Commercialized versus politicized banks

The first distinction we make is between commercialized and politicized banks. The former are treated as private enterprises without public functions. Operating banks should be free to solicit finance from financial markets if they wish (Hardie and Howarth Reference Hardie and Howarth2013), at the potential cost of vulnerability to investor flight during crises. Failing banks are to be resolved (transferring accounts to another bank while imposing investor losses) or sold to investors of any nationality. In contrast, local and national governments expect politicized banks to fulfil public policy goals. This includes alternative banks that were established and designed to offer financial services to underbanked local communities and governments (Butzbach Reference Butzbach2016; Calomiris and Haber Reference Calomiris and Haber2015; Cassell Reference Cassell2021; Deeg and Donnelly Reference Deeg and Donnelly2016). Such banks are permitted to have institutional protections on bank ownership in the public interest (Goyer and Valdivielso Reference Goyer and Valdivielso del Real2014). We make a new distinction between what Iain Hardie and David Howarth (Reference Hardie and Howarth2013) call international marketization and domestic marketization. International marketization generates incentives during a crisis to resolve the bank and keep ownership open, so that the bank remains commercialized (Howarth and Quaglia Reference Howarth and Quaglia2016). Domestic marketization creates incentives to block resolution and protect local control, which keeps the banks politicized by threatening widespread voter losses during a bail-in.

State strength

We add to marketization versus politicization the variable of state strength: the propensity (willingness and capability) of national government and/or regulators to intervene in the economy (Hall Reference Hall2018) – in this case to supervise and resolve banks (Woll Reference Woll2014). Standing across from financial systems, the SRM relies heavily on state institutions to ensure resolution in compliance with the BRRD. Individual country weaknesses and strength in Italy and France are demonstrated in Lucia Quaglia and Ivo Maes's study (Reference Quaglia and Maes2004). These authors see the state's capacity as incorporating horizontal coordination across state institutions to ensure policy coherence (in this case, between the finance ministry, central bank and prime minister's office), and vertical infrastructural power to overcome resistance to policy implementation (directed at both banks and local government where required). To these institutional factors we also consider financial resources available.

We posit further that the power of national governments is strengthened or weakened by which EU institutions a national government chooses to work with. Rather than argue that EU institutions uniformly strengthen national commitment to EU rules (Moravcsik Reference Moravcsik2018), we posit that the ESM reinforces state strength to implement EU economic policy (Jones Reference Jones2021), including Banking Union policy, while the Commission and SRB are more accommodating of national requests for leniency in applying EU law (Donnelly Reference Donnelly2018).

Key to this outcome is the ESM's mission to ensure restructuring of state and/or bank finances as a condition of financial assistance. Also relevant is the ESM's intergovernmental, non-EU status (Gocaj and Meunier Reference Gocaj and Meunier2013), which shields it from political pressure to relax its conditionality. In contrast, the DG Competition's mission in resolution matters is to balance restrictions on state aid with implications of failure for the general economic interest.

Interactive effects

Where commercialization is strong and the state is weak, bank resolution is likely to follow a liberal model, allowing bank shareholders and creditors to lose their investments as the bank is sold or closed in accordance with the BRRD. Where both commercialization and the state are strong, we expect governments to pursue liberal economic nationalism: protecting and promoting national banks as much as possible within the limits of European rules and institutions (Clift and Woll Reference Clift and Woll2012), to avoid scaring off investors and undermining bank resolution.

The combination of a strong state and politicized banks is expected to support economic nationalism: mercantilist measures to keep ownership national, regardless of international commitments and rules (Helleiner and Pickel Reference Helleiner and Pickel2005). Banking nationalism was widespread throughout Europe into the mid-2000s, but is generally seen as a thing of the past. However, we expect a combination of a weak state and politicized banks to generate functional economic nationalism in which governments pursue leniency on BRRD implementation from friendlier EU institutions. Local governments especially expect banks to support social policy, economic development and public finance in return for patient capital and regulatory forbearance that stabilize banks during downturns (Cassell Reference Cassell2021; Deeg and Hardie Reference Deeg and Hardie2016; Epstein Reference Epstein2017). These politicized banks are unable to write off non-performing loans (NPLs) and raise new capital without state aid as the BRRD expects. Weak national government then lobbies EU institutions for exemptions for lack of perceived alternatives instead of enlisting ESM help. Table 1 encapsulates these ideal types and their conditions.

