That’s how Atlante, the Italian bank rescue fund, which has been capitalised by Italian banks in order to buy Italian bank equity and buy non-performing loans from Italian banks, can work.
Regulatory magic allows €300m of new equity in Banca Popolare di Vicenza to be supported by €118m of UniCredit’s equity, or €225m of Intesa's.
Shuffle the cards around, and the Italian banking system acquires brand new regulatory capital.
Although nothing in the real, economic world changed, that regulatory magic reassured the market and Moody’s, which had feared UniCredit’s contribution to the fund could have squeezed its ability to pay AT1 coupons.
Of course, regulatory limits on banks paying AT1 coupons are another, equally arbitrary regulatory rule, and so are the rules about bail-in and state aid, which have already tied Italian regulators in knots, as they try to rescue firms without using any public money.
The fund is more magical even than that for UniCredit – the fund’s first transaction got UniCredit out of its €1.5bn sole underwriting commitment to the Vicenza IPO, and weighed far more heavily on small institutions like UBI Banca, which took a capital hit of 13bp, than on UniCredit, where it cost 3bp of capital.
Of course, perhaps regulators owe the big banks one. A €1.5bn IPO underwriting commitment to a bank which hasn’t looked healthy for a long time is a decent chunk of risk, even for a bank the size of UniCredit. Intesa is now staring down the barrel of a €1bn sole underwrite for Veneto Banca.
A nudge from the regulator might have been just the encouragement they needed to see the public-spirited benefits to recapping their smaller peers — it’s just lucky that the rules can be changed to get them off the hook again.