For savers who don’t deal with finance on a daily basis, it is difficult to understand which banks are sound. In this article we see what the risk factors are and which banks are most at risk of failure.
What are the factors of a bank failure?
Transparency is the first factor to take into consideration in a banking institution.
Indeed, important information must be quickly accessible and provided clearly and completely. If the bank takes too long to provide them in response to our requests, this is not a good sign.
The size of the bank is also an important factor. Big banks are also subject to the direct supervision of the European Central Bank.
In total they are 114 banks are supervised across the European Union and these banks hold more than 80% of total banking assets.
The listing on the stock exchange is just as important. In fact, small banks are often not listed, which makes them somewhat less accessible to small savers. Indeed, listed banks are always under the control of investors, including large investors who expect profits.
Consequentially, the slightest vulnerability is immediately punished in the form of loss of value.
If a bank’s share price is strong or in line with the general market trend, it means that big investors, always very sensitive to information, consider the bank reliable.
In reverse, if the market is stable or positive, but the stock price is falling, it means something is wrong or the bank is in danger of failing.
The next factor, which may seem difficult but is fundamentally important and easy to control, is the credit rating.
This index indicates the capital reserves available to the bank in the event of investment losses. Naturally, the higher the better, but in any case this ratio should not be less than 10%.
Finally, there is the Common Equity Tier 1 ratio (CET1), acronym for Common Equity Tier 1 ratio, a percentage value that shows the solidity of a financial institution in relation to risky investments.
The minimum value established by the European Banking Authority below which an institution is considered risky is 8%. Again, the higher the percentage, the better.
This percentage value distinguishes between banks at risk of insolvency or bankruptcy and good Italian banks.
In other words, if this parameter falls below 8%, the credibility of the bank is at risk (even the credibility of a stable bank suffers).
Why can banks fail?
The main role of banks is to collect some people’s savings (through operations such as opening deposits, current accounts, etc.) and to place the same savings available to other people, that is, of those who apply for loans or mortgages.
In other words, banks raise funds and provide them to those who have none.
However, it is clear that this trick only works if the capital is held for a certain period of time.
In reverse, if everyone asked the bank to return their money, the bank would not be able to respond because all the money lent to the borrowers would be lost.
Which banks are at risk?
Over the past two years, Bankitalia has outsourced 26 out of 208 banks – more than one out of ten.
Sixteen institutions are currently under special supervision. Most of these are cooperative banks and small banks. Local banks are historically less prone to speculative finance, assembled and employed locally.
However, many of them have collapsed under the weight of bad loans that may have been made to a few individuals and outside their local area. Other bigger banks are also on the verge of bankruptcy (Monte Paschi, Carige and Unicredit). Some banks are however been saved from technical failure (Popolare di Vicenza, Veneto Banca, Cassa Risparmio Rimini, Cassa Risparmio di Cesena, Cassa S. Miniato…).
As for bank failures, Calige’s situation, which has been going on for years without a solution, has reached its limit. The bank is on the verge of bankruptcy or spontaneous resolution and the government has intervened with an emergency decree to block it.
I use the term “spontaneous resolution” to indicate that a stable institution has received an order from the Bank of Italy and the ECB to resolve another institution in crisis or diseased.
The bailout funds were drawn from the Interbank Resolution Fund, further weakening the other banks in the system. Banca Monte Paschi di Siena and two Venetian banks, later merged into Banca Intesa, have received money from the state, directly or indirectly.
In which direction are the banks going?
Underlying the low profitability of many Italian financial institutions is the failure to realize that the world has changed and that the loan-based model is no longer at the heart of the matter and cannot sustain profitability on its own.
Intesa, for example, has chosen a “fee-based” business model, as seen from year to year, and has maintained and developed its own product factories, namely Eurizon (managed savings products), Intesa Assicurazioni (insurance) , fee-based investment banking (formerly Banka Imi), together with a private banking and financial advisory network based on private banking and a financial advisory network based on Fideuram. Credem then replicated this structure.
Unicredit sold its product factories (Pioneer to Amundi, Bancassurance to Allianz and Cnp to Aviva).
Outsourcing product factories is not wrong and often leads to significant capital gains, but at present, under the circumstances, it is not the most efficient option. In the future, we will move towards larger banks that will be able to take on other tasks (insurance companies, asset managers, distributors of financial products).
If you are considering investing, it is obviously important to know the current “health” of Italian banks to avoid the risk of bankruptcy.
Now that you have seen that the situation is never rosy, we advise you to always have a complete picture before making an investment, high risk or not.
Above all, it is important to rely on an expert in the sector, such as an Independent Financial Advisorwho knows how to guide you on the best path for you, as there is no conflict of interest.