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| With $21 Billion Loss, Italian Bank Signals Wider Vulnerabilities | |
| (about 1 hour later) | |
| Italy’s biggest bank reported a huge loss on Tuesday, foreshadowing the possibility that many financial institutions across Europe could be forced to acknowledge the full extent of their own problems under increased regulatory scrutiny. | Italy’s biggest bank reported a huge loss on Tuesday, foreshadowing the possibility that many financial institutions across Europe could be forced to acknowledge the full extent of their own problems under increased regulatory scrutiny. |
| The unexpectedly large fourth-quarter loss of 15 billion euros, or about $21 billion, posted by the Italian bank UniCredit, which is based in Milan, was announced just hours after the European Central Bank disclosed details of its plan to dig deeper into the books of banks operating across Europe. | The unexpectedly large fourth-quarter loss of 15 billion euros, or about $21 billion, posted by the Italian bank UniCredit, which is based in Milan, was announced just hours after the European Central Bank disclosed details of its plan to dig deeper into the books of banks operating across Europe. |
| The timing of UniCredit’s announcement appeared to be coincidental, but it highlighted the vulnerabilities still lurking within the balance sheets of many institutions more than five years after the financial crisis led to a recession from which Europe and its banks have still not fully emerged. | The timing of UniCredit’s announcement appeared to be coincidental, but it highlighted the vulnerabilities still lurking within the balance sheets of many institutions more than five years after the financial crisis led to a recession from which Europe and its banks have still not fully emerged. |
| The central bank, newly empowered to oversee euro zone banks, plans to finish its review of institutions under its jurisdiction by October. Analysts say they expect more banks to write down the value of their bad loans and other troubled assets in coming months. | The central bank, newly empowered to oversee euro zone banks, plans to finish its review of institutions under its jurisdiction by October. Analysts say they expect more banks to write down the value of their bad loans and other troubled assets in coming months. |
| Mario Draghi, the central bank’s president, and other top euro zone officials have warned that some banks may be declared insolvent and forced out of business. Italy’s banking industry in particular is thought to have many cases that could be problematic, as the politically unsettled country continues to labor with chronically slow growth and entrenched special interests that have impeded efforts to overhaul its economy. But even more stable and economically potent countries like Germany are thought to have banks with deep-seated problems. | Mario Draghi, the central bank’s president, and other top euro zone officials have warned that some banks may be declared insolvent and forced out of business. Italy’s banking industry in particular is thought to have many cases that could be problematic, as the politically unsettled country continues to labor with chronically slow growth and entrenched special interests that have impeded efforts to overhaul its economy. But even more stable and economically potent countries like Germany are thought to have banks with deep-seated problems. |
| The specter of heightened European Central Bank scrutiny, in contrast to sometimes lax oversight by national regulators in the past, has set internal auditors at euro zone banks scrambling to try to put their books in order, according to consultants and regulators. Like UniCredit, at least some of these banks are expected to own up to problems and take corrective action before the central bank requires them to do so. | The specter of heightened European Central Bank scrutiny, in contrast to sometimes lax oversight by national regulators in the past, has set internal auditors at euro zone banks scrambling to try to put their books in order, according to consultants and regulators. Like UniCredit, at least some of these banks are expected to own up to problems and take corrective action before the central bank requires them to do so. |
| If so, the long-slumbering euro zone economy could only benefit. After the financial collapse of 2008, the United States required an overhaul of its banks the following year, which is one reason the American the economy has recovered more quickly. The lack of a comparably rigorous bank cleanup in Europe has hobbled growth by causing a dearth of lending to consumers and crimping credit to businesses. | If so, the long-slumbering euro zone economy could only benefit. After the financial collapse of 2008, the United States required an overhaul of its banks the following year, which is one reason the American the economy has recovered more quickly. The lack of a comparably rigorous bank cleanup in Europe has hobbled growth by causing a dearth of lending to consumers and crimping credit to businesses. |
