The state loan of €3.9 billion (Dh19.14bn) to Banca Monte dei Paschi di Siena "is not a bailout of a bank in crisis", said Ignazio Visco, the governor of Italy's central bank, yesterday.
The Bank of Italy had given a green light to a taxpayer-backed bond to the troubled Tuscan bank designed to offer an "exceptional and temporary capital buffer" needed as a result of the European Banking Authority's insistence that Italian sovereign-debt holdings be marked down in value, Mr Visco said at an annual bankers conference.
"It's a loan, one that can be used as regulatory capital, and it carries a particularly high cost that will rise over time," he said.
Monte dei Paschi on Thursday revealed that it had more than €700 million in losses related to complicated derivative transactions that have triggered a slew of criminal probes.
But the government's aid is actually due to risks linked to the bank's "large portfolio of government bonds", Mr Visco said, adding that the bank's overall capital base was adequate.
Italy's banking system remained "fundamentally healthy and has limited exposure to structured-financed products", the governor said.
Use of such products should not be curtailed as they allowed services such as variable-rate mortgages and currency hedging for companies seeking to expand in foreign markets, Mr Visco said. What was essential were skilled risk-management and governance processes, he added.
To ensure that, Italian legislators should grant the central bank, responsible for supervision, greater powers to remove executives deemed unfit, even if a bank was not in a state of crisis, the governor said.
Turning to the banking system as a whole, Mr Visco said that two deep recessions had scarred profitability in the sector because of an upsurge in nonperforming loans. But Italy had a particularly tough method of classifying troubled loans, which analysts and even the IMF should consider when observing their recent surge, he said.
Meanwhile, Italian banks have raised more than €17bn in fresh equity, and the country's five largest banks had raised their average core Tier 1 ratio, a key solvency measure, to 10.8 per cent, he said, adding that some medium-sized banks still needed to boost their regulatory capital.
Core bank profitability in terms of return on capital was about 3 per cent last year and would remain suppressed "until an economic recovery is well under way", the governor said.
Italy's economy might stop contracting in the second half of the year, Mr Visco said, warning that the level of uncertainty of such a forecast is high.
European policy decisions, most notably by the European Central Bank, had helped to lower funding costs for the government and companies, and it was "crucial that this continues and is reinforced," Mr Visco said.
Italian banks bought an additional €100bn of domestic sovereign-debt securities last year, but a third of those were short-term treasury bills, he said.
Italy's public finances remained in a fragile state due in part to worries on the part of international investors, but the spread, or interest-rate premium Italy pays, compared with Germany remained unjustified by economic fundamentals, he added.
* Dow Jones