Table 1 State–Bank Relations and Bank Resolution Approaches

The two countries investigated below, Italy and Spain, had significantly different experiences of bank resolution between 2009 and 2021. Both countries experienced enduring economic stagnation, increasing rates of NPLs, difficulty securing fresh investment due to local political and/or family control of banks that stymied reforms, and an increasing inability of national government to finance restructuring by selling bonds of its own. But differences existed. Italian banks were marketized domestically, using their customers to refinance and then as hostages to resist bail-ins, which the Finance Ministry supported. Spanish banks were marketized internationally, and state institutions were built up to restructure and reopen Spanish banks to international finance. When local government limited these resolutions, the state leveraged financial support and contractual obligations from the ESM to finish the job it had started.

The remainder of this article assesses the degree of commercialization or politicization in banking, state actions to involuntarily restructure and recapitalize banks, the interactions between the national government and EU institutions, and the degree of fit with the typology above. The next section provides an overview of EU rules and institutions pertaining to bank resolution and state aid that Italy and Spain have to contend with. The following two sections analyse bank resolution institutions and practice in Spain and then Italy, respectively. The final section discusses the results.

State intervention

At the same time, strong state intervention by the Spanish Finance Ministry was driven by a sense of urgency to clean up the banking sector. In part, this was to assuage international investors' fears that the state would not be called upon to bail out insolvent cajas.Footnote ¹ This led the ministry to attempt consolidation of the problem-ridden assets of Spanish banks, including those of the cajas, as early as 2009. The Fond de Reestructuración Ordenada Bancaria (FROB) was established with a capital of 99 billion euros of public money as a bad bank to take on troubled assets and to funnel loans and cash injections into banks as needed. A German-style institutional protection scheme, in which banks would monitor each other and become responsible for the losses of failing banks (Deeg and Donnelly Reference Deeg and Donnelly2016), was introduced as the Banco Financiero y de Ahorros (BFA) in December 2010 (see below). The country's deposit insurance system (Fondo de Garantia de Depositos en Cajas de Ahorro) would serve as the final line of defence against insolvency spreading to other banks (in theory). The European Commission would oversee that state aid would not distort economic competition by advantaging particular institutions (European Commission 2010). This was designed to prevent bank failures from becoming systemic crises.

Cajas were pushed to merge together in the hope that healthier banks would compensate for the weaknesses of others over the next three years. Bankia was established as an amalgamation of several cajas that had been resolved and recapitalized and had non-performing assets removed into the FROB for long-term resolution.

By May 2010, the state aid and financial engineering initiatives had proven insufficient to deal with the financial challenges cajas had to deal with (economic stagnation increasing non-performing loans), and a series of mergers further consolidated the sector. Caja Castilla-La Mancha had failed to recover after state aid in 2009 and was taken over by Cajasur with the government guaranteeing against losses. The FROB then provided five-year loans to establish the BFA as a bad bank, which would acquire and gradually sell off NPLs and foreign investment for seven other cajas (Bankia, Bancaja, Caja de Canarias, Caja de Avila, Caja de Laeitana, Caja de Segovia and Caja de Rioja), with Bankia becoming the new ‘good bank’ for Spaniards. The BFA became a combination of holding company and institutional insurance system. Following this, Bankia attempted to raise capital on the stock market to increase its available funds. This was an important test of market confidence that the restructuring to date was sufficient to solve the sector's problems. Bankia raised 3.5 billion euros, which was significant but later turned out to be insufficient to keep the bank solvent (Johnson Reference Johnson2011).

The government also re-regulated cajas to restrict their behaviour and prevent future aggressive risk taking. In 2011, the Spanish government mandated that cajas return to their original role as local/regional providers of basic financial services, particularly savings and loans. Their own deposit insurance was forcibly merged with that of the large commercial banks, effectively subsidizing them through their commercial counterparts (Deeg Reference Deeg2012).

These interventions ameliorated the cajas' financial problems, but problems remained. Rumours of undisclosed financial shortcomings at various cajas continued until Bankia requested financial assistance from the national government in May 2012. The state's reaction resulted in the successful turnaround of the Spanish alternative banking sector.

