Estimates state that the Italian banking system is holding around €360 billion of non-performing loans and if banks were required to write down these loans to current market values the Italian banking system could be required to raise up to €40 billion of new capital. The issue is that the most vulnerable banks are not able to raise new capital and the Italian Government is not able to provide financial assistance to bail out a bank under new EU rules until private sector creditors, accounting for 8% of the bank’s liabilities, have been forced to convert to equity. The junior debt which is first in line to be bailed in is largely held by retail investors. The risk is that a large bail in of retail bonds could trigger a depositors run on the Italian banks. There may well be more market volatility ahead. Read the full article for Hamish Douglass' view on Europe.