Italian lender cuts exposure to Nomura as required by ECB

Rome

TROUBLED Italian lender Monte dei Paschi di Siena has reduced its exposure to Japanese bank Nomura to within regulatory limits, as required by the European Central Bank (ECB), two sources close to the matter told Reuters.

The bank had a 4.7 billion euro (S$7.1 billion) net exposure to Nomura at the end of March, nearly half its total capital and almost double the 25 per cent limit set by regulators for bank exposures to a single party.

The bulk of the exposure is linked to a 2009 loss-making derivative trade known as Alexandria, which is at the centre of a string of judicial investigations in Italy.

Monte dei Paschi, which emerged as the weakest lender in a Europe-wide review of banks last year, had been told by the ECB to bring its exposure to Nomura within the regulatory limits by July 26, including by closing the Alexandria trade if necessary.

The sources said that a three billion euro capital increase the Tuscan bank has just completed and the closure of asset swap deals with Nomura worth 500 million euros had brought the exposure back within the 25 per cent ceiling.

One of the sources said the contracts that have been closed were separate from the Alexandria trade, which is at the heart of a scandal that rocked Monte dei Paschi in 2012 just as it was being hit hard by the eurozone debt crisis. The trade is also at the centre of legal proceedings in Italy and Britain.

Talks between Monte dei Paschi and Nomura to close Alexandria have stalled, the source said, adding that Monte dei Paschi had re-negotiated the asset swap contracts it closed with Nomura with other counterparties, without naming them.

This allowed the bank to cut the exposure to Nomura without taking a hit on its accounts and also improve its risk profile, this source said.

It was not clear whether the ECB, which has told the Siena-based bank to take a series of measures to bolster its financial strength, would now consider that Monte dei Paschi's exposure to Nomura has been reduced to a sustainable level.

Monte dei Paschi and Nomura declined to comment.

The ECB has also told Monte dei Paschi to find a buyer quickly, but so far there has been no significant progress on that front, sources have said.

Italian prosecutors have alleged that Monte dei Paschi's former management entered Alexandria and other derivative trades to conceal losses after stretching its finances to buy rival Antonveneta in 2007 for nine billion euros. The bank was forced to restate its 2012 accounts to reflect around 730 million euros of losses linked to those trades. REUTERS