Brexit has crashed the Italian banking system. Italian banks crashed -22% on Friday, and then fell another -9% on Monday. The -31% plunge has pushed Italian banks down to the lowest level since the Eurozone crisis.
Italy is the first casualty of the Brexit shock waves reverberating around the world.
Italian banks were already on the cusp of failure, with a 300-billion-euro ($341 billion) load of non-performing loans.
Italy is preparing a €40 billion rescue of its financial system in the wake of the collapse. EU law prohibits the use of public funds to prop up banks, if losses on shareholders, bondholders and uninsured depositors aren't imposed beforehand.
The collapse of the Italian banking sector is a reminder that banks with an enormous amount of non-performing loans on their balance sheets are at risk when an exogenous event like Brexit hits.
Italy's banks were already so weak that the yield spread between the 2- and 10-year bonds falling from 2.783 on May 10, 2016, to 2.3963 (-13.89%) on June 28, 2016, was all it took to collapse the banking system.
Can US Banks Withstand the Brexit Shock Waves?
One of the most shocking facts about Brexit was the massive panic selling in US banks. The average decline for the country’s six biggest banks was -7.59%. Apparently, banks were not seen as a safe place to put money.
Banks depend on interest income more than ever now that tougher government regulation has stripped trading desks' ability to generate revenues and profits.
While US banks are far stronger than Italy's banks, notice the similarity with yield spreads in the US. The yield spread between the 2- and 10-year bonds fell from 1.9240 on May 2, 2016, to 1.6763 (-12.87%) on June 28, 2016.
I'm not suggesting that US banks are close to collapse, but I do question how much of a narrowing of the yield spread they can withstand in the wake of Brexit.