In Italy, there are – not surprisingly - more bank failures. On January 2, the ECB appointed temporary
administrators at Banca Carige, based in Genoa, after shareholders were unable to secure additional equity. The problems in Banca Carige are not new, but the can had been kicked down the road until late last year. The Italian government seems to stand
ready to pour money into Banca Carige via the instrument of precautionary recapitalization (as also applied to Monte dei Paschi in Siena in 2017) even though this bank cannot really be considered a systemically important financial institution. Also,
guarantees of Carige’s bondholders go through the Italian deposit insurance scheme, thus transferring contingent liabilities to the rest of the Italian banking system. However, the bail-out goes beyond this specific case. According
to news reports, Italy’s government has set up a 1.6 billion euro fund to compensate investors who have lost their money in a string of recent bank liquidations. This will pay junior bondholders up to 95 percent of the original value of the investment
and shareholders up to 30 percent. While this arrangement is almost exclusively for retail investors, it certainly extends the financial safety net far beyond what has been agreed under the new European bail-in rules. And even if one can make the case for
compensation for retail investors that were mis-sold junior securities in banks, there is no case to be made to compensate equity holders!