On 22 April 2015, the Italian Ministry for the Economy and Finance (the “MEF”) and the Association of Banking Foundations and Saving Banks (Associazione di Fondazioni e Casse di Risparmio SpA) signed an important protocol (the “Protocol”) setting out self-regulating principles applicable to Italian banking foundations (the “Banking Foundations”) on several issues, including asset management policies and corporate governance. Almost all the existing Banking Foundations adhered to the Protocol (85 out of the total 86 existing Banking Foundations).

The Protocol represents an important self-regulatory instrument, which is likely to ignite a critical change in the shareholding of many Italian banks in the next few years, thus providing opportunities for domestic and international strategic and financial investors.

Banking Foundations: What They Are and Where They Come From

Banking Foundations are private, non-profit entities with unique features that set them apart from ordinary non-profit foundations. Banking Foundations were created in the context of the privatization and consolidation process of the Italian banking sector in the early 1990s.

Pursuant to a complex legislative reform enacted in 1990[1], the non-profit activities of public banks were concentrated in newly established Banking Foundations, and the banking activities were segregated into joint stock corporations with a for-profit purpose—the “new” savings banks. However, Banking Foundations held majority stakes in the newly-formed saving banks and, therefore, could exert a strong influence on their management. Banking Foundations operated under the direct supervision of the MEF and were required to maintain strong links with the same territory where the respective new savings banks operated.

Further regulations were enacted that forbad Banking Foundations from owning majority stakes of saving banks[2] with the goal of reducing Banking Foundations’ influence on the banking system and facilitating banking mergers, also by means of specific tax benefits. Although those tax benefits were declared illegal state aids by the European Court of Justice in the so-called UniCredit case of 2004 and thus overturned, the Italian banking sector experienced a wave of bank mergers between the end of the 1990s and the beginning of the 2000s. As a consequence of this merger season, Banking Foundations ended up owning relevant participations in the then top five Italian banks (namely, Banca Intesa, UniCredito Italiano, Capitalia, Istituto Bancario San Paolo di Torino and Monte dei Paschi di Siena). Banking Foundations’ influence on the Italian banking system was further reinforced by the mergers among some of those top five banks (namely, Banca Intesa merging with Istituto bancario San Paolo di Torino and forming Intesa San Paolo, and Unicredito Italiano merging with Capitalia to form UniCredit).

The legislator, the MEF, and the banking regulator regarded Banking Foundations as important players in the banking business, as they ensured a strong degree of stability in the overall banking system. However, the financial crisis has proved a game-changer in this regard, especially due to the difficulties encountered by Banking Foundations vis-à-vis the fall of the market price of banks’ shares, the general tightening of the banks’ dividend policies, and, in some instances, the call for significant capital increases by their participated banks (most notably in the Monte dei Paschi di Siena case). As a result, the MEF promoted the negotiation and adoption of the Protocol in order to ensure the Banking Foundations’ sustainability and their non-profit purpose and to promote a further separation of Banking Foundations from the banking sector.

The Protocol: Cap on Banking Foundations’ “Exposure” Towards Any Single Entity or Group of Entities

The Banking Foundations will implement the principles set out in the Protocol by amending their bylaws. These principles encompass a wide spectrum of issues, including policies for a prudent asset management, a cap on total indebtedness (i.e., 10% of total assets), a ban on the use of derivative instruments (other than those entered into for hedging purposes or without any risk of losses), and corporate governance principles (e.g., required turn-over of management bodies).

Foremost, the Protocol sets a limit on each Banking Foundations’ “exposure” towards any single entity or group of entities. In particular, each Banking Foundation may not invest, directly or indirectly, more than one-third of its total assets on any single entity or group of entities. Any Banking Foundation with investments exceeding the one-third limit as of 22 April 2015 is required to dispose of the excess within the next few years (i.e., three years in the event of listed financial instruments, or five years in the event of non-listed financial instruments).

As a direct consequence of this principle, we can expect changes in the shareholding of several Italian banks. In fact, as of today, 42 Banking Foundations have more than one-third of their assets invested in one bank or banking group (of which 16 are in listed banks and 26 are in non-listed banks).

The measures in the Protocol, together with the recently enacted reform of mutual banks (see our Client Alert The Future of Italian Mutual Bank of 25 March 2015) and the various reforms of Europe’s banking regulations (see our Client Alerts SSM and the Quiet Revolution: Italy to Reform Banking and Finance Legislation Under EU Provisions of 17 November 2014 and The Single Supervisory Mechanism: A Further Step Towards the Banking Union of 28 October 2014), are the key legal drivers of the expected consolidation of the Italian banking sector, which is set to provide opportunities for domestic banks in acquisitive mode, international strategic investors looking at opportunities to gain or extend a presence in Italy, and financial investors looking for special situations.