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European Commission agrees €5.4 billion bailout for oldest bank in the world

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The European Commission has given formal approval for the restructuring of Banca Monte dei Paschi di Siena. The bank, regarded as the oldest in the world, is the fourth-largest in Italy.

A €5.4 billion bailout has been arranged, taking the amount of Italian taxpayer money deployed to rescue the country’s banks up to €20 billion.

The five-year rescue mission will see the bank transferring €26.1 billion to a privately-funded special vehicle. The bank will also swap its business model and gear itself towards retail customers and SMEs.

According to finance minister Pier Carlo Padoan, the Italian state will take a 70% stake in Monte dei Paschi, with an exit planned for 2021. Padoan spoke of his confidence that state money would be recouped “at a premium”.

EU Competition Commissioner Margrethe Vestager added: “This capital injection could only be approved after junior bondholders and shareholders have contributed to the costs of restructuring, in line with ‘burden-sharing’ requirements under EU state aid rules.”

Sick bank of Europe

Italy’s banks have been labelled the “Achilles Heel” of the eurozone’s financial system. Non-performing loans in the country have grown to 18% of total balance sheets. The banks are also finding it hard to raise new capital under compliance laws from the European Central Bank.

Saddled with bad loans and a public misconduct scandal, Monte dei Paschi has been a prime example of Italy’s banking issues.

Last year a €40 billion “rescue mission” was launched by the Italian government as bank shares collapsed on the Milan bourse. The wobble was put down to aftermath of the Brexit vote in the UK.

“When Britain sneezes, Italy catches a cold. It is the weakest link in the European chain,” Lorenzo Codogno, former director of the Italian treasury, said at the time. “I don’t think the Italian system is about to blow up. We could muddle through for years, but we need to get out of this loop.”

Ancestry

Monte dei Paschi was founded in the Republic of Siena as Monte di Pietà on March 4, 1472. The bank’s current form dates back to 1624, when Siena was incorporated into the Duchy of Tuscany.

The bank consolidated and increased its influence during the 17th and 18th centuries, before being split into two distinct groups in 1995. A spin-off, Fondazione Monte dei Paschi di Siena, was created as a non-profit organisation centred on charity and social utility.

Huge losses incurred by the bank’s Santorini and Alessandria operations resulted in the firm taking a number of undisclosed derivative loans from Deutsche Bank and Nomura. When these loans were uncovered in 2013 the bank’s shares plummeted by 8.4%, followed by further drops over the next week.

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