And Yet It Moves: Understanding Why Italy’s Threat Is Exaggerated

Toward the end of 2015, Portugal bailed in some senior creditors in addressing a failed bank. Many observers were aghast. This was thought to be horrific and uncivilized by some of the very same people who are critical of the EU and Italy’s decision not to bail in senior creditors in the two failed regional banks in Italy.    

They were wrong about Portugal. It was not a watershed event that spurred capital flight from Europe. And they are wrong about Italy. This does not end banking union, and if Europe moves to two-speed, as some proposal for EU reform post-Brexit suggested, it will not be because of Italy and the EU’s decisions regarding Veneto Banca and Banca Popolare di Vicenza.

The critics are like someone watching a basketball game. One player fouls another who had an easy shot. Fouling the player to force them to ostensibly take a more difficult shot is not cheating. It is not a loophole. It is part of the rules of the game, and part of the strategy of the game.  

Some argue that by not bailing in senior creditors, Italy violated the “spirit, if not the letter, of the European banking resolution rules.” It is certainly not the case that Italy violated the letter of the law. Indeed the EU approved the actions, making them legal. The spirit of the law is a different story, but arguably, the spirit was upheld by Italy and would be violated by the overly rigid ruling by the critics.  

The procedures and processes were followed to the letter. The Single Resolution Board, the pertinent entity, ruled that the BRRD (the directive that governs the resolution process) did not apply because the failure of the two regional banks was not expected to have a “significant adverse impact on financial stability.” This is important because this transferred the back to Italian authorities and the national insolvency laws and procedures.