Bank inquiry puts state aid policy to test

Date: 27/06/1996

By Tim Jones

A LITMUS test of European Commission state aid policy towards the financial sector is likely to be decided before the summer break, according to member state officials.

Italy's rescue package for Banco di Napoli is currently under investigation and is expected to be approved, under certain conditions, before the end of July.

The terms of the Rome government's rescue package for Italy's seventh largest bank were notified to the Commission at the end of March, and a decision - at least in principle - is anticipated in time for a meeting of shareholders on 30 July.

In March, the Italian treasury agreed to save the bank from collapse after it announced a loss in 1995 of 1.6 billion ecu - the largest in the history of Italian banking.

Since then, the bank's financial situation has deteriorated even further, with reported losses of 150 million ecu in the first quarter of 1996.

The forthcoming decision on Banco di Napoli will be the first real test of the Commission's mettle in the highly sensitive financial sector since the bail-out of France's Crédit Lyonnais last year.

This was the Commission's biggest ever state aid case, brought about by the ill-timed expansion of the bank which left it on the verge of bankruptcy with losses of 3 billion ecu.

The Commission allowed Paris to inject 6.9 billion ecu of state aid into the bank, but only if it slimmed down by 35&percent; within three years and concentrated asset sales on its European banking network rather than simply offloading non-core assets abroad.

Banco di Napoli's problems are similar, but not on the same giant scale as those of Crédit Lyonnais. Loans to clients fell 7&percent; in the first quarter, while write-offs for bad and doubtful loans hit 3.2 billion ecu.

On 15 June, Banco di Napoli announced that the treasury would inject 1.1 billion ecu and is putting together a consortium of banks to invest another 750 million ecu.

Asset sales have already begun. At the end of May, the bank announced it was selling off 50 of its 77 branches in northern Italy to Banca Popolare di Brescia for a total of 150 million ecu.

The Commission has made it clear that it will set the same kind of conditions for Banco di Napoli as those applied to Crédit Lyonnais, which have, so far, held well.

Apart from forcing a round of significant asset sales, the bank's request for a further injection of cash was rejected by Paris after the Commission made it clear that this would be hard to approve.