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Individual  essay:  Otto  Kannisto  


Conflicts  of  interests:  Italian  banking  sector  and  non-­‐performing  loans  
According  to  the  European  Central  Bank  (2016)  a  loan  is  said  to  be  non-­‐performing  when  “more  than  90  
days  pass  without  the  borrower  paying  the  agreed  installments  or  interest.”    Although  non-­‐performing  
loans  (NPLs)  are  normal  part  of  banking  business,  for  example  it  is  often  assumed  that  certain  
percentage  of  loans  will  default,  they  can  cause  problems.  From  the  viewpoint  of  the  lender,  such  as  a  
bank,  NPLs  decrease  profits  since  by  definition  it  can’t  recover  payments  from  NPLs.  If  decrease  in  
lender’s  profits  is  significant  it  will  reduce  its  capacity  to  issue  new  loans.  This  in  turn  can  hurt  the  
economy  on  whole  since  well  functioning  financial  markets  are  a  central  part  of  modern  society.  
In  Italy  rising  share  of  the  NPLs  brought  on  by  economic  downturn  has  caused  major  difficulties  
for  banks.  Based  on  data  by  the  World  Bank  (2016)  share  of  bank  NPLs  to  total  gross  loans  in  Italy  was  in  
2015  almost  eighteen  percent  whereas  in  2007  it  was  under  six  percent.  In  monetary  terms  total  
amount  of  bad  debts  in  2016  was  360  billion  euro  (The  Economist,  2016,  61).  This  worrying  development  
and  its  negative  effect  to  stock  prices  of  Italian  banks  have  forced  stakeholders  to  confront  the  problem.  
However,  because  of  the  magnitude  of  the  debt  problem  and  the  systemic  risks  it  poses  there  are  many  
parties  of  interest.  These  include:  Italian  banks,  their  customers  and  debtors,  Italian  government  and  
international  authorities  such  as  the  European  Commission  (EC).  With  so  many  stakeholders  there  is  
always  potential  for  conflicts  of  interests.    
Boatright  (2014,  46)  defines  a  conflict  of  interest  as  follows:  “A  conflict  of  interest  occurs  when  a  
personal  or  institutional  interest  interferes  with  the  ability  of  an  individual  or  institution  to  act  in  the  
interest  of  another  party,  when  the  individual  or  institution  has  an  ethical  or  legal  obligation  to  act  in  
that  other  party’s  interest.”  To  examine  possible  conflicts  in  case  of  Italian  NPL  problem  I  will  outline  
solutions  put  forward  by  stakeholders  and  discuss  the  different  obligations  that  these  stakeholders  
have.  I  will  start  with  bailout  plan  devised  by  Italian  banks  themselves.  
One  way  to  deal  with  NPLs  is  to  sell  them.  But  who  would  buy  them  and  at  which  price?  To  
answer  these  questions  Italian  banks  and  other  institutions  motivated  by  looming  financial  collapse  
agreed  to  set  up  a  fund  called  Atlante.  The  sole  purpose  of  Atlante  is  to  buy  bad  debts  from  banks  and  
thus  alleviate  their  financial  situation.  Among  participants  to  Atlante  is  state  controlled  Cassa  Depositi  e  
Prestiti  (CDP).  Independent  asset  management  company  Quaestio  Capital  Management  is  managing  
Atlante  and  no  single  shareholder  is  allowed  to  have  majority.  According  to  the  Economist  (2016)  
aforementioned  features  may  cause  problems:  for  example  which  banks  should  be  saved  and  is  CDP  
involvement  in  accordance  with  the  Eurozone  rules.    
   There  are  several  potential  conflicts  of  interests  in  Atlante.  Here  the  word  potential  refers  to  
Boatrights  (2014,  47)  definition  in  which  he  draws  a  distinction  between  actual  and  potential  conflict  of  
interest  main  difference  being  that  actual  conflict  of  interest  is  acted  upon  whereas  potential  conflict  of  

