Use the Lexology Getting the Deal Through tool to compare the answers in this article with those from other jurisdictions.
What are the principal governmental and regulatory policies that govern the banking sector?
The main principles of the Italian system aim to ensure the sound and prudent management of supervised entities, the stability of the entire banking and financial system as well as its efficiency and competitiveness.
The general structure of banking policy in Italy has, over the past three decades, been based on the obligation to comply with the principles and rules arising from Italy’s membership of the European Union. As a consequence, the Italian banking system complies with the principle of the mutual recognition of banking authorisation granted in a EU member state.
The exercise of banking activities by authorised EU banks, both in relation to freedom of establishment and to freedom of service provision, must be preceded by a notice to the Bank of Italy from the competent supervisory authority in the bank’s home state.
The structure of the Italian banking system is based on the presence of different kinds of institutions, which are entitled to conduct their business in relation to the following activities:
- banks: legally entitled, in principle, to carry out most types of banking activity (collecting savings from the general public, granting of loans and other forms of financing, payment services, issuing of e-money and, pursuant to specific rules, the exercising of investment services). Italian banks may be incorporated as companies limited by shares or as cooperative banks in the alternative form of banca popolare or banca di credito cooperativo;
- financial intermediaries: used to be entitled to provide financing, equity investments, brokerage on currencies and payment services (as reserved activities); however, after the reform of 2010, they are now entitled only to grant financing, which is now the sole reserved activity;
- payment institutions: entitled to carry out only payment services or other ancillary activities; and
- e-money institutions: entitled to carry out business in the electronic money and payment services sectors.
Primary and secondary legislation
Summarise the primary statutes and regulations that govern the banking industry.
The main principles governing the banking industry are contained in two main legislative Acts: Legislative Decree No. 385/1993 (Italian Banking Act) (TUB) and Legislative Decree No. 58/1998 (Italian Financial Act) (TUF). In the past two decades, the connections between the banking and the finance industries have considerably increased; therefore, the most recent legislative acts affect both the banking and the finance sectors.
The TUB contains the principles regulating the carrying out of business by banks, other financial intermediaries, as well as by other entities operating in the banking sector. Moreover, the TUB is the principal legislative source for the framework of the powers and responsibilities of the regulatory authorities in Italy.
Both the TUB and TUF have been significantly amended in the past few years.
The other principal legislative Acts and regulations governing banking and financing activities in Italy are the following:
- Bank of Italy Circular No. 285/2013, which contains the new supervisory instructions for banks;
- Bank of Italy Circular No. 263/2006, which contains the precautionary guidelines for banks;
- Law No. 262/2005 on the protection of savings, which has profoundly affected the TUB; in particular, this law has reorganised: the powers of the Bank of Italy and its governor-general; the relationships, responsibilities and mutual cooperation of the two main public authorities respectively responsible for the supervision of the banking system (Bank of Italy) and of the securities market (Consob); and corporate governance for listed entities (including banks);
- Legislative Decree No. 206/2005 (Consumers’ Code), which contains provisions concerning the distance marketing of consumer financial services, including the distance marketing of banking products;
- Legislative Decree No. 11/2010, which implemented in Italy Directive 2007/64/EC (Payment Services Directive) (PSD). In particular, this decree introduced the rules for payment institutions in Italy. Therefore, at present, the rendering of payment services is reserved to banks, e-money institutions and payment institutions. The PSD has recently been repealed by Directive (EU) 2015/2366 (PSD 2). The deadline for implementation of PSD 2 by the member states was 13 January 2018 although it has already been implemented by Italy in December 2017 (see Update and trends);
- Legislative Decree No. 231/2007, which implemented Directive 2005/60/EC on the prevention of the use of the banking and financial system for the purposes of money laundering and terrorist financing;
- Legislative Decree No. 141/2010, which implemented Directive 2008/48/EC on credit agreements for consumers. In particular, this decree introduced a set of provisions in the TUB regulating, inter alia, pre-contractual transparency duties, verification of the creditworthiness of consumers and the rights of consumers in case of withdrawal. This decree has also had a considerable impact on financial intermediaries. Indeed, this decree has cancelled from the list of reserved activities (towards the general public) equity investment and currency exchange services; and
- Legislative Decree No. 180/2015, which implemented Directive 2014/59/EU (Bank Recovery and Resolution Directive) (BRRD) establishing a framework for the recovery and resolution of credit institutions and investment firms.
In Italy, an important regulatory role is provided by the Bank of Italy. In carrying out this role, the Bank of Italy has adopted several regulations setting the requirement for pre-contractual transparency, the organisation and effectiveness of the alternative dispute resolution system provided by the TUB, the authorisation and supervision procedures over all supervised entities, etc.
