Italian banks facing funding threat as bond sales scrutinized

[LONDON] Italian lenders are in danger of losing a key source of funding as the sale of bank debt to consumers comes under scrutiny after investors lost money on four firms that are being bailed out.

Sales of subordinated bonds to customers should be banned, the Bank of Italy's senior deputy Governor Salvatore Rossi said in an interview with Sky News broadcast on Monday. Consumers cut holdings of bank debt, including subordinated notes, to 187 billion euros (S$290 billion) in June from 277 billion euros a year earlier. That's almost 30 per cent of bonds issued by Italian lenders, central bank data show.

"Small and medium-sized banks would be particularly affected by such a law because they rely on local clients for funding and their alternatives are more limited and expensive, " said Jacopo Ceccatelli, chief executive officer at Marzotto SIM SpA, a Milan-based brokerage.

The ban is being considered after investors in debt sold by four Italian lenders saw their savings vanish when the banks were restructured last month. Finance minister Pier Carlo Padoan promised "humanitarian measures" last week to partially compensate people who bought about 340 million euros of junior notes from Banca delle Marche SpA, Banca Popolare dell'Etruria e del Lazio SC, Cassa di Risparmio di Ferrara SpA and Cassa di Risparmio della Provincia di Chieti SpAeven.

The losses prompted bank customers across Italy, who have tended to treat bonds like high-yield deposit accounts rather than risky investments, to sell their debt. Subordinated notes of lenders including Banco Popolare SC, Unicredit SpA and Banca Monte dei Paschi di Siena SpA extended three weeks of declines on Monday, to their lowest levels in almost two years.

The sell-off caps a difficult year for Italy's banking sector which is weighed down by bad loans and needs consolidation to fix chronic over-capacity, according to Royal Bank of Scotland Group Plc analyst Alberto Gallo.

Treatment of bondholders has become a hot political topic. Prominent reports about Luigino D'Angelo, a 68 year-old pensioner who committed suicide after losing money in Banca Etruria, have pushed the government and Bank of Italy to address the problem.

"Wholesale markets are basically inaccessible to some of the smaller banks," meaning a partial ban on bond sales to their clients would raise funding costs, said Marco Elser, an investor in distressed financial assets at Lonsin Capital in Rome.

BLOOMBERG