Personnel changes and audits were the first changes made. Bankia president Rodrigo Rato stood down on 9 May 2012 and was replaced by Jose Ignacio Goirigolzarri from BBVA, who promptly announced a capital shortfall of 4.3 billion euros (rather than a small surplus, as previously reported), requested a bailout from the government, and submitted to stress tests by the Bank of Spain and consultancy firm Oliver Wyman. They found 21 billion euros in losses for 2012, and 59 billion for the Spanish banking system as a whole (Aguado and Pinedo Reference Aguado and Pinedo2020). Bankia was unable to repay its initial loan from the FROB. The FROB then converted its debt into shares, owning 45% of Bankia, closed down the BFA and added 19 billion euros of financial transfers to assert state control and ensure continued service. The rest of Bankia's board resigned. All cajas lost their investments, not just the original seven, but others that had invested in the BFA.

Calling on the ESM

In June 2012, government efforts had failed to end the vicious circle fully, and the government called on the ESM to strengthen its mandate and available resources to further reduce bank politicization. The Spanish government asked for 37 billion euros in loans from the European Financial Stability Facility, which would soon become the ESM, to help cover these costs, adding that the funds were needed solely to restructure and recapitalize the banking system. Negotiations for a Memorandum of Understanding were undertaken with the ECB, Commission and International Monetary Fund (IMF). The hope was that financial markets would not question the country's commitment to balancing its budget; above all that restructuring banks would stop the need for state aid to prop up the financial system. The Eurogroup met this request with an open mind, and the two sides negotiated terms that included a fuller audit and stress testing of the Spanish financial sector over the rest of 2012, so that the country's borrowing needs could be assessed, and conditions calibrated to meet the perceived shortcomings of Spanish banking practices.

This arrangement gave the Spanish state time and political room to make changes to the banking system that went further than had hitherto been possible. Spain gave the FROB fully fledged resolution authority powers in August. It could order any bank to transfer NPLs to a bad bank. In December, the state created Sociedad de Gestion de Activos procedentes de la Reestructuracion Bancaria (SAREB) as this bad bank, with a time horizon of 15 years to hold and gradually sell NPLs. At the same time, it would solicit investment primarily from remaining cajas, from Santander, Deutsche and Barclay's banks, as well as other investors abroad to buy the assets (de la Torre Viscasillas Reference De la Torre Viscasillas2013).

SAREB's creation allowed the Finance Ministry to collect 55% of the capital required to finance the NPLs on its books from private investors, with the other 45% coming from the Spanish treasury. Beyond this, SAREB was allowed to attract further investment by selling subordinated debt to leverage its capabilities, which were purchased primarily by foreign insurance companies. Finally, the ECB suggested that SAREB also act more like a bank to extend credit to potential buyers of NPLs, or to contract outside asset managers to do this on SAREB's behalf. The Spanish government chose the latter, with the result that international private equity firms TPG, Apollo, Blackstone and Cerberus invested in platforms to invest in NPLs from specific cajas (Chassany et al. Reference Chassany, Hammond and Johnson2013). With these facilities in place, SAREB was able to take on another 55 billion euros of NPLs from a variety of cajas by January 2013. Overall, banks were retained, and commercialization/marketization enhanced thanks to enhanced state power, both in authority and resources.

At the same time, the reforms envisaged that the cajas would become less politicized at the local level. They would lose their responsibilities for funding health, housing and social services that were part of their original mandates. In the Spanish government's eyes this meant ending the co-dependence of cajas and local councils, both as purveyors and shapers of social policy, and as mutual providers of financial capital and financial guarantees on a long-term basis. Henceforth, separate foundations would be established to undertake these functions. They received initial funding in the process of restructuring the banking system but were expected to solicit funding from the private sector as well.

Critical in understanding the Spanish state's goals, and its capacity in achieving them, is the experience of the preceding three years, and in its strategy of working with the ESM to force through the kinds of highly political changes that severed cajas from local politics and public policy (Tymkiw Reference Tymkiw2012). The previous three years had been dominated by the central government attempting to consolidate the caja system, and having partial but insufficient success. Ties to local government and to social policy provision were by this point considered a stumbling block to reducing loans (to local communities), and therefore NPLs over the long term (El País 2012). Caja sales of subordinated bonds to depositors threatened to further politicize and slow reforms.

Although controversial and perhaps undesirable in itself, depoliticization was hoped to stop the banks' increasing financial problems. This was not the entire strategy, however. It was hoped that external investment would support Spanish cajas once the restructuring was over, so that the Spanish VOFC would be even more internationally commercialized than before the reforms. Reduced political ties and responsibilities, and a bail-in of small subordinated debt holders, were an important part of this strategy to lure international investors back to banks seen as more commercial and less politicized (Johnson Reference Johnson2013). Introducing the legislation, the Spanish finance minister Luis de Guindos underlined that the reforms were unfortunate, but necessary demands of the ESM, the ECB and the European Commission (Johnson et al. Reference Johnson, Spiegel and Chaffin2012). External pressure was used to complete reforms that otherwise would have been much more limited, and more like the Italian reforms discussed below.

