The European Central Bank (ECB) has pulled the plug on two troubled Italian banks, sending them into insolvency proceedings as it pushes ahead with efforts to clean up weak banks holding back the economy.
The two banks, Veneto Banca SpA and Banca Popolare di Vicenza SpA, have struggled to overcome high levels of loans that were not being paid back.
The ECB on Friday said it had given the banks time to raise more capital, but they had not been able to offer credible solutions.
It ruled they were “failing or about to fail,” and would now face insolvency proceedings in Italy.
The Italian Ministry of Economy and Finance said the government would meet over the weekend to “adopt the necessary measures to keep the banks fully operative, protecting all account holders, depositors and senior creditors.”
However, shareholders and holders of the banks’ junior bonds face being wiped out.
Weak banks that cannot lend adequately to businesses have been a key vulnerability for Italy in particular and for the eurozone economy as a whole.
The ECB took over as top banking regulator in 2014 as part of an effort to strengthen oversight of the EU’s banking system.
It was given the job because national regulators were considered too slow to address troubles at their home banks.
The decision follows a similar ruling on Spain’s Banco Popular Espanol SA earlier this month, the first time the ECB exercised its new powers to blow the whistle on a failing bank.
In that case, EU banking authorities found that a sale to the larger Santander bank for 1 euro was an acceptable solution.
Another Italian bank, Intesa Sanpaolo SpA, on Wednesday said it would be willing to acquire some parts of Veneto Banca and Banca Popolare di Vicenza as long as it does not worsen its own finances.
That meant it could not take over those banks’ bad loans, for which another solution would have to be found.
The Italian banking fund Atlante invested 3.5 billion euros (US$3.92 billion) in Veneto Banca and Banca Popolare di Vicenza last year, but the financial position of the two banks continued to deteriorate.
The ECB said they suffered not only from high levels of bad loans, but “underlying challenges to their business models.”
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