In the end, “reasoned risk” could turn out to be the concept that explains the whole strategy of the Draghi government. The former president of the ECB used it to explain the relationship between vaccines and reopening of the economy, but the chain can stretch to the other node, that of public debt. And, therefore, the supply chain is: vaccines, reopening, recovery, increase in GDP, reduction of the debt / GDP ratio, now around 160 percent. But this “reasoned risk” can leave someone with the match in hand: the banks that, of the securities of that debt, would still remain stuffed.
The boom in emissions with which European governments are financing anti-pandemic measures has in fact dumped more than 2 trillion euros in securities into the coffers of European banks. A third of this mountain is in the assets of Italian banks which increased their portfolio of government bonds by almost 10 percent between winter and summer 2020. They are overwhelmingly Italian Treasury bonds. In fact, despite the calming interventions of the ECB and the EU, which consolidated the confidence of the markets and cooled the spread, the share of BOTs and BTPs in the hands of foreign investors, in the first half of 2020, continued to decline: from 25 , 9 to 23.6 per cent of the total Italian debt. The domestic banks in particular absorbed these sales: their BTP portfolio rose from 16.9 to 18.6 per cent of the total. To say that they are stuffed with them is, perhaps, little: that mass of Treasury bonds represents 18 percent of their assets and is worth almost twice their capital.
It can be safely ruled out that the situation will be reversed this year. Overall, the Treasury is expected to issue nearly € 600 billion worth of bonds in 2021. The ECB should absorb just under 200 of them. The other 400 (including over 60 billion net issues, beyond renewals of maturing bonds) will end up on the market. Based on the trends of recent months, it inevitably means in the portfolios of home banks.
In fact, deaf rumblings are beginning to be felt in Europe about the re-emergence of the “doom loop”, the perverse circuit, specifically above all Italian, whereby if the market loses faith in the Treasury and the spread rises, the banks’ balance sheets shake, the State he is forced to intervene, the debt becomes heavier, the banks wobble even more and off to another turn of the spiral. Completing the banking union, with European deposit insurance, would put banks on firmer ground, but it is very unlikely to happen as long as the “doom loop” lurks.
It is a subject that the Germans have always insisted on and Deutsche Bank has recently returned to the subject with a study and a simulation. The leverage to break that perverse circuit – is the thesis – is to discourage the purchase of public securities which, today, whatever the level of the spread, are officially “zero risk” and allow banks to invest in public securities, without worrying about preparing defenses in the event of a collapse in values, although crises on the market for government bonds, as we have seen in recent years, are a concrete possibility.
Deutsche Bank analysts try to imagine a system in which the share of zero-risk securities has a ceiling. For example, 30 percent of the bank’s capital. On securities in excess, compared to 30 per cent of the capital, there would be an increasing risk, as the stock of securities increases, to be faced with guarantees in the balance sheet, as for other non-public securities. For Italian banks, exposed to Treasury securities up to 194 per cent of the capital, this system would entail a substantial capital strengthening. It would involve injecting approximately 4.3 billion euros of fresh capital into its balance sheets. Not a huge amount, compared to a total current value that exceeds 300 billion euros. But as the troubles of the Italian credit system in recent years have shown, for the banks what is lacking is capital.
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