The European Central Bank has told Monte dei Paschi it needs to plug a capital shortfall of 8.8 billion euros, higher than a previous five-billion-euro gap estimated by the bank, the lender said on Monday, confirming what sources told Reuters.
Last Friday, the Italian government approved a decree to bail out Monte dei Paschi after Italy’s number three lender failed to win investor backing for a desperately needed five-billion-euro capital increase.
The bank said on Monday it had officially asked the ECB last Friday for go ahead for a “precautionary recapitalisation”.
A precautionary recapitalisation is a type of state intervention in a struggling bank that is still solvent. It means only a modest bail-in of investors though the government can buy shares or bonds only on market terms endorsed by EU state aid officials in Brussels, reported Reuters.
LIQUIDITY POSITION RAPIDLY DETERIORATED
In its reply, the ECB said it had calculated the capital it believed the bank needed on the basis of a shortfall emerging from European stress test of large lenders earlier this year.
In those tests Monte dei Paschi was the only Italian bank to come short under an adverse scenario.
The ECB said the lender was solvent but signalled the bank’s liquidity position had rapidly deteriorated between the end of November and December 21, Monte dei Paschi announced.
“The bank has quickly started talks with the competent authorities to understand the methodologies underlying the ECB’s calculations and introduce the measures for a precautionary recapitalisation,” read the Monte dei Paschi statement.
The bank’s problems date back several years but successive Italian governments have failed to tackle the issue, which became a political taboo this year with new EU rules banning state bailouts unless private investors take losses first, added Reuters.
The European Commission said on Friday it would work with Rome to establish conditions were met for a bailout of Monte dei Paschi.
However, on Monday ECB policymaker Jens Weidmann said plans for a state bailout of Monte dei Paschi should be weighed carefully as many questions remain to be answered.
Italy’s market watchdog, Consob, said last week the bank’s shares and securities would be suspended from trading until the conditions of a state bailout become clear.