A man walks past a branch of the Monte dei Paschi di Siena bank FILIPPO MONTEFORTE/AFP/Getty Images

The Electoral Fate of Italy’s Banks

To fix Italy's banking system, the government that emerges from the general election in March will need a solid majority, a comprehensive strategy to boost economic growth, and a willingness to confront vested interests. But none of the parties has shown any indication that it can meet any of these criteria, much less all three.

LONDON – As Italy approaches what promises to be one of its most contentious general elections since 1945, banks are the elephant in the room. Too big and cumbersome to be ignored, they are a constant source of embarrassment for the parties that have been in government since the global financial crisis of 2008, especially for former Prime Minister Matteo Renzi, who hopes to rekindle his political career in March. They are also an inviting anti-establishment target for the populists of the Five Star Movement.

Indeed, Italy’s banks epitomize all the problems that the financial crisis brought to the country, and on which the populists are capitalizing: a double-dip recession followed by sluggish GDP growth, high unemployment, especially among the young, and a collapse of domestic demand. Banks also embody the tangle of vested interests, malpractice, and even corruption that, together with la dolce vita, have come to be associated with Italy.

Despite the bail-in of four local banks, the bailout of Monte dei Paschi (one of Italy’s systemically important banks), the liquidation of two regional banks, and the market-led rescue of the mid-size banking group Carige – all within two years – the banking system has yet to be stabilized. Will the underlying economic recovery – this year and next, the Italian economy should grow in real terms by 1% – assist Italy’s banking sector by keeping a lid on a stock of non-performing loans (NPLs) totaling nearly €180 billion ($220.9 billion)? Or should the recovery be used to clean up wobbly banks’ balance sheets, by bundling their NPLs and selling them at a discount?