The European Union has approved an Italian contingency plan to guarantee the liquidity of the country’s banks amid uncertainty over the sector’s stability in the wake of the United Kingdom’s vote to leave the bloc.
Under the plan, Rome could provide up to 150 billion euros ($166 billion) in government guarantees until the end of this year. Only solvent banks would qualify for the liquidity support, which was approved under the European Commission’s “extraordinary crisis rules for state aid to banks.”
“As this decision and other precedents demonstrate there are a number of solutions that can be put in place in full compliance with EU rules to address market turbulence,” a commission spokeswoman told The Wall Street Journal.
Italian banks have been struggling with high levels of bad loans and poor profitability amid super-low interest rates. Of the sector’s 200 billion euros in gross non-performing loans, about 85 billion euros have not yet been written down, according to The Financial Times.
The U.K.’s “Brexit” vote on June 23 triggered a steep sell-off in banking stocks followed by intense volatility this week, exacerbating the Italian banks’ existing problems. Shares in the banks rallied on Tuesday, the FT said, as “investors were heartened that Prime Minister Matteo Renzi was eyeing a multibillion-euro injection of state capital into the sector’s weakest institutions.”
Italian officials have said the government hopes to inject up to 40 billion euros in fresh capital into domestic banks. The liquidity guarantees are separate from that plan.
“In contrast to liquidity support, which the commission can approve during times of market turmoil, capital injections fall under the EU’s new strict rules on bank bailouts,” the WSJ noted. “Those rules would require private investors, including bondholders, in the bailed-out bank to take losses.”