Week in Review (22 March)

Italy’s victory over DG Comp bodes well for compensation scheme for bank customers

In our 4 February report we noted that further conflict could emerge between Italy and the European Commission over the legality of a scheme for compensation of savers in three banks – Banca Etruria, Veneto Banca, and Banca Popolare di Vicenza.

A ruling this week by the EU General Court will encourage the Italian government to defend its compensation scheme and to continue to push for creative solutions to its banking sector malaise, even if they run the risk of falling foul of EU State Aid rules. The Court found that the Commission did not have sufficient evidence to conclude that the measures adopted for the benefit of Tercas by the Italian Fondo Interbancario di Tutela dei Depositi (FITD) were taken under the influence or control of the Italian public authorities.

The ruling will have implications for the use of deposit guarantee funds (DGFs) throughout the European Union. EU Member States have used these DGF, which are mandatorily formulated under EU law to protect depositors up to €100,000 in case of bank failure, to rescue failing banks. The ruling is certain to have implications for the banking sector as it gives DGFs significant leeway to use funds raised to help banks and escape state aid rules. It will have implications for Carige which is looking to use the same mechanism to avoid failure.

The initial Commission decision resulted in much less favourable interventions by Italian authorities in 2015 and 2017 to help Monte dei Paschi among others. This has prompted the Italian banking association, reacting to the General Court decision, to call on the Commission to reimburse lenders and savers who lost money “due to the consequences of its wrong decisions”.

Dutch provincial election results to deprive government of Senate majority

The membership of the 12 Dutch ‘Provincial States’ – essentially regional parliaments – is of greater significance than that of similar subnational assemblies in other European countries, as in the Netherlands the 12 assemblies vote on the membership of the Senate. The recent elections to the 12 Provincial States, held on 20 March, were viewed as a test of the four party national governing coalition – headed by Mark Rutte’s VVD. The coalition currently holds a one seat majority in the Senate.

Across the 12 Provincial States the VVD seat total is set to decline from 89 to 80. The VVD was also surpassed by the FvD, which took 14.5% of the vote, and is set to control 86 seats across the Provincial States. The FvD is now the largest party in three provinces, and the second or third largest in the remainder. The FvD, which was contesting the provincial elections from the first time, is the latest in a succession of right-wing to far-right Dutch Eurosceptic parties.

Elections to the Senate by the new members of the Provincial States will take place on 27 May. The results of the Provincial elections mean that Rutte’s four party governing coalition will lose its majority in the Senate. The FvD breakthrough is unlikely to lead to Dutch national politics shifting radically to the right, but rather to make the operation of government more awkward.

Dramatic decrease in NPL levels but significant challenges remain particularly in Eurozone periphery

The European Commission unofficially aims to have Europe’s NPL overhang dealt with by end 2021. To that end it will have been encouraged by the most recent figures released by the ECB’s Single Supervisory Mechanism (SSM) which show that in Q3 2018 Eurozone NPLs were down €131.4 billion from Q3 2017.

The NPL ratio decreased significantly year-on-year in Cyprus (-13.3%), Slovenia (-5.3%), Ireland (-3.7%), Portugal (-3.6%), Greece (-3.2%). In terms of volume, particularly notable was the reduction in Italian NPLs which fell by €42.6 billion during the same period.

Challenges remain however, with Greek, Cypriot and Portuguese banks having the highest NPL ratios (standing at 43.4%, 20.7% and 14.5% respectively in Q3 2018). In Q3 2018, the stock of NPLs was largest in the case of Italian (€153 billion), followed French (€130 billion), Spanish (€95 billion) and Greek banks (€90 billion).