Italian 'zombie' banks put EU financial system at risk

The world's oldest bank Monte dei Paschi headquarters in Siena, Italy © Stefano Rellandini
Experts are warning the banking crisis in Italy may spread to Europe as the rules restricting state aid to major banks need to be reviewed.

“We adopted rules on public money; these rules must be assessed in a market that has a potential crisis to decide whether some suspension needs to be applied,” Societe Generale Chairman Lorenzo Bini Smaghi told Bloomberg, adding that the whole banking market was currently under pressure.

According to new EU regulations, taxpayers’ money cannot be used to support failed banks. If Italy follows this rule, several national lenders may go bankrupt, leading to huge losses for depositors. 

Last week, the European Commission allowed Italy to inject €150 billion to maintain liquidity with the government considering an extra €40 billion to support the banking sector.

Italian banks are burdened by about €360 billion ($389 billion) of soured loans, about a quarter of the country’s GDP.

Italian authorities are expected to invoke a European rule letting the country free up temporary state aid if regulatory stress tests reveal a shortfall at Banca Monte dei Paschi di Siena - the third largest lender, according to unnamed source quoted by Bloomberg.

The capitalization of Italy’s banks has dropped by 50-70 percent since the beginning of the year, according to analysts.

“Italian banks have turned into ‘zombies’ able to survive only with government backing,” the vice-president of the IFC Financial Center told Russian business daily Vzglyad, adding that without state support the whole financial system of the country would collapse, leading to a banking crisis throughout the European Union.