Italy: is a banking crisis on its way?

Italy: is a banking crisis on its way?

As we know, in the aftermath of 2008 the global banking system was on the verge of collapse. Today the American banks are again highly profitable, but what about the European banks? It seems that many big European institutions are struggling. It’s a combination of different factors such as increased regulatory cost, sluggish innovation and exorbitant fines (especially in the U.S) that are putting the pressure on. A look at Deutsche Bank really sums up the decline that some of the top European banks have faced.

Taking a closer look at Italy, it seems the situation is even more alarming. In addition to the general challenges, there are some specific domestic reasons that compound the problems of the Italian banking sector. Eight of Italy’s biggest banks are struggling under the enormous amount of bad debt that they have accumulated in their books. According to a recent study by the Italian small businesses association, Confederazione Generale Italiana Artigiani Mestre (CGIA), the amount of non-performing loans (NPLs) held by Italian banks as per September 2016 totaled 186.7 billion Euro, a figure that is unparalleled in Europe. Monte dei Paschi di Siena (MPS), the world’s oldest bank and Italy’s third largest bank by assets, is the most prominent case of Italian banks that are turning to government aid after failing to attract sufficient additional capital from financial markets. A market value of approximately 1 billion Euro versus more than 40 billion Euro in bad loans says it all.

Whilst this situation is certainly a result of hazardous business practices of Italian banks in particular lending policies, it has been building for many years and therefore policy makers and regulators need to critically reflect on their own role in this mess. A lack of strong surveillance mechanisms and an inconsistent rulebook certainly did not alleviate the situation. This, together with the incapability of policy makers to implement strong and sustainable reforms significantly increases the risk of a serious banking crisis in Italy. Already now, Italian borrowers notice increased difficulties in accessing new loans. As always, it is the small and medium sized enterprises (SMEs) that suffer most from the prospect of a credit crunch.

Paolo Zabeo, from CGIA, highlights that big Italian corporations have a tradition of good relationships with banks while SMEs never had that kind of negotiating power. As 131,2 billion Euro out of 186.7 billion Euro of NPLs would be outstanding to large corporations the question must be raised if loan issuance to big dominant corporate groups may have been influenced by personal favoritism rather than proper risk analysis and strong guarantees at the expense of smaller companies.

SMEs make up the majority of the Italian economy. The harder it is for these companies to access loans the bigger the risk for a major downturn of the Italian economy as a whole. Luckily, it’s not all bad news. New Fintech platforms promise to play an important role in improving SME’s access to credit and step in where banks are increasingly leaving a gap. PrestaCap as one of these innovative online lenders and is rapidly growing its lending operations in an effort to remedy the situation by providing SMEs with direct access to capital from professional and institutional investors and this in a fast and convenient way. This offers SME borrowers access to a deep pool of capital that has previously not been available. Our solution is much simpler and means lower fees and better terms for both borrowers and investors. We at PrestaCap do not lend to big companies because we believe that it will be the SME companies that will make the Italian economy stand out again.

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