The outcome of these changes allowed further restructuring. In May 2013, subordinated debt holders were bailed in and new capital raised through preferential shares. Bankia was able to access capital markets once again, although the state through the FROB retained 60% of shares in 2019. The plan was that once Bankia's share price rose strongly enough to issue new shares and pay off its debt to the FROB, that it would do so. In 2021, a deal was struck to sell Bankia to Catalonia-based CaixaBank (Bankia Caixa 2021), which had a distinct commercial strategy (Buck Reference Buck2015).

Banco Popular

Banco Popular's resolution five years later demonstrates the consequences of the Spanish state's increased institutional capacity and its willingness to resolve banks within the BRRD's rules. Popular, based in Madrid, was one of Spain's larger alternative banks that had survived earlier restructurings and mergers by absorbing smaller competitors, securing foreign investment (Varde Partners, Citibank, Bx+ and Dexia), selling off various assets and divisions to raise capital and using the proceeds to deal with the financial problems of the cajas it took over. By June 2017, when the ECB declared it failing or likely to fail (FOLTF), it represented nearly 14% of all deposits in Spanish banks and was therefore nationally significant.

The FROB and the Bank of Spain interacted primarily with Santander as a potential takeover candidate and, with an agreement in hand, presented a proposed takeover to the SRB as a fait accompli. The Board promptly recommended resolution along the terms of the proposal, which the Commission approved within hours, making final administrative approval a one-day procedure. The terms and the speed of the approval demonstrate how the SRM was envisaged to work, in a relatively simple resolution from the perspective of the resolution authorities. (International Association of Deposit Insurers 2014: 13–15). In short, the SRM worked well because the Spanish resolution mechanism worked well, and because there were good preconditions for making it work for the Spanish authorities.

Under the BRRD, banks and national resolution authorities should have established and agreed resolution plans before a real insolvency arises. When insolvency is on the horizon but not imminent, these plans can be supplemented with a search for specific solutions. For example, is there a takeover candidate, for what parts and on what terms? This happened in the Popular case in Spain. Subordinate bond holders were wiped out in accordance with the bail-in provisions of the BRRD and shareholders lost their investments as well. Santander paid 1 euro to take over the bank. Moreover, because Santander was willing and able to purchase Popular outright and then deal with the separation and sale of assets itself, it saved the FROB, as the Spanish resolution authority, the task of managing this itself (MercoPress 2017). These were not insignificant business dealings. Popular had subsidiaries in Portugal, Latin America and the United States that were sold off to local competitors, as well as a significant real estate portfolio. Santander sold just over half to the Blackstone real estate group for 5 billion euros. This both raised capital and reduced (potential) NPL exposures. The Spanish state prepared this resolution over the course of six months or more, allowing it to construct terms of its own choosing and have them approved.

The interim conclusion on Spain is that we witness an overall pattern of liberal economic nationalism that works well within the institutional and legal constraints of the BRRD. The state was early and vigorous in its establishment of mechanisms to restructure bank finances, push mergers, mandate cross-subsidization, and eventually, to cut cajas off from their local political obligations and connections. The latter did not emerge until after the agreement with the ESM to strengthen the Spanish state's surgery on the banking sector, however. This suggests that it worked well because the state had leveraged terms with the ESM to enhance the interventionist power of the state, both in mandate and resources. Had this not happened, Spain might have ended up stuck with local, politicized limits to its capacities to reform. Furthermore, when problems resurfaced with Popular years afterwards, the institutional capacity and will to impose bail-ins facilitated the bank's transfer to Santander, meaning the state needed no additional financial resources. Overall, Spain's successful resolution outcomes are not just a question of being hit earlier and harder by a financial crisis, and of acting earlier than Italy, but are also related to a combination of state strength, magnified by binding agreements with and resources from the ESM, designed to accept and impose terms of resolution as set out in the BRRD.

