The Bank of Italy said Friday that the cost to rescue failing lender Banca Monte dei Paschi di Siena (BMDPY) will likely hit €8.8 billion ($9.25 billion), a figure that falls largely in line with European Central Bank estimates.
Monte dei Paschi will need around €4.6 billion to shore up its capital base and repair its common tier 1 equity ratio, the Bank of Italy said in a statement, and a further €2 billion to cover retail investors, putting the cost for Italian taxpayers at €6.6 billion. Another €2.2 billion in rescue costs will be tabbed to "entities other than the Italian state," according to the statement.
"The amount of 'precautionary' capital that a bank can request from the state is the amount necessary to cover the capital shortfall deriving from the adverse scenario of a stress test," the Bank of Italy said. "In the case of Banca Monte dei Paschi di Siena, the requirement has been assessed by the ECB at €8.8 billion in reference to the stress test" published this year by the European Banking Authority.
Such an infusion would provide Monte dei Paschi with a core capital buffer equal to 8% of lending assets in the adverse scenario, which assumed three years of economic strain, compared with the -2.4% regulators said in July it would actually have. Monte dei Paschi was the only company among 51 lenders reviewed whose buffer would have been wiped out, the authority said, though 10 others -- including Deutsche Bank -- would have been left with a buffer below 8%.
The world's oldest bank, Monte dei Paschi, requested the government bailout after the markets turned their backs on its efforts to raise €5 billion needed to bolster a balance sheet depleted by bad loans.
The country's No.3 lender made the announcement minutes after Italy's cabinet approved the emergency creation of a €20 billion fund to help distressed lenders, raising the prospect that the bank will be nationalized.
"This will secure the capital needs of MPS and allow the bank to pursue its industrial plan," Italy's finance minister Pier Carlo Padoan told journalists at the time. "Italy's third-largest bank will finally return with force to operate in support of the Italian economy."
Rescuing Monte dei Paschi has proven politically risky, however, largely because so much of its junior debt is held by ordinary Italians and the new European Bank Resolution & Recovery Directive forbids taxpayer aid for banks without first having investors (both bondholders and shareholders) take a hit.
According to the International Monetary Fund, about a third of the €600 billion in debt issued by Italian banks, including half of the €60 billion in subordinated bonds sold, are owned by domestic retail investors.
In the case of Monte dei Paschi, the figure amounts to about €5 billion, according to Italy's Repubblica newspaper. The notes were sold at individual branches with the approval of the Italian Securities and Exchange Commission.
The FTSE Italy Banks index rose 0.2% in Friday trading following the Bank of Italy statement, while the FTSE MIB benchmark was little-changed at 19,179.5 points. Trading in Monte dei Paschi stock has been suspended.
With assistance from James Langford in New York.