groups, but Bagnai said foreign investors were likely to fill an estimated 2.5 billion-euro capital shortfall.

Editing by Crispian Balmer and Andrew Roche

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