Last night I had a wonderful opportunity to participate on a panel at Fordham University. The event was managed by the Fordham Graduate Finance Society (they did a great job), and our panel was to provide an outlook related to the “new” financial landscape.
There were several topics discussed that created a lot of good, healthy debate. The moderator completed his line of questioning by asking each member of the panel what risk they feared that might not necessarily be a focal point for the financial press. I volunteered that I was very concerned with Italy’s banking system because I believe that it has the potential to take down the Euro and Eurozone.
There is a terrific article/note that I want to share that addresses the current situation among Italy’s roughly 500 banks. Basically, more than 20% of the Italian banks have Texas Ratios >100%, effectively rendering them failed. Although many of the banks are small, several of Italy’s largest banks are struggling under the stresses of non-performing loans.
Brexit may have dinged the Eurozone’s armor, but the Euro remained unscathed. A failure of Italy’s banking system will be a frontal assault on both the Eurozone and the Euro from which there may not be a recovery. Remember how the markets reacted after the UK vote last June? There was immediate global pain followed by a fairly quick recovery. Should Italy not be able to rescue its banking system, we suggest that the pain will be more severe and recovery may take far longer to manage.