Reforms to help kick-start Italy’s non-performing loans market

Non-performing loans sit heavily on the balance sheets of Italian banks weighing down profits and threatening the wider economy. They now make up around 18% of all lending in Italy – around one third of the Euro area’s €1 trillion NPLs and equivalent to about 20% of Italian GDP. UniCredit’s €81bn gross NPL exposure alone tops that of the UK as a whole. How to deal with them has been something of a sensitive issue in recent months for Matteo Renzi’s government, juggling to solve the Italian bank crisis without triggering EU State Aid rules which would require a bail-in of Italian bank bondholders.

The summer slump in Italian bank stocks may have been sparked by Brexit fears, but it was compounded by the scale of Italy’s NPL woes in the wake of the EBA’s stress tests published at the end of July. Asked by the ECB to cut its gross NPL exposure by 2018, Banca Monte dei Paschi di Siena put its entire bad loan portfolio for sale. With a net book value of €27bn (almost €47bn gross), a lower than expected portfolio price of around €9bn spooked equity investors.

Our note 'Reforms to help kick-start Italy’s NPL market' looks at the issues and suggests some reforms.

Italy NPL Chart

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