Italian ‘bad bank’ scheme: no pain, no gain, but still hope

•    Despite stabilisation in economic  conditions recently, NPLs in Italian banks’ balance sheets  have continued to increase, reaching a gross amount of over  EUR200bn at the end 2015, one of the largest in the euro  area.  
•    The Italian authorities have set-up  a scheme to encourage banks to sell their bad loans to Asset  Management Companies (AMCs). This initiative is a welcome  move in our view, as the economy needs credit supply to meet  credit demand for investment, which so far has been the weak  spot of the recovery (Figure 1).  
•    But, we believe that implementing a decentralised mechanism is sub-optimal, as it creates little  incentive for low-capitalised banks to adhere voluntarily.  
•    The ABS backed by NPLs could be  eligible as collateral at the ECB’s refinancing operations  under strict rating conditions. This would potentially also  pave the way for the possible inclusion in purchases under the ABSPP in the future.  
•    ECB eligibility would favour the  development of a market of ABS backed by NPLs. Market  valuations of the NPLs might slightly benefit as well, with  some potential marginal reduction of the gap versus book  value.
•    For ECB’s eligibility, rating  agencies’ valuations are crucial as a minimum rating of “A-”  by two agencies recognised by the ECB is required. State  Guarantee is important for market pricing but not for rating  valuation, as the provision of the guarantee itself depends  on the ratings which have to be at least BBB-.  
•    We think authorities should focus on improving the insolvency framework and enhancing the efficiency of the  collateral recovery process. This would contribute to  improve rating valuations of ABS backed by NPLs, thus  increasing market pricing, the likelihood of getting State  Guarantee and the ECB eligibility.

Barclays Research