Banks: Italian Bank Shares Fall In New Euro Worry

A day of confusion in trading in bank shares on the Italian stockmarket on Friday has raised concerns that the euro crisis is taking a new direction.

Media reports said investors across Europe were shaken when shares of Italian banks including giants, UniCredit and Intesa Sanpaolo, fell sharply on concerns about their capital positions.

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The Financial Times reported:

"Shares in Italian banks recorded heavy falls in trading on Friday prompting the stock market regulator to open an inquiry into stop-loss orders that may have triggered a sell off.

"Shares in UniCredit, Intesa Sanpaolo, Banco Populaire, UBI Banca and Banca Monte dei Paschi di Siena were briefing suspended after they fell 10 per cent (the limit they are permitted to fall) around 1000 GMT after starting the session in positive territory." (That's around 6 pm Friday, Sydney time.)

Intesa Sanpaolo closed down more than 4% while UniCredit lost more than 5% on the day. Investment bank, Mediobanca, the most powerful of all Italy's financial groups, lost 4%.

It has tentacles through the Italian economy in banking finance, insurance, the media, manufacturing and food.

Shares in Popolare Milano, Italy's oldest Italian cooperative bank, plunged 15% last week to the lowest since at least 1989.

Banca Monte dei Paschi di Siena was one of the biggest losers over the week (it has also been one of the weaker big banks in the past couple of years), losing 11.4% by the close on Friday.

That was the biggest fall in a year for the bank.

Market reports said the trading pause was brief, but yields on Italian government bonds surged, sparking fear that the eurozone's debt troubles could be spreading.

And, the spread between Italian and German 10-year bonds hit 212 basis points - their highest level since the creation of the euro.

The news worried markets in Europe and the US.

In London shares in Lloyds Banking Group Plc, Britain's biggest mortgage lender, fell 10% last week and those of the Royal Bank of Scotland Group dropped 12% after the head of The Bank of England, Sir Mervyn King, warned the eurozone crisis was the biggest threat to the UK financial system's stability.

And Wall Street's 1% fall was linked directly to the news from Italy.

Italy's market regulator opened an investigation into stop-loss orders executed on the shares of the banks, according to reports.

The regulator, Consob, will also monitor trading on the Milan exchange in the coming days.

Stop-loss orders are placed with brokers to sell stocks when they reach a certain price and are designed to protect profits that have already been made or prevent further losses.

Some London and US reports said over the weekend the stop loss orders and associated falls may have been linked to a warning from ratings group Moody's late Thursday, that many Italian banks faced possible ratings downgrades because of their exposure to Italian sovereign risk.

Moody's put the long-term debt and deposit ratings of 16 Italian banks and two Italian government-related financial institutions on review for possible downgrade.

It also changed the outlook to negative from stable on the long-term debt and deposit ratings of a further 13 Italian banks.

A week earlier Moody's had warned that it could downgrade Italian sovereign debt in the next three months on concerns about eurozone contagion from Greece.

Italy has government debt which will reach 120% of the size of the economy (as measured by GDP) by the end of this year.

The government has started work on a new austerity plan that could cut billions of euros of spending over the next five years.

Italian banks reportedly have more than 150 billion euros of Italian government debt.

Insurers (naturally) are also big holders as well, such as the giant Generali which held around 47 billion euro of debt at the end of last year.

The Italian government debt market is the third largest in the world, so doubts about the creditworthiness of the country are concerned matter to investors.

Meanwhile Australian banks look like escaping new equity rules proposed by global banking regulators.

Over the weekend the regulators announced a new proposal to impose an extra capital charge on the world's biggest banks to make them safer by 2019.

The Group of Governors and Heads of Supervision (GHOS) said after a meeting in Basel on Saturday the proposal would be put out to public consultation next month.

"The additional loss absorbency requirements are to be met with progressive common equity tier 1 capital requirement ranging from 1 percent to 2.5 percent, depending on a bank's systemic importance," the group said in a statement.

And an additional 1% surcharge would also be imposed if a bank becomes significantly bigger, pushing the total to 3.5%.

The plans, which need approval from world leaders at the G20 meeting in November, would be phased in between January 1, 2016 and end of 2018.

The capital surcharge will come on top of the new 7% minimum core capital all banks across the world will have to hold under new Basel III rules being phased in over six years from 2013.

However, many of the world's biggest banks already hold core tier 1 capital ratios of 10% or more and therefore easily meet or exceed the top end of the surcharge band.

The central bankers have opted for a smaller surcharge than foreseen but, in return, the surcharge will have to be in the form of top quality capital -- retained earnings or common equity.

The proposal, which was due to be finalized by last November but faced opposition from banks and some countries, will apply first up to so-called globally systemically important banks (G-SIBs).

"These measures will strengthen the resilience of G-SIBs and create strong incentives for them to reduce their systemic importance over time," the statement said.

The July consultation paper will indicate how many banks face a capital surcharge but it is not clear yet if their names will be published.

The number of banks affected is likely to change over time as lenders grow or shrink and the consultation will spell out how often a snapshot of the sector will be taken.

Banks will face a surcharge according to an indicator that draws on five elements -- size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity, and complexity.

The Financial Times reported on its website:

"People familiar with the discussions told the Financial Times earlier this month that eight banks, JP Morgan, Citigroup, Bank of America, Barclays, HSBC, Royal Bank of Scotland, BNP Paribas and Deutsche Bank are likely to make up the top category.

"But they cautioned that the list is based on 2009 data and the exact calculations may be tweaked over the next few weeks.

"As a result, banks like Citi and RBS which have substantially changed their business models could move down the scale and others might move up. Goldman Sachs, UBS, Credit Suisse and Morgan Stanley are expected to be in the second group with a 2 per cent surcharge."

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