Trust in banks is shaking again

Just when ECB managed to sweep the panic about the high fine for Deutsche Bank under the carpet just for a minute, well at least so it would be forgotten for a while without anything getting actually solved, another European bank is asking for a word. Italian bank Banca Monte dei Paschi di Siena – bank house with the longest history in the world. This bank hasn’t learned how to avoid crisis in its entire 500-year long history.

For example the summer stress tests of European banks evaluated it as the most vulnerable among 51 evaluated bank houses. Third biggest Italian bank has a balance full of bad loans. Moreover, to bet on derivatives didn’t work out for its previous board. (Here we can see a resemblance with Deutsche Bank.) The stocks of the bank lost more than 80 % of their value in last 12 months which is proof of the investors’ losing trust. Except under the impression of improved mood in Europe, the trust in Monte dei Paschi di Siena grew as well in past couple of days. Bank’s stocks added more than 30 % in one day on Monday. Bank announced that as part of its rescue plan it’s planning to get rid of the bad loans (under the value), which they have in the amount of 28 bn. EUR. It is also planning to increase its capital for about 5 billion euros. This make or break plan also counts with firing one tenth of the employees.
 
But everything turned different on Tuesday and when the speculators got to think about the rescue plan for a bit they didn’t like it as much anymore. While the stocks were growing like mushrooms after rain on Monday business with them was stopped after they fell 23 % on Tuesday. The price of Monte Paschi’s stocks was 17 % lower on Tuesday afternoon then it was in the morning. The bank will need the support of market when it wants to try to restructure. And this trust is missing. That means that Monte Paschi will continue to be ECB’s nightmare. Second – after Deutsche Bank which is in the same condition as before except this condition stopped to be talked about so much on public and that is the only difference between now and the days when the stocks of Deutsche fell so sharply. The troubles of the third biggest Italian bank can get other Italian bank houses under the pressure as well. It is known that many of them don’t have their loan balances spotless.

Why should we feel bothered by troubles of one Italian bank? Because the past had shown us many times that plague of one bank can make many other banking institutions suffer too. On top of that, it is very obvious that the bank’s stocks started intensively moving and the trust in the banking sector has been experiencing shakes past few months. If let’s say construction businesses were in troubles then it is nothing pleasant either but it would be enough to wait for when the mood in the economy gets better and construction would get going again. But the banking sector is crucial because it arranges the payment communication which is based on trust and if that vanishes it’s going to be bad. The stock markets would be the first to go. That’s one of the main reasons why I wouldn’t touch the stocks (and especially the banking ones) not even with a 10-foot hygienic pole.