FSB warns Italy against overhaul of bad loans market

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The Financial Stability Board has warned Italy to “resist” proposed laws being discussed by Giorgia Meloni’s government that it says would “undermine” the country’s bad loans market and increase uncertainty for investors.

In a report published on Thursday the Basel-based institution, which makes recommendations about the global financial system, said the country had made tremendous progress on cleaning up its banks’ balance sheets since non-performing loan (NPLs) levels peaked at €360bn in 2015.

But proposed changes to the legislation by Italy’s rightwing government, aimed at helping households and small businesses that have previously defaulted on their debts, “would introduce uncertainty or undermine the NPL secondary market”, said the FSB.

Italian banks piled up bad loans between 2008 and 2015 in the aftermath of the financial crisis. Reforms introduced from 2016 under prime ministers Matteo Renzi and Paolo Gentiloni opened up the market, allowing hedge funds and other international investors to buy up loans, in a bid to bolster the health of the Italian banking system.

However, some of Meloni’s allies have argued that the market favours “foreign speculators” and damages small businesses and families.

Under the complex set of proposals, first introduced in early 2023 by Meloni’s Brothers of Italy party, small borrowers who have defaulted on their loans between 2015 and 2021 would have the option of repurchasing the NPLs even if banks had already sold them on to professional investors. The borrowers would have to pay a 20 per cent premium on the loans if recovery proceedings have not started, or 40 per cent otherwise.

Investors have heavily criticised such proposals, with analysts warning they would impair the market. Most of these NPLs have been securitised and given state-backed guarantees on the senior tranches of the debt as a way of attracting investors. 

The FSB’s review said such state-backed guarantees, known as GACS, as well as an overhaul of restructuring and enforcement procedures, “successfully” helped banks slash NPLs from a 2015 peak to €63bn in June 2023.

Italy’s “remarkable progress” can serve as a framework for other countries in the future, it said. However, the government should work on progressing such achievements without undermining them, it added. 

Economy and finance under-secretary Federico Freni tried to reassure investors at the end of last year, saying it was a “non-issue” and there was “no reason for the government to intervene” with new legislation on the NPL market.

The proposals were last discussed by Italy’s senate last week.