Which regulatory authorities are primarily responsible for overseeing banks?
The activity of overseeing banks is mainly carried out by the Bank of Italy, together with other public bodies.
The Ministry of Economy and Finance (MEF) is entitled to set out, in regulations enacted by it, the integrity requirements for shareholders and the experience requirements for persons responsible for administrative, management and supervisory functions in banks or financial intermediaries.
The MEF’s Inter-Ministerial Committee for the Credit and the Savings (CICR) also has certain powers, strictly coordinated with the Bank of Italy. It regulates some aspects of transparency in customer relationships and the collection of savings.
The Bank of Italy undertakes the main supervisory and regulatory duties, exercising them through a range of administrative, regulatory and control powers.
The Bank of Italy is also in charge of the supervision of:
- financial intermediaries that are entitled to provide financing;
- e-money institutions; and
- payment institutions.
Government deposit insurance
Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.
According to the TUB, deposits are not insured by the government, but through a protection scheme originally set up on a voluntary and private basis, even though performing a public function.
The deposit protection schemes currently in force are the Inter-Bank Fund for the Protection of Deposits, to which any Italian bank (and in some cases also Italian subsidiaries of banks operating outside the EU area) must adhere, and the Insurance Deposit Fund for Cooperative Savings, which operates for cooperative banks.
In case of insolvency of a banking institution holding deposits, a minimum compensation is provided, currently limited to €100,000. The Bank of Italy is entitled to modify this limit in order to adjust it to the variation to the rate of inflation.
Some depositors (territorial entities, senior managers and directors of the same bank, banks and other credit institutions, etc) and some types of deposits and credits (credits resulting from bonds, promissory notes, share capital and reserves, etc) are excluded from the guarantee.
The refund in favour of the depositors shall be paid within 20 days from the commencement of the forced liquidation procedure of the relevant bank. This term may be extended by the Bank of Italy by a further 10 days, but only in exceptional circumstances.
Furthermore, it is notable that the Italian government recently set up a public guarantee system in support of banks in crisis.
With reference to the increasing exposure of the above-mentioned Non-Performing Loans (NPLs), Law Decree No. 18/2016 introduced a government guarantee to facilitate NPL transactions; the Guarantee on Securitisation of Non-Performing Loans (GACS), which is provided by the MEF to requesting intermediaries.
In particular, the GACS aims at facilitating the dismantling of NPLs. The Italian government, according to the GACS, can guarantee only senior tranches of securitisations.
The European Commission agreed that the measures under the GACS do not contemplate state aid that would distort competition.
At the end of 2016, Banca Monte dei Paschi di Siena, being a significant Italian bank and, in accordance with the provisions set forth in the BRRD, asked the European Central Bank (ECB) for access the ‘precautionary recapitalisation’ measures. The precautionary recapitalisation consists of an injection of own funds into a solvent bank by a EU member state when this is necessary to remedy a serious disturbance in the economy of this member state and preserve financial stability.
At the beginning of July 2017, the European Commission approved the Italian public support in the form of precautionary recapitalisation of MPS, consisting of €5.4 billion in state aid.
On 28 July 2017, in accordance with Law Decree No. 237/2016, the MEF approved by means of Ministerial Decree, inter alia, an increase in the capital of MPS in order to provide the subscriptions of the shares by the same MEF.
Following the recapitalisation and the conversion of the subordinated bonds into shares, the MEF holds about 53 per cent of the share capital of MPS.
Transactions between affiliates
Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.
Pursuant to Law No. 262/2005, the Bank of Italy, according to CICR Resolution 277/2008, provides the limits and conditions under which a bank may assume risks towards ‘related parties’.
This concept includes both ‘related entities’ and ‘entities connected to related entities’. ‘Related entities’ are:
- persons who carry out directive and control duties within the bank or the leading bank of the group;
- major shareholders who, under the TUB, needed prior authorisation for the acquisition of their share capital (see question 21);
- entities that may appoint, by virtue of agreements or of the articles of association, one or more members of the directing and controlling bodies;
- companies over which the bank or the banking group may directly or indirectly exercise a dominant influence; and
- other entities identified by the Bank of Italy by the application of the International Accounting Standards (IAS).
‘Entities connected to related entities’ are:
- companies directly or indirectly controlled by a related entity;
- entities that control directly or indirectly a related entity; and
- other entities identified by the Bank of Italy by the application of the IAS.
Pursuant to the provisions of the Bank of Italy, the full amount of the risk assets of a bank or of a banking group towards related parties cannot exceed certain diversified thresholds (in any case, no more than 20 per cent) of its regulatory capital.