State initiatives

There were four issues working against a Spanish-style restructuring. The first two were discussed above: bank resistance and reliance on domestic marketization. The third was weaker state intervention, both horizontally and vertically. While the Bank of Italy recognized problems in Italian banks and demanded that banks raise capital, the Finance Ministry denied the existence of structural problems that required more than temporary liquidity support. This is reflected in the lack of a bad bank that could separate NPLs from bank balance sheets with state aid assistance, and a resolution authority benefiting from an initial public investment from the government, when it was still possible. The window for using state financial resources had closed by 2014, once the extraordinary allowances of the DG Competition for state support of banks following 2008 had expired, and the Banking Union had decided to restrict state aid in favour of private investor bail-ins as the first and heaviest contribution to bank resolution under the BRRD (Howarth and Quaglia Reference Howarth and Quaglia2014). Importantly, the absence of a bad bank made it possible for MPS (and other Italian banks) to resist the sale of NPLs at any significant haircut.

This lack of intervention meant that in 2015 and 2016, when it became clear that reducing NPLs was unavoidable, the government found itself cajoling private banks into creating private funds (Atlas 1 and 2) that would effectively act as bad banks, but without state support, since this was no longer possible. The Atlas fund ran from April 2016, funded with 5.5 billion euros by five banks (the big three banks plus Popolare de Milano and UBI), to help with recapitalizations of other banks if they could not raise the money on the markets (Schoenmaker and Véron Reference Schoenmaker and Véron2016). These special-purpose vehicles were underfunded considering the magnitude of problems faced, leading to concerns that it could not be used for systemic problems (see particularly the cases of smaller regional banks below), and fraught with suspicion by the participating banks that money would either be siphoned off quickly into subsidizing bail-outs of specific banks, or subsidizing a particular bank's takeover of a failing institution.

Fourth, the Italian legal system's handling of insolvencies, bankruptcies and haircuts posed obstacles for outside investors seeking to secure rights to discounted assets, and led to concerns between banks about collectively funding special-purpose vehicles. Silvia Aloisi and Paola Arosio (Reference Aloisi and Arosi2016) underline that Italian insolvency law meant that court proceedings could take eight years on average to sort out claims over discounted assets rather than the four years typical across the EU, making investment less attractive and financial support from other banks riskier. These legal features led to concern by outside analysts that NPLs would neither be sold nor reduced in value, that financial problems would persist, and that healthy banks would bleed for sick ones in the Atlas funds. Some speculated in particular that the money would be used to subsidize UniCredit's underwriting of 1 billion euros in capital raising for Vicenza. At the same time, the understanding from Intesa was that the assets would be sold at close to book value, and not at a heavy discount to (foreign) private equity firms. The government pressured banks to invest to avoid a systemic run on Italian banking (Aloisi and Arosi Reference Aloisi and Arosi2016). The study below will look first at small regional banks, and then at MPS, which remains unresolved.

Regional banks

A pattern of distressed regional alternative banks replicates the pattern of politicized banks having difficulty shedding losses, raising capital and returning to health. Initial problems had less to do with commercialization than with poor economic circumstances leading to high NPL levels. In three regional banks resolved between 2013 and 2015, the primary deviation from their traditional, regional focus was expansion into nearby markets rather than financial engineering or wholesale finance. But local identity and political ties led those banks to double down on local sources of political and financial support and pose barriers to resolution. In each case, the Bank of Italy demanded recapitalization, which led the banks to turn to local businesses and depositors instead of outside investors. Carige failed to raise sufficient capital after 2009 and entered administration by 2013, with parts sold off to Ferrera and Banca Popolare dell'Emilia Romagna (in 2017). Other resolutions failed due to local political and bank resistance. Banca Etruria e del Lazio refused a central bank demand to write off NPLs, selling subordinate bonds to its own customers and raising additional capital from local businesses instead in 2013. It further refused a takeover from rival regional Banca Vicenza in 2014 on grounds of regional identity and in 2015 was charged with negligence and failure to act on supervisory orders (Bank of Italy n.d.). Banca delle Marche also turned to its own depositors and local businesses but entered administration in 2013 and was resolved in 2017 (Pometto Reference Pometto2018).

Monte dei Paschi di Siena

MPS is a large bank but shares features of local political connections and support with regional banks. It similarly promotes Italian government resistance to BRRD implementation, regardless of the Bank of Italy's efforts to get the bank restructured and recapitalized. Italian state demands that Italian banks increase capital began as early as 2009, with the Bank of Italy, the European Banking Authority and the IMF raising concerns about the level of capital required by MPS. In this case, we see an explicit involvement of the Finance Ministry to indirectly support the bank, given a lack of private investor enthusiasm. MPS issued Tremonti bonds (subordinated, hybrid, government-backed bonds that could be converted into shares) and Monti bonds to raise 4.1 billion euros in capital in 2009, but the Ministry of Finance bought almost all of them when investors failed to buy. MPS borrowed another 5 billion euros in new bonds in 2014, and then attempted to raise another 3 billion in 2015 to backfill repayments to the state. When investors failed to bite, MPS's stock price plummeted, making a future capital increase unlikely to succeed (Il Fatto Quotidiano 2015).