interest  is  likely  to  occur  but  may  not  translate  to  action.  Because  there  is  no  majority  ownership  
managers  of  the  Atlante  fund  face  impersonal  conflict  of  interest  that  is  sometimes  described  as      “two  
masters”  problem.  For  Atlante  manager  there  aren’t  necessary  personal  gains  to  be  achieved  by  
choosing  certain  NPLs  to  buy  over  others  but  for  their  clients  there  are.  Therefore  when  deciding  which  
NPLs  to  buy,  managers  have  to  choose  which  of  their  clients  are  most  important.  This  is  a  potential  
impersonal  conflict  of  interest.    
Altante  and  especially  CDP’s  involvement  in  it  is  also  problematic  for  European  regulators.  On  
the  one  hand  creation  of  Atlante  is  move  towards  stabilizing  the  Italian  economy.  This  is  beneficial  for  
the  European  Union  and  should  be  therefore  encouraged.  But  on  the  other  hand  it  can  be  argued  that  
state  intervention  via  CDP  gives  Italian  banks  an  unfair  advantage  against  their  European  counterparts.  
In  short  the  question  for  European  authorities  is  which  of  the  interests  is  more  important:  fairness  of  the  
system  or  the  stability  of  the  system?    
In  addition  to  Atlante  there  are  other  parties  interested  in  buying  NPLs.  One  of  these  is  KKR  and  
its  platform  called  Pillarstone.  The  Economist  (2016,  58)  states  that  Pillarstone  aims  to  combine  
corporate  restructuring  with  loan  management  for  banks.  Although  Pillarstone’s  approach  may  be  novel  
it  also  introduces  potential  for  conflicts  of  interests.  As  in  the  case  of  Atlante  management  this  conflict  is  
potential  and  impersonal  by  its  nature.  Pillarstone  may  have  to  choose  between  the  interests  of  
company  it  has  taken  over  and  bank  which  loans  it  manages  and  that  has  lend  money  to  the  company  
taken  over.  For  example  it  is  in  banks’  interest  to  receive  payments  as  soon  as  possible  whereas  for  the  
corporation  taken  over  by  Pillarstone  paying  back  loans  as  fast  as  possible  might  not  make  sense  if  there  
are  other  options  available.      
One  might  ask  why  bother  with  NPL  funds  and  management  companies?  Why  not  just  bail  out  
the  Italian  banks?  After  all  using  taxpayers’  money  to  save  struggling  bank  is  hardy  an  unusual  solution  
these  days.  According  to  the  Economist  (2016,  59)  one  reason  why  Italian  government  is  hesitant  to  bail  
out  troubled  banks  is  the  new  and  stricter  policy  of  the  European  Commission.  The  new  policy  aims  to  
cut  down  government  bailouts  by  introducing  mandatory  bail-­‐ins.  In  practice  this  means  that  if  a  bank  
receives  government  money  its  shareholders  and  creditors  are  forced  take  on  some  losses.  To  be  exact  
the  new  EU  Bank  Recovery  and  Resolution  Directive  or  BRRD  (European  Commission,  2014)  states:  “In  
circumstances  of  very  extraordinary  systemic  stress,  authorities  may  also  provide  public  support  instead  
of  imposing  losses  in  full  on  private  creditors.  The  measures  would  nonetheless  only  become  available  
after  the  bank's  shareholders  and  creditors  bear  losses  equivalent  to  8%  of  the  bank's  liabilities  and  
would  be  subject  to  the  applicable  rules  on  State  aid.“  The  directive’s  goal  is  to  reduce  moral  hazard  that  
arises  when  a  bank  becomes  “too  big  to  fail”.    But  even  if  BRRD  is  justified  it  has  caused  some  ethical  
dilemmas  because  in  Italy  many  of  these  creditors  are  regular  citizens  who  happen  to  be  bondholders  
and  can’t  afford  to  lose  the  value  of  their  investments.  
In  the  heart  of  the  problem  lies  the  question  of  asymmetric  information  and  its  ethical  
implications.  Were  the  regular  bond-­‐buying  citizens  aware  of  the  risks  and  if  not  who’s  fault  is  it?  To  
make  matters  even  more  convoluted  there  have  been  allegations  of  banks  purposely  misleading  their  
customers.  For  example  Italian  lawyer  Floro  Bisello  states  in  Bloomberg  interview  (2016):    “Many  of  my  