Furthermore, persons who carry out directive and controlling duties within the bank, as well as a company of the banking group, can enter into obligations with the bank only under the prior authorisation of the board of directors.
In December 2011, the Bank of Italy approved the rules implementing the CICR Resolution 277/2008. According to this implementation’s rules:
- in the approval of transactions with ‘related entities’ the role of the independent directors of the bank is particularly relevant since the bank shall constitute an executive committee (internal to the board of directors) exclusively composed of independent directors who are requested to communicate their prior opinion in respect of the relevant transaction by means of an express declaration in occasion of the vote in the board of directors called to resolve on the transaction; and
- the bank will set internal procedures aiming at regulating the transaction with related entities.
What are the principal regulatory challenges facing the banking industry?
As a consequence of the significant legislative and regulatory activity carried out in the past few years, the Italian banking industry has to take into account various legislative and regulatory requirements.
Based on the practical experience of entities operating in the banking system, the more frequent regulatory challenges, also in the light of the most recent business trends in Italy, relate to:
- the structural organisation that affects financial intermediaries (other than banks) already authorised to carry out payment services;
- the implementation of business plans featuring the integration between banks and payment institutions (eg, through the use of ATM networks owned by the banks for the offering to the public of money transfer services by payment institutions);
- the recent introduction of a new set of rules adopted by the Bank of Italy in respect of the transparency and fairness duties for the entities carrying out consumer credit;
- the need for the financial intermediaries to adapt their business, their corporate structure as well as the internal compliance function to the new legal framework that has now been implemented after the adoption of the secondary regulation of the Legislative Decree No. 141/2010 and the Decree of the Ministry of Economics and Finance No. 53/2015;
- the duty to comply with the principles set out in the recent CICR Resolution 644/2012 which, by implementing new article 117-bis TUB, adopted new rules for limits and criteria for fees applied by banks in financing contracts in case of overdraft and overrun by the client;
- the implementation of the BRRD, introducing a new and more incisive bank resolution framework; and
- the implementation of Directive (EU) 2015/2366 on payment services in PSD 2 and, more generally, the development of a new business model based on the integration between traditional banking business and the fintech area, which may start a process of ‘disintermediation’ in the relations between the banks and their customers.
More generally, the most relevant challenge as regards regulation will be the gradual and organic implementation into the internal legal framework of the reforms that have been conceived and approved at EU level. This process has already begun and is expected to continue in the coming years until the new regulatory architecture is fully implemented.
Are banks subject to consumer protection rules?
Banks (as well as other financial intermediaries and e-money institutions) are subject to several consumer protection rules particularly under the profile of transparency.
This title includes specific rules for the sectors of consumer credit and payment services.
A specific section of the TUB provides a general set of transparency and fairness rules applicable to all the customers of a bank.
The main protections offered to consumers are the following:
- a written form is required for any banking contract;
- the banks shall comply with several pre-contractual requirements such as that to inform the customer in writing, inter alia, of the interest rates applicable to any financing contract to be entered into and the effective global interest rates applied in Italy; prices that will be applied and other economic terms; and the customer’s right of withdrawal;
- within certain terms from the signing of the contract or from the unilateral amendment by the bank of the conditions contained in it, the consumer may withdraw from the contract; and
- in case of non-compliance by the bank, consumers have the right to complain, without bearing any cost, to the Banking and Financial Arbitrator (ABF), the Italian institute established for the resolution of controversies on banking and finance matters.
In particular, more detailed rules for consumer protection are contained in the Bank of Italy’s Resolution of 29 July 2009, which implemented the primary level provisions through a set of highly detailed provisions aimed at ensuring that bank customers are informed in a fair, transparent and complete manner but, in particular, this Resolution focuses on the duty of the banks and intermediaries to comply with specific obligations in respect of consumer protection. The Bank of Italy Resolution of 29 July 2009 requires banks to provide a set of pre-contractual documents containing the main terms and conditions of the contract.
Furthermore, banks and intermediaries are also obliged to comply with documentary standard forms relating to periodical communications; rules regulating unrequired marketing messages; disclosure duties in respect of the economic conditions of any kind of contract; implementation of internal procedures for receiving and managing the complaints of consumers, etc.
In addition to the above, further regulations are provided in a specific section of the Consumer Code (Legislative Decree No. 206/2005) where specific requirements are set forth in respect of distance marketing to consumers of bank and financial services.
The Bank of Italy is responsible for the enforcement of such consumer protection rules in the banking sector.
As mentioned above, complaints may also be filed with the ABF, even though the decisions of the latter have no direct binding effect on the banks.
