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Document Type

Case Study

Case Series

Ad hoc Capital Injection

Abstract

The 2017 recapitalization of Italy’s third-largest bank, Banca Monte dei Paschi di Siena (MPS), the oldest bank in the world, represents an unusual precautionary, “open bank” recapitalization under the European Union’s Bank Recovery and Resolution Directive (BRRD) rules. In 2015, the bank held the largest portfolio of nonperforming loans (NPLs) in Italy (with 34.8% of its total loans), and in 2016 it was the only bank to fail the European Banking Authority’s adverse scenario stress test, although its reported total capital ratio at the end of the year was 10.4%. To address its NPL problem, MPS agreed with the European Central Bank to sell off its NPLs, supported by a plan to raise EUR 5 billion (USD 5.2 billion) in private capital by the end of 2016 and convert junior bonds held by institutional investors into equity. However, in December 2016, the capital raise fell through following political turmoil from Italy’s failed constitution referendum. On December 23, the Italian government announced the precautionary recapitalization of MPS by the state under a newly approved law decree, funded by EUR 20 billion through Italy’s Ministry of Economy and Finance (MEF). By the end of December, the European Commission (EC) approved liquidity assistance of up to EUR 15 billion while the MEF worked with the bank to develop a restructuring and recapitalization plan, which would involve the conversion of subordinated creditors into equity holders. The EC approved the final recapitalization plan in July 2017, totaling EUR 8.1 billion. The recapitalization plan, implemented in August, involved the conversion of all EUR 4.3 billion subordinated debt into new ordinary shares, giving former subordinated debt holders a 45.4% stake in the bank, and the MEF’s subscription of EUR 3.9 billion in new ordinary shares, representing a 52.2% stake. However, the MEF invested an additional EUR 1.5 billion in MPS to acquire the converted shares from retail subordinated bond holders who the government determined had been victims of mis-selling, increasing the MEF’s stake to 68.3%. MEF planned to sell its stake by the end of 2021. Owing to lack of market interest, the MEF received approval from the EC for an extension to sell off the shares for an undefined, multi-year period. In November 2023, the MEF sold 25% of its stake in MPS for EUR 920 million, reducing the MEF’s stake to 39.2%.

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