clients  are  factory  workers,  pensioners,  who  lost  all  the  savings  they  had.  Some  of  them  were  told  that  
investing  in  subordinated  bank  bonds  was  just  a  way  to  earn  higher  interest,  but  just  as  safe  as  investing  
in  Italian  government  bonds.”  Here  it  should  be  noted  that  Bisello’s  description  might  not  represent  the  
full  picture.  In  fact  Bloomberg  (2016)  analysis  shows  that  households  owning  bank  bonds  are  on  average  
twice  as  wealthy  as  national  average,  i.e.  not  poor  pensioners  or  factory  workers.  
To  further  our  investigation  to  Italian  bond  selling  I  will  introduce  aspects  of  ethical  theory.  In  
field  of  the  financial  activities  at  least  two  distinctive  ethical  systems  can  be  applied.  One  of  these  is  
utilitarianism:  a  philosophy  stating  that  moral  worthiness  of  action  is  determined  by  its  effect  on  total  
happiness  (Posner,  1979,  104).  To  a  utilitarian  action  is  ethical  if  it  produces  more  happiness  than  pain.  
This  is  also  the  idea  behind  vast  economic  theory  originating  from  a  concept  of  the  utility  function.  
Question  for  the  utilitarian  is  if  the  selling  of  bank  bonds  to  regular  citizens  produced  more  happiness  
than  pain.  This  is  an  impossible  question  since  neither  can  be  measured  and  we  can’t  know  how  many  
people  were  affected.  By  the  latter  I  am  referring  for  example  to  the  widely  reported  suicide  of  a  
bondholder  who  lost  his  saving.  In  his  case  simple  transaction  of  money  to  bonds  eventually  caused  
suffering  not  only  to  him  but  also  people  around  him.  Even  if  utilitarian  question  cannot  be  truly  
answered  one  would  venture  to  guess  it  to  be  unlikely  that  selling  of  the  bonds  produced  so  much  
happiness  that  it  outweighs  pain  which  follows  if  these  bonds,  previously  believed  to  be  safe  
investment,  lose  their  value.    
Besides  utilitarianism,  theory  of  discourse  ethics  can  be  applied.  To  fully  describe  discourse  
ethics  is  beyond  this  essay  but  some  generalizations  can  be  made.  Discourse  ethics  is  a  theory  that  
emphasizes  role  of  the  interpersonal  communication.  In  discourse  ethics  valid  norm  is  product  of  a  
thorough  argumentation  between  parties  involved  (Gilbert  &  Rasche,  2007,  190)  or  as  Habermas  (1999,  
42)  puts  it  "A  norm  is  valid  when  the  foreseeable  consequences  and  side-­‐effects  of  its  general  observance  
for  the  interests  and  value-­‐orientations  of  each  individual  could  be  jointly  accepted  by  all  concerned  
without  coercion."  There  is  naturally  much  more  to  the  discourse  ethics  but  for  our  case  this  is  already  
enough.  For  example,  act  of  selling  a  bond  is  not  a  norm  but  we  can  translate  it  to  a  norm  such  as  “a  
bank  should  be  able  to  sell  risky  bonds  to  all  customer.”  Inspection  of  this  ad  hoc  norm  reveals  couple  
interesting  points.  First:  buyers  of  the  bonds  were  not  coerced.  This  is  in  accordance  with  discourse  
ethics.  But  were  the  foreseeable  consequences  jointly  accepted?  Now  we  arrive  to  the  points  of  
asymmetric  information  and  claims  of  dishonesty  mentioned  earlier.  If  the  buyers  were  not  aware  of  the  
consequences  but  sellers  were  it  could  be  argued  that  actions  committed  by  sellers  were  unethical  and  
ethically  valid  conclusions  via  discourse  were  not  reached.  In  fact  according  to  Reuters  (2015)  there  has  
been  high-­‐level  political  discussion  about  banning  the  sales  of  bank  subordinated  debt  to  retail  
For  Italian  government  in  general  the  conflict  of  interest  is  potential  and  impersonal  but  for  the  
person  in  charge  meaning  Prime  Minister  Renzi  there  is  also  a  personal  component  in  the  problem.    In  
theory,  the  conflict  is  impersonal  for  the  Italian  government  because  they  are  operating  under  pressure  
from  two  opposing  side:  the  European  authorities  and  bondholding  Italian  citizens.  If  the  government  is  
eventually  forced  to  bail  out  banks  it  will  have  to  choose  whether  to  respect  BRRD  and  cause  harm  to  
Italian  bondholders  or  whether  to  not  respect  it  therefore  undermining  the  European  unity.  For  PM  

