European Central Bank Intervenes in Banca Carige

On January 2, the European Central Bank (ECB) took control of the governance of the troubled Italian bank Banca Carige SpA, after a majority of Carige’s directors resigned that day.  The ECB’s announcement of its action stated that it had appointed three temporary administrators and a three-member surveillance committee to take charge of the bank and replace the bank’s Board of Directors.  In a written statement, the ECB explained that the board members’ en masse resignation

made the installation of temporary administration necessary to steer the bank in order to stabilise its governance and pursue effective solutions for ensuring sustainable stability and compliance. . . . The decision to impose temporary administration is an early intervention measure aimed at ensuring continuity and pursuing the objectives of a strategic plan. The appointment of the temporary administration results in the removal of Banca Carige’s management and control bodies.

Only ten days earlier, on December 21, 2018, the ECB reportedly had given Carige until the end of December “to durably meet its capital requirements, urging the lender to complete the capital strengthening and actively seek a merger partner, while continuing to shed bad debts and other non-core assets.”  The next day, however, the Genoa-based bank’s leading shareholder, Malacalza Investimenti, the holding company of wealthy Genoese businessman Vittorio Malacalza, blocked approval of a crucial cash call at Carige.  Malacalza Investimenti’s stated reason for its decision was that it wanted more details on Carige’s new business plan and merger options before backing a new infusion of capital.  As a result, Carige’s Deputy Chairman and a board member resigned at a board meeting after Malacalza’s decision.

Although Carige, like other Italian banks, had floundered in the wake of the 2008 financial crisis, its restructuring reportedly did not keep pace with that of other Italian banks.  Between 2014 and 2017, thanks to governance issues and persistent problems in the Genoese local economy, the Genoa-based bank lost €1.3 billion euros in large measure because of bad loans, and had to raise € 2.2 billion in three successive cash calls.

In June 2018, Carige had presented a capital-conservation plan to the ECB, but the ECB had rejected that plan, requesting a new plan by November 30, 2018 and insisting that its capital requirements be met by the end of 2018.   Subsequently, continuing governance challenges and management clashes did nothing to stabilize Carige’s situation.  By the end of 2018, after Malacalza Investimenti’s refusal of the cash call,  Carige reportedly lost 83 percent of its market value.

Note: The ECB’s takeover of Carige is significant in two respects.  First, it establishes an important regulatory precedent, as the first time that the ECB has taken control of and appointed new administrators for a commercial bank since it acquired enhanced supervisory powers in 2014.  The precedent is not without controversy.  A member of the European Parliament, Sven Giegold, a member of the European Parliament (EP) reportedly “called for an investigation of whether earlier attempts to rescue Banca Carige violated European Union rules on state aid.”  Giegold, a member of the EP Greens/European Free Alliance Group, stated “that other Italian banks last year were strong-armed into providing Banca Carige with fresh capital, which proved to be inadequate.”

Second, while Carige is of moderate size compared to ltaly’s leading banks, the ECB’s challenge in steering the bank to stability is made disproportionately greater by the turbulence of Italian politics.  Even though Malacalza, immediately after the ECB takeover, indicated support for a recapitalization of Carige, the ECB is first faced with determining whether a suitable buyer for Carige can be found.  Even if one is found, the ECB must still contend with Carige’s substantial indebtedness.  As South EU Summit noted,

[s]hould the bank’s situation worsen, the Central Bank would be obligated to make shareholders and creditors bear a portion of the losses, as per EU rules. Even if a buyer for the bank is found, this is likely to cause tensions between the EU, and Italy’s right-wing coalition government, which tends to defend the interests of shareholders, who are often middle-class Italians.

How well the ECB does in resolving this financially and politically complex situation may determine whether it becomes a precedent that the ECB can cite to justify future supervision of troubled financial institutions or a precedent that European populists can cite to challenge European Union regulation.