The Italian central bank has hired The Boston Consulting Group to develop and establish a ‘bad bank’ asset management company, that will be used to deal with the pile of non-performing loans on the bank balance sheets left over from the financial crisis. The consulting deal is worth nearly €400,000.
Like the banks of many western countries, Italian banks have suffered the hangover of a period of liberal lending criteria, with many continuing to hold “bad debts” whose continued risk factors are a burden on the banks’ wider lending portfolio. To rid themselves of these bad debts, many banks globally – usually with the help of state aid – set up ‘bad banks’ in which the bad debt can be dumped.
The size of the bad loans held by Italian Banks tripled to €274 billion since the start of the financial crisis, and accounts for an estimated 16% of all loans, according to estimates from The Boston Consulting Group (BCG). The biggest defaulters are in construction, with 20% of all loan non-performing, followed by retail, with 17%.
To segregate healthy from bad loans, the Italian central bank recently decided to develop and establish an asset management company whose function it will be to liquidate bad debts. The central bank (Banca D’Italia) is working with the Treasury and the Prime Minister's office to identify the best way to reduce the weight of so-called "suffering" caused by the continued debt load. The process is being facilitated by The Boston Consulting Group – according to Italian media the consultants will receive €379,500 before tax in fees. BCG was awarded the contract without it going to tender, with the central bank citing that it had to move quickly in the light of the urgency of the matter.
State intervention in creating a bad bank with government backing, as in the case of Italy, is not being openly backed by the European Commission. The EU has been hesitant in supporting the plan, a stance based partly on the back of risks to Italy’s wider public finances.
Consulting in banking
Policy makers in the banking industry regularly turn to management consultants to support strategic processes and/or complex transformations. In June the British Bankers Association for example commissioned Oliver Wyman to conduct an in-depth study on the competitiveness of the UK banking sector, while in Italy UniCredit earlier this year selected Accenture to help it improve its operational efficiency through the implementation of a new, technology enabled delivery model.