When the ECB used its supervisory power to demand that MPS shed NPLs from 2014 onwards, MPS would not sell at a large enough discount to entice investors. The ECB demanded in April 2016 that 7 billion euros worth of loans be liquidated. When MPS offered NPLs at a rate of 30% in an attempt to raise 5 billion euros in July, investors failed to buy, and the bank turned to its own depositors as investors, selling them subordinated bonds instead. By December, this had failed to raise more than half of the sum MPS sought. The bank requested assistance from Atlas but failed to get it from other banks.

On 23 December 2016, MPS, together with the Bank of Italy and the Italian Finance Ministry, requested an exceptional precautionary recapitalization. The Commission and ECB agreed, declaring MPS solvent and eligible on 26 December. On 4 July 2017 the Commission approved 8.1 billion euros in assistance, including 5 billion in state-owned shares. Loans booked at over 26 billion euros were sold for 5.5 billion (representing a larger discount than previously offered), and investors who had transferred deposits into subordinated bonds were bailed in. However, the Commission approved state compensation of 1.5 billion euros to them by the Italian state after heavy lobbying by the Italian government, effectively nullifying the application and intent of bail-ins in accordance with the BRRD (Nicoletti Reference Nicoletti2017). The Commission's permission cited consumer protection, given MPS's mis-selling of subordinated bonds to unsuspecting customers (European Commission 2017b).

While MPS remained a nominally private bank, significant state ownership and bond guarantees remained a reality, and the bank was obligated to pay back the state (or be taken over by another bank that would) by the end of 2021. By then, however, the bank could not pay, and the state retained its stake. Overall, NPL reduction was achieved through this exceptional initiative to a degree that had not happened previously, and without the conditionality of the ESM. Instead, the conditionality of the ECB and European Commission served this function (Moschella and Quaglia Reference Moschella and Quaglia2019).

MPS restructuring and resolution demands attracted strong political resistance at that national level as well as the local. Guido Bastianini, former head of Carige, was appointed CEO in 2020 at the behest of the Five Star Movement party (Fonte Reference Fonte2022). He opposed privatization and restructuring in line with EU institutional and legal requirements, and resisted demands from other voices in government that he resign to pave the way to repay state aid.

By the end of 2021, under the terms of the agreement with the European Commission, the Italian state was obligated to sell off its stake in MPS to another bank. This would fulfil the terms of viewing the state as a temporary provider of patient capital, which would be permissible, rather than outright state aid, which would not. Either way, MPS would have to repay the money invested in it by the end of the year. However, it was not possible to find a domestic buyer.

All this while, UniCredit was approached as the candidate to take over MPS. Its hesitancy was high, underlined by the CEO's condition that a takeover pass five tests. These included that a merger could not increase UniCredit's NPL load, and not worsen its capital position (Walker and Ghiglione Reference Walker and Ghiglione2021). By its own calculations, UniCredit demanded 7 billion euros in payment to offset these risks, while the government would not pay more than 2.5 billion (Morris Reference Morris2021). Reports started to circulate as a result of this impasse that the Draghi government would request an extension of the five-year period during which the state could act as patient investor (Ghiglione Reference Ghiglione2021) to the European Commission.

However, in February 2022, the Draghi government flexed its muscles to achieve a critical change that could allow a more liberal economic nationalist outcome in accordance with EU law. MPS needed another 2.5 billion recapitalization; the Draghi government was negotiating state aid with the Commission, but also insisted Bastianini step down for refusing to restructure (Sciorilli Borrelli Reference Sciorilli Borrelli2022). Bastianini was replaced by Luigi Lavaglio in February 2022, a specialist in restructuring from UniCredit (Za and Fonte Reference Za and Fonte2022). The appointment of Lavaglio from UniCredit opened the door for a restructuring that would satisfy a future takeover by UniCredit. While the pre-2022 behaviour fits the expectation of functional economic nationalism, Lavaglio's appointment suggests that state strength to force changes within Italian banks was stronger under the Draghi administration than its predecessors.