A host of acronyms and obscure
terminology can make the Italian financial crisis even more
difficult to grasp.
Here is a list of explanations of some of the most
prominent:
- Bad bank. The solution adopted by other countries, starting
with Spain, to free bank balance sheets of non-performing loans.
The bad bank takes up the portfolio of the riskiest of these
loans which will then be resold on the open market.
- Bail-in. An internal measure to "save" a bank, in other words,
to restructure a bank involved in losses by shareholders,
stakeholders, and investors with more than 100,000 euros
deposited.
- BRRD. The 2014 European directive that went into effect this
year, which provides for public funds to be used to restructure
a bank only after a bail-in.
- Bail-out. An external measure to save a bank, usually with
public money, such as in Spain.
- Securitization. An operation through which the bank gives up
non-performing loans to a third-party investor (in the guarantee
mechanism agreed to by the EU and Italy, there will be one for
each bank) who then issues bonds called asset-backed securites
(ABS) guaranteed by those loans: it gives back to the bank an
immediate value, duly lowered, against a future influx of profit
from the partial recoup of those loans.
- GACS. The Italian acronym for the public guarantee on
non-performing loans. This State-backed guarantee assists the
meeting of supply and demand in the market for securitized
investments, at a price that is acceptable for the budgets of
the banks that choose to participate. The price however, in
agreement with the EU, is a market price, meaning that it's
calculated based on prices of credit default swaps (insurance
contracts based on the risk of default, in which the cost is
proportionate to the risk) from Italian issuers with a level of
risk corresponding to that of the insured investments.
- Senior, junior, and mezzanine. These are the various "tranche"
levels in which ABS are divided. The Treasury, through the
public guarantee of securitization of non-performing loans,
guarantees only the senior tranches, the least risky. The minor
risk is guaranteed by the fact that the first tranche levels
absorb the losses.
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