| In some countries, regulators were overly protective of their own banks and allowed them to avoid dealing with bad loans or other problems. As a result, many banks were too weak to lend, creating a credit squeeze that is particularly acute in countries like Italy. In addition, there was no system to shut down sick banks in an orderly way that did not require a bailout by taxpayers. In Ireland, for example, the cost of bank rescues helped cripple the economy. | In some countries, regulators were overly protective of their own banks and allowed them to avoid dealing with bad loans or other problems. As a result, many banks were too weak to lend, creating a credit squeeze that is particularly acute in countries like Italy. In addition, there was no system to shut down sick banks in an orderly way that did not require a bailout by taxpayers. In Ireland, for example, the cost of bank rescues helped cripple the economy. |
| “It’s about time Europe caught up and got on the same level as the U.S. in terms of bank regulation,” said Alem Husain, a European bank analyst at SNL Financial, a research company in Charlottesville, Va. | “It’s about time Europe caught up and got on the same level as the U.S. in terms of bank regulation,” said Alem Husain, a European bank analyst at SNL Financial, a research company in Charlottesville, Va. |
| At the same time, though, shocks could be in store as new vulnerabilities in the European banking system come to light. Many lenders in Europe are struggling, including Austrian banks exposed to Ukraine or Russia, other Italian banks like Monte dei Paschi di Siena and German banks with holdings in the depressed shipping industry. | At the same time, though, shocks could be in store as new vulnerabilities in the European banking system come to light. Many lenders in Europe are struggling, including Austrian banks exposed to Ukraine or Russia, other Italian banks like Monte dei Paschi di Siena and German banks with holdings in the depressed shipping industry. |
| The European Central Bank said on Tuesday that it would release in October the results of a review intended to make sure that banks are properly valuing assets like real estate or government bonds in their portfolios, and that they are setting aside enough money to cover possible losses. The review will examine assets that the banks, so far, have valued at €3.72 trillion. That is nearly 60 percent of the assets held by the 128 large banks subject to scrutiny, the central bank said. | The European Central Bank said on Tuesday that it would release in October the results of a review intended to make sure that banks are properly valuing assets like real estate or government bonds in their portfolios, and that they are setting aside enough money to cover possible losses. The review will examine assets that the banks, so far, have valued at €3.72 trillion. That is nearly 60 percent of the assets held by the 128 large banks subject to scrutiny, the central bank said. |
| Although UniCredit’s loss was a shock, investors seemed to applaud the bank’s courage in exposing the scale of its problems. After initially falling, shares in UniCredit rose almost 7 percent on Tuesday. The bank said it expected to make a profit of about €2 billion this year and announced a five-year turnaround plan that aims to more than triple profit by 2018. | Although UniCredit’s loss was a shock, investors seemed to applaud the bank’s courage in exposing the scale of its problems. After initially falling, shares in UniCredit rose almost 7 percent on Tuesday. The bank said it expected to make a profit of about €2 billion this year and announced a five-year turnaround plan that aims to more than triple profit by 2018. |
| Federico Ghizzoni, chief executive of UniCredit, said on Tuesday that it was encouraged by recent signs of an economic revival in Italy and the euro zone. Mr. Ghizzoni called 2013 a turning point for the bank. UniCredit also has major holdings in Eastern Europe as well as Germany and Austria. “We see some recovery coming,” he said in a conference call with analysts. “It makes sense to present a plan if you see some stabilization.” | Federico Ghizzoni, chief executive of UniCredit, said on Tuesday that it was encouraged by recent signs of an economic revival in Italy and the euro zone. Mr. Ghizzoni called 2013 a turning point for the bank. UniCredit also has major holdings in Eastern Europe as well as Germany and Austria. “We see some recovery coming,” he said in a conference call with analysts. “It makes sense to present a plan if you see some stabilization.” |
| UniCredit booked a €9.3 billion loss from a revaluing of its holdings in Italy, Austria and Eastern Europe, while it set aside an additional €7.2 billion to cover losses from problem loans. Loan loss provisions now total €9.3 billion, the bank said. The losses were partly offset by operating profit that UniCredit put at €2.1 billion. Some analysts questioned the bank’s decision to book a €1.4 billion gain from its stake in the Bank of Italy, the central bank. Without that gain, the loss would have been even greater. | UniCredit booked a €9.3 billion loss from a revaluing of its holdings in Italy, Austria and Eastern Europe, while it set aside an additional €7.2 billion to cover losses from problem loans. Loan loss provisions now total €9.3 billion, the bank said. The losses were partly offset by operating profit that UniCredit put at €2.1 billion. Some analysts questioned the bank’s decision to book a €1.4 billion gain from its stake in the Bank of Italy, the central bank. Without that gain, the loss would have been even greater. |
