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Attack on Italian Banks
Produces a Healthy Backlash

Oct. 29, 2104 (EIRNS)—After the release of the stress test results, Italian bank shares collapsed: Monte del Paschi bank, 22%; Cassa di Risparmio di Genova (Carige), 18%. Mass media such as the German weekly Der Spiegel led the drumbeat: "The next Euro-crisis is brewing in Italy." The "narrative" is that Italian banks suffer from having loaned too much to the national economy, which is in recession. Thus, they have more bad loans than German banks, for instance. No word about the real story of the bankrupt financial system.

The lie is causing a backlash in Italy, where the establishment has accused the ECB of being discriminatory. The good thing is that the issue of real economy versus financial economy has come to the surface.

Exemplary is Il Sole 24, the daily owned by the Italian Industrialist Association, which is hammering on the fact that the tests have "stressed" only commercial banking, whereas financial trading has been excluded.

The so-called adverse scenario, based on a GDP collapse of 7.6% for Germany, 6% for France, and 6.1% for Italy in 2014-2016, have projected losses on the loan portfolio, but generated revenues of €6 billion on the financial front!

Italian, Spanish, and Dutch banks have been most heavily penalized. According to Mediobanca data, the loan portfolio on the banks' balance sheet is 56.3% for Italy; 58.4% for Spain; and 58.2% for the Netherland (2013 data). In comparison, the figures for Germany are 30.5%; France, 36.1%; and U.K., 44.4%.

Additionally, Il Sole writes:

"German and French banks are full of derivatives: Big banks in Germany have 26.7% of their assets in derivatives; France, 15.5%; while Italy has only 6.6%. And most of such derivatives (e.g., 89.9% in Germany) are used for 'trading' and not for hedging. Furthermore, German and French banks are full of toxic assets, whose value is impossible to assess, because they have no market value: these amount to 48% of the net tangible capital in Germany; 27% in France; and 16.7% in Italy. All this finance in the balance sheets changes the total of 'risk weighted assets' (RWA) remarkably, and that is the key parameter used to calculate capital requirements: German banks reduce the latter more easily than Italian banks, because finance affects balance sheets less than the real economy. Thus, they succeed in raising the level of capital solidity."

Not only German banks: France's "Société Générale has twice the balance sheet of Intesa Sanpaolo (€1.141 billion), but loans for only 29%, whereas Intesa has loans for 52%. The rest, about €800 billion, is financial trading: assets, derivatives, and more. SocGen went through the test with only €37 billion of primary capital."

Another view of this, for example: Germany's banks are leveraged 6:1 if only their "risk-weighted assets" are considered against their capital; but if all their assets are considered, including value-at-risk in derivatives, the leverage is 25:1! The case is very similar for the banks in France, 8:1 becomes 27:1. The sources for this are "Capital Issues" and the U.S. FDIC.

"And what to say about the British banks? ... All of them have been promoted, including that very Royal Bank of Scotland which forced the British government to nationalize it to avoid default. The British bank, which accumulated losses of £45 billion from the Lehman crash, stood with just €56 billion net tangible capital ... of a total balance sheet of €1.232 billion. This is barely more than 4% capital to guarantee the solidity of the bank which suffered most from the crisis. What makes it feel like a good investment? It has loans for only €530 billion—a little more than Unicredit, which has a 30% smaller balance sheet and must back its exposure to households and firms with much higher reserves than the British bank."