Renzi  siding  with  bondholders  would  be  beneficial  since  these  bondholders  and  people  around  them  are  
part  of  the  voting  population  from  which  Prime  Minister  derives  his  mandate.    
According  to  Financial  Times  (2017)  securisation  of  NPLs  has  continued  and  share  of  them  is  
likely  to  drop  in  in  2017.  However,  it  is  not  yet  clear  how  much  demand  there  will  be.  Italian  government  
is  trying  to  boost  NPL  market  by  providing  guarantees  for  some  of  these  securities.  From  the  perspective  
of  conflict  of  interest  presented  in  previous  paragraph  this  can  be  seen  as  a  rational  move.  By  backing  up  
the  market  oriented  solution  government  can  avoid  the  conflict  of  interests  that  arises  if  a  bailout  is  
To  summarize  there  are  many  conflicts  of  interest  interwoven  to  Italian  NPL  crisis.  Most  of  these  
are  potential  and  impersonal  as  is  often  the  case  in  world  of  finance.  Have  these  conflicts  influenced  
decision-­‐making?  Only  the  people  making  decision  know  for  sure.  For  the  outside  observer  it  seems  
probable:  managers  of  Atlante  and  other  NPL  funds  are  forced  to  choose  between  competing  interests  
of  their  customers.  The  same  applies  to  Italian  government  but  instead  of  customers  it  may  be  forced  to  
choose  between  interest  of  Italian  people  and  European  regulators.    
In  addition  to  conflicts  of  interest  there  are  some  morally  ambiguous  elements  in  the  Italian  
NPLs  case  that  make  it  even  harder  to  solve.  By  this  I  mean  that  to  use  the  relative  simple  solution  of  
bailout  Italian  government  would  most  likely  be  forced  to  punish  people  who  may  have  been  treated  
unethically  by  the  same  banks  Italian  government  aims  to  save.  












Boatright,  John  R.  (2014),  Ethics  in  Finance,  3rd  edition.  USA,  Wiley  Blackwell,  46–49.  
Bloomberg,  22.12.2016,  Bank  Bondholders  Italy  Aims  to  Protect  Are  Not  All  That  Poor,  
Bloomberg,  28.6.2016,  Households  on  the  Hook  for  Italy’s  Next  Bailout,  
European  Central  Bank  (2016)  What  are  non-­‐performing  loans  (NPLs)?­‐me/html/npl.en.html  



European  Commission  (2014)  EU  Bank  Recovery  and  Resolution  Directive  (BRRD):  Frequently  Asked  
 Questions  <­‐release_MEMO-­‐14-­‐297_en.htm>  
Gilbert,  Ulrich  &  Rasche  Andreas  (2007)  Discourse  Ethics  and  Social  Accountability:  The  Ethics  of  SA  8000  
 Business  Ethics  Quaterly,  vol.  17.  187–216.    
Habermas,  Jürgen  (1999)  The  inclusion  of  the  other:  Studies  in  political  theory.  Cambridge  MA:  
Blackwell  Publishing.    
Posner,  Richard  A.  (1979)  Utilitarianism,  economics,  and  legal  theory,  Journal  of  Legal  Studies,  vol.  104.  
Reuters,  18.12.2015,  Arrivederci  for  Italian  retail  sub  debt?  


The  Economist,  16.4.2016,  A  heavy  load,  61–62.  
The  Economist,  20.8.2016  ,  Bargain  Hunt,  57–58.  
The  Economist,  9.7.2016,  Crisis  and  opportunity,  59–60.  
The  Financial  Times,  30.1.2017,  Securitisations  of  Italian  NPLs  set  to  rise  in  2017  –  Moody’s  


The  World  Bank  (2016)  Bank  nonperforming  loans  to  total  gross  loans  (%)  


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