| While the European Central Bank did not offer any major surprises on Tuesday regarding its review of the banking system, it did give lenders more details about what kind of scrutiny to expect and underscored its determination to do a thorough job to restore trust in the sector. In October, the central bank, with national bank regulators in the 18 countries of the euro zone, will disclose the results of stress tests to measure whether banks can withstand shocks like a financial crisis or recession. | While the European Central Bank did not offer any major surprises on Tuesday regarding its review of the banking system, it did give lenders more details about what kind of scrutiny to expect and underscored its determination to do a thorough job to restore trust in the sector. In October, the central bank, with national bank regulators in the 18 countries of the euro zone, will disclose the results of stress tests to measure whether banks can withstand shocks like a financial crisis or recession. |
| Banks found to have problems will be required to take remedial action, like raising more capital or even closing. It is also possible that banks will be required to act sooner, if regulators discover hidden problems during the review. Banks could also be compelled to restate their financial results if regulators decide that the lenders have not properly valued their portfolios. | Banks found to have problems will be required to take remedial action, like raising more capital or even closing. It is also possible that banks will be required to act sooner, if regulators discover hidden problems during the review. Banks could also be compelled to restate their financial results if regulators decide that the lenders have not properly valued their portfolios. |
| In Brussels this week, European finance ministers moved closer to setting up a system for closing terminally ill banks without creating a financial crisis. The Economic and Financial Affairs Council, which is made up of the finance ministers and central bank officials from the 28 member nations of the European Union, met on Tuesday to discuss the final shape of the banking resolution authority, the Single Resolution Mechanism, that ministers agreed last December to create. | In Brussels this week, European finance ministers moved closer to setting up a system for closing terminally ill banks without creating a financial crisis. The Economic and Financial Affairs Council, which is made up of the finance ministers and central bank officials from the 28 member nations of the European Union, met on Tuesday to discuss the final shape of the banking resolution authority, the Single Resolution Mechanism, that ministers agreed last December to create. |
| The Single Resolution Mechanism is meant to help end the links between banks and sovereign states that contributed to the euro crisis. The mechanism will eventually have a €55 billion war chest. But the system is subject to the approval of the European Parliament and has been delayed by debates including how much say member states will have in any decision to close big banks. Jeroen Dijsselbloem, the Netherlands’ finance minister, who speaks on behalf of the finance ministers for the 18 euro zone countries, expressed optimism on Monday night that a deal would be reached this week. | The Single Resolution Mechanism is meant to help end the links between banks and sovereign states that contributed to the euro crisis. The mechanism will eventually have a €55 billion war chest. But the system is subject to the approval of the European Parliament and has been delayed by debates including how much say member states will have in any decision to close big banks. Jeroen Dijsselbloem, the Netherlands’ finance minister, who speaks on behalf of the finance ministers for the 18 euro zone countries, expressed optimism on Monday night that a deal would be reached this week. |
| On Tuesday, Yannis Stournaras, Greece’s finance minister, said the Economic and Financial Affairs Council had agreed on a common position and that he and Mr. Dijsselbloem would present on Wednesday in Strasbourg, France, where the European Parliament has its main seat. Mr. Stournaris declined to lay out the details of the proposal, saying only that if he did not believe a compromise was possible, “I would not go to Strasbourg.” | On Tuesday, Yannis Stournaras, Greece’s finance minister, said the Economic and Financial Affairs Council had agreed on a common position and that he and Mr. Dijsselbloem would present on Wednesday in Strasbourg, France, where the European Parliament has its main seat. Mr. Stournaris declined to lay out the details of the proposal, saying only that if he did not believe a compromise was possible, “I would not go to Strasbourg.” |