In recent years, particular attention has been focused on the non-compliance of certain financial intermediaries and e-money institutions that did not provide accurate pre-contractual information on the cost and interest rate to be applied to the service of revolving credit cards, and the consumers were found to be unaware of the very high costs generated by the service.
In April 2016 the government approved Legislative Decree No. 72, which implemented Directive 2014/17/EU (Mortgage Credit Directive) establishing harmonised rules in the field of mortgage loans entered by a consumer.
The new legal framework aims to increase consumer protection by specific new provisions on:
transparency and fairness in the contractual behaviour of banks;
- advice to consumers;
- an objective estimate of the value of the real estate given by the borrower as warranty; and
- the assessment of the consumer’s creditworthiness.
The new legal framework also aims at preventing situations of over-indebtedness of the borrowers.
The Legislative Decree has given the CICR the task of adopting the implementing regulations with regard to several other aspects.
Moreover, as of 1 October 2016, the CICR Resolution of 3 August 2016 introduced important new developments for consumers with regard to the problem of compound interest.
The CICR Resolution contains the implementing measures of the second paragraph of article 120 of the TUB, as redefined by Law Decree No. 18/2016.
In particular, in relation to the protection of the consumers from the risk of unlawful application of compound interest, the new version of article 120 of the TUB assigned the CICR the task of identifying procedures and criteria for the calculation of the interest in transactions concerning the banking activity, providing that:
- in current account or payment account relationships the same frequency for the computation of interest, both creditor and debtor, in any case, for at least one year, must be ensured toward consumers, the interest is calculated on 31 December of each year and, in any case, upon termination of the contractual relationship; and
- debit interest accrued, including that related to loans under credit cards, cannot produce further interest except from a default interest, and it is calculated exclusively on the capital.
In January 2018, the public authority responsible for regulating the Italian financial markets (Consob) approved amendments to Regulation No. 11971 of 14 May 1999 aimed at adapting the secondary regulations to Regulation (EU) No. 1286/2014, relating to documents containing key information for Packaged Retail and Insurance-based Investment Products (PRIIPs), directly applicable to member states from 1 January 2018.
The Key Information Document (KID) is a document containing the key information that must be provided to customers who are retail investors purchasing PRIIPs, in order to facilitate understanding and comparability.
In particular, the new provisions of the amended Regulation establish mandatory reporting to Consob of the documents containing KID for PRIIPs, in accordance with the provisions set out in the TUF.
In what ways do you anticipate the legal and regulatory policy changing over the next few years?
Over the next few years various legislative and regulatory interventions are expected to be implemented in Italy.
In the coming years, in addition to the implementation of EU legislation, in particular Directive 2014/92/EU (on the comparability of fees related to payment accounts, payment account switching and access to payment accounts with basic features) (PAD), other regulatory measures in the banking sector are expected, with the aim to ensure greater transparency in the relationships between banks and customers and to strengthen the instruments for the protection of consumers.
In light of this, new legal provisions will be introduced with regard to matters that require the implementation of the EU framework, such as:
- the prohibition of additional expenses or charges for the ‘portability’ of payment accounts;
- the withdrawal right from door-to-door contracts; and
- the amendment of the alternative dispute resolution system with customers.
In particular, the general principles on correctness and transparency to be complied with by credit intermediaries in relations with customers will be further detailed.
With the introduction of the new European Standardised Information Sheet and the definition of a minimum seven-day period of reflection before entering into a credit agreement (new article 120-novies of the TUB, introduced by Legislative Decree No. 72/2016 on mortgage loan contracts concluded by a consumer), it has become increasingly evident that the attention of the legislator is oriented towards the improvement of pre-contractual information duties to protect the weaker party to the contract.
Extent of oversight
How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?
Banking supervision performed by the regulatory authorities, and in particular by the Bank of Italy, consists of three types:
- regulatory supervision: this covers the power to adopt provisions of a general nature;
- information supervision: this covers the acquisition, audit and assessment of periodical information provided by the entity supervised on a compulsory basis; and
- inspection supervision: this covers the Bank of Italy’s power to carry out on-site inspections.
The Bank of Italy’s supervision aims at ensuring the sound and prudent financial management of supervised entities as well as the stability, efficiency and competitiveness of the banking and financial system as a whole. This aim is pursued through the enforcement of the rules and provisions regulating the credit sector.
Within the exercise of regulatory supervision, the Bank of Italy adopts provisions having as their purpose:
- capital adequacy;
- risk containment;
- ownership restrictions;
- permissible shareholdings;
- administrative and accounting organisation of the banks and internal audits; and
- public disclosure that supervised entities must provide with respect to the above points.
