Two more Italian banks failed over the weekend– Banco Popolare di Vicenza and Veneto Banca.
(In other news, the sky is blue.)
The Italian Prime Minister himself stated that depositors’ funds were at risk, so the government stepped in with a bailout and guarantee package that could cost taxpayers as much as 17 billion euros.
That’s a lot of money in Italy– around 1% of GDP. In fact it’s basically as much as the 17.1 billion euros they spent on national defense last year (according to an estimate by Italian think tank IAI).
You don’t have to have a PhD in economics to figure out that NO government can afford to spend its entire defense budget every time a couple of medium-sized banks need a bailout.
That goes especially for Italy, whose public debt level is already 132% of GDP… and rising. They simply don’t have the money.
Moreover, the European Union actually has a series of new rules collectively known as the “Bank Recovery and Resolution Directive” which is supposed to prevent failing banks from being bailed out with taxpayer funds.
Here’s the thing– Italy has LOTS of banks that are on the ropes.
So with taxpayer resources exhausted (and technically prohibited), who’s going to be on the hook next time a bank goes under?
Easy. By process of elimination, the only other party left to fleece is the depositor.
Here’s how it works:
Let’s say a bank takes in $1 billion in deposits.
Naturally the bank doesn’t just keep $1 billion in cash sitting in its vault. They invest the money. They make loans. They buy assets.
So the bank’s balance sheet shows $1 billion worth of assets, and $1 billion worth of deposits that they owe to their customers.
But sometimes banks screw up when they invest their customers’ funds. Loans go bad. Borrowers default.
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