Yes I am back. I know it has been a while. What can I say? I have been quite busy!
One of the things taking up my time during the week was preparing for and then giving a talk for the Q-Group on operational risk capital modelling. It sounds arcane, I know, but there was one exciting part: I had the opportunity to try out the simulated laser pointer that you can create by pressing your finger on the screen of the iPad during a Keynote presentation.
Since regulators expect banks to use their capital models to quantify 1 in 1,000 year losses, I slipped a reference in my presentation to the Italian bank Monte dei Paschi di Siena which, having been founded in 1472, is a mere 539 years old. The somewhat oblique point was that no-one should take these models too seriously.
It was an ironic twist that evening that this was headline on the front page of the Wall Street Journal website:
It seems that Monte dei Paschi di Siena was one of a number of banks suffering as a result of the European sovereign debt crisis and it makes an interesting case study of the challenges of the business of banking.
Back in the original days of the global financial crisis, the banks that got into the most trouble were the ones with significant exposure to “toxic assets” (US mortgages, mortgage-backed securities and their ilk). Once people started to worry about these toxic assets, the problem was that no-one really knew how much exposure any given bank had to these assets and so no-one wanted to lend to anyone else. Since many banks (including Australian banks) rely on wholesale debt markets (i.e. they borrow money from big institutional investors around the world like pension funds), this became a problem for everyone.
Back then you might have thought that a regional bank like Monte dei Paschi di Siena would be fairly immune to what was going on, but it got off to a bad start in the crisis by acquiring another bank, Banca Antonveneta in 2007. In retrospect (and even at the time in the eyes of some analysts), it paid too much and over-extended itself at the wrong time. Within a couple of years, its capital buffers had become so thin that it was forced to turn to the Italian government for a capital injection and also cut its dividend payments right back in an attempt to rebuild. This was painful for Siena because, in a peculiarity of Italian banking, the majority shareholder of Monte dei Paschi di Siena is a charitable foundation, originally established in the 1990s for the express purpose of acquiring the bank when banks across the country were being privatised. This foundation makes donations to all sorts of public groups across the city of Siena and, with the dividend cut, the donations stopped too.
To make matters worse, the bank is a large holder of Italian government bonds, which have not been performing particularly well of late. With a capital base of €7.1 billion (figure as at April 2011), it held €32.5 billion (figure as at December 2010) in Italian government bonds and so any decline in value of Italian government bonds put pressure on the bank’s capital. In mid-2011, in the face of the European debt crisis, the bank decided it needed to further bolster its capital position. But the foundation did not want to lose its majority share-holding, so the foundation turned to JPMorgan and Goldman Sachs (aka the vampire squid) to borrow money to buy new shares issued by the bank. Unfortunately the loans were secured by shares and as the share price continued to fall, the foundation had to hand over more shares to its lenders. If things do not improve, the foundation is likely to be forced to sell more shares, ultimately losing its majority stake in the bank. The foundation, which once made around €250 million a year in donations to the city, is not looking likely to be able to contribute nearly as much to the public good in the future.
Will this venerable bank be the first to survive for 1,000 years? It has not failed yet, but the immediate future still looks rather shaky.
Possibly Related Posts (automatically generated):
- Time for States to Give Up Borrowing? (24 February 2009)
- Cypriot sovereignty surrendered (18 March 2013)
- The Amazing Shrinking Banks (31 January 2009)
- Where does the money go? (31 December 2010)
Do we have an estimate of how many banks existed in 1500 – that is, what’s the 500-year survival rate?
That is an excellent question. I don’t have a good answer off the top of my head, but I will look into it. But Monte dei Pascha di Siena was certainly not the only one, so the survival rate would be low.
Also, it’s an interesting question whether this is the “same” bank that was founded in 1472. For me, that would depend on its causal continuity – on its organisational and financial history – and there may be discontinuities there given it has been nationalised at least once (since it was privatised in the 1990s).
Hey Mule, where’s the Melbourne Cup analysis??? I seem to recall you picking it (first time….) last year?
Also, what are your thoughts on RBA today? I imagine the 93% vote for no cut in October might be a little different today….. here’s my @ss about view …. I think the economy needs stimulus, and have so for a long time. I think the current stats support that idea. However, I wonder if the RBA has ‘only just’ turned their ship around to the idea of easing (from tightening), and might wait until December and then choose an incremement that suits the situation at the time (within the context of the gap in Jan…you never know with these guys!!). In any case, Man Financial, the joke called the EFSF and so on, tilt the atmospherics to an ease today I think….
AJ. Like you and most of the world, I am in the rate cut camp this time around.
As for the Cup: my tip is Illo.