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Italy’s banking crisis and the bail-in strategy – Editor

Articles by John Mauldin which appeared in Forbes magazine on September 21 [1] and December 8 [2] discuss the high probability that Italy will experience a severe banking crisis in the next few quarters. The simple fact is that Italy’s banks are carrying a huge load of bad debt, and political turmoil isn’t making that problem any easier to solve.

According to the author: “The current Italian banking crisis carries with it the possibility of bank failures. The consequences of these failures pyramid the crisis because of European Union regulations. Essentially, the position of the European Union is that the European Central Bank and the central banks of member countries cannot bail out failing banks by recapitalizing them – in other words, injecting money to keep them solvent.

“EU regulations go so far as to prohibit Italy from using its state funds to shield investors and shareholders of banks from losses, unless there is risk of “very extraordinary” systemic stress. Rather, the EU has adopted a bail-in strategy.”

But what is an investor? Mauldin says: ” In the view of the EU, depositors are, in cases of a bank resolution, investors in the bank. The bail-in process can potentially apply to any liabilities of the institution not backed by assets or collateral.

“There is some insurance available …… but there is no EU-wide system of deposit insurance …

“This means that while the first 100,000 euros ($112,000) in deposits are safe, in the sense that they cannot be seized, any money above that amount can be. ”


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