Italy may defy EU’s regime for handling ailing banks

Italy is prepared to defy the EU and unilaterally pump billions of euro into its troubled banking system if it comes under severe systemic distress, a last- resort move that would smash through the bloc's nascent regime for handling ailing banks.

Matteo Renzi, the Italian prime minister, is determined to intervene with public funds if necessary despite warnings from Brussels and Berlin over the need to respect rules that make creditors, rather than taxpayers, fund bank rescues, according to several officials and bankers familiar with his plans.

Regulators

The threat has raised alarm among Europe’s regulators, who fear such a brazen intervention would devastate the credibility of the bloc’s newly-implemented banking rule book during its first real test.

In the race to find workable solutions, Margrethe Vestager, the EU’s competition chief, has laid out options for Rome to address its banking problems without breaking the bail-in principles of Europe’s banking union.

Italy’s four biggest banks alone hold €85 billion in non-performing loans, and its bank stocks fell about a third after the UK vote to leave the EU.

Concerns are building over this month’s bank stress test results and a constitutional referendum in Italy in October, on which Mr Renzi has staked his job.

Citigroup described the vote as "probably the single biggest risk on the European political landscape this year outside the UK".

After several of its ideas on intervention were rebuffed, Rome is considering whether to act alone. “We are willing to do whatever is necessary [to defend the banks] and do not rule out acting unilaterally, although that would only be as a last resort,” said a person familiar with the government’s thinking.

European officials fear any Italian intervention would carry high risks, opening a battle over illegal state ­support that would put off private investors.

State aid

Angela Merkel

, the German chancellor, last week rebuffed Italy’s request for a suspension of state aid and bail-in rules in order to recapitalise its banks.

Benoit Coeure, a senior European Central Bank official, has said any suspension of bail-in rules would spell the end of the banking union "as we know it".

– (Copyright The Financial Times Limited 2016)