As far as inspection supervision is concerned, this authority is not only exercised over banks and other Italian supervised entities, but also over the branches of banks established in Italy by foreign banks.
Banking supervision over a group of banks is defined as ‘consolidated supervision’ and implies a significant extension of the powers of the Bank of Italy also with respect to the following entities:
- companies in a banking group;
- banking and financial companies in which one of the companies of the group has an interest equal to at least 20 per cent of the capital;
- banking and financial companies that are not part of a banking group but are controlled by the natural or legal person that controls a bank or a group of banks;
- companies that control at least one bank; and
- non-banking companies and non-financial companies directly controlled by a single bank.
As well as the supervisory activity over banks and groups of banks, the Bank of Italy exercises its powers over other relevant entities such as financial intermediaries, e-money institutions and payment institutions.
As a general remark, each of the above-mentioned categories (banks, financial intermediaries, etc) is regulated by specific supervisory rules adopted by the Bank of Italy.
A group of banks means a group composed of:
- a leading Italian bank that controls other banking, financial (or instrumental to the banking activity) companies;
- a leading Italian financial company that controls other banking, financial (or instrumental to the banking activity) companies; or
- a leading Italian financial company, that has at least one bank within the company group.
How do the regulatory authorities enforce banking laws and regulations?
The supervision exercised by the Bank of Italy over the correct performance of banking activity by supervised entities is quite pervasive and includes the duty to provide periodical information, as well as the inspection power of the authority.
In cases of infringement of both laws and secondary level regulations by supervised entities, the Bank of Italy has a wide range of powers of intervention and sanction.
Supervision authorities and in particular the Bank of Italy, mainly enforce laws and regulations by the following means (in rising order of seriousness):
- written warnings;
- notice of infringement by the Bank of Italy (upon receiving the notice a full hearing of the parties starts in which the entities involved may file with the Bank of Italy a written defence and potentially block the adoption of a sanctioning resolution); and
- administrative pecuniary fines on persons and banks, companies or other bodies involved, should the written defence not be accepted.
If a serious irregularity is found in the management of the supervised entities or in case of a serious breach of the law or of regulatory or statutory provisions, the Bank of Italy may propose that the MEF withdraw the banking licence. If the MEF considers the reasoning of the Bank of Italy well founded, it may order, by means of ministerial decree, the withdrawal of the licence and the commencement of the administrative forced liquidation procedure against the supervised entity.
In addition, with regard to credit institutions at risk of insolvency, the Bank of Italy may issue a number of extraordinary provisions in case of violation of legislative, administrative or statutory provisions which regulate their activities.
These extraordinary provisions include:
- the prohibition against starting up new operations; and
- the order to close branch offices, which may affect individual branches of an Italian bank, including those located abroad, or one or more branches located in Italy of a non-EU member state bank.
With Regulation dated 3 May 2016, the Bank of Italy amended the provisions on sanctions and on the administrative procedure for imposing them, adopted by Regulation of 18 December 2012.
The procedure has thereby been adapted to the innovations on sanctions introduced by Directive 2013/36/EU (CRD IV) and to the new structure resulting from the establishment of the Single Supervisory Mechanism (SSM); this new system has granted the ECB a supervisory role to monitor the financial stability of banks based in the eurozone states, starting from 4 November 2014.
The new provisions have provided important clarifications with regard to the procedure, by setting thresholds, based on the companies’ turnover, for the establishment of the relevant sanctions and by setting forth the requirements for the temporary interdiction from exercising banking activity.
What are the most common enforcement issues and how have they been addressed by the regulators and the banks?
For the following data we refer to the last available annual report on supervision issued by the Bank of Italy, which relates to 2016, but also contains references to data collected in the first few months of 2017.
In 2016, the Bank of Italy played an active part in the SSM, where more than 7,400 corrective actions were undertaken, including periodic and targeted assessments, meetings with company representatives, requests of information or warnings, out of which 140 inspections were carried out, 45 of which at significant banks.
More than 520 administrative decisions regarding Italian banks were adopted.
To verify compliance with the rules on transparency, 153 inspections were carried out at the branches of banks and other intermediaries leading to notifications of compliance breaches and corrective measures against 94 intermediaries.
As a result, intermediaries returned about €35 million to customers for improper charging of fees.
In 2016, 45 sanction provisions were issued by the Bank of Italy (compared with 49 in 2015), against 363 natural persons and nine legal entities, the latter mainly sanctioned because of breaches of anti-money laundering provisions. The total value of applied sanctions was approximately €10 million (€9 million in 2015).
During the first two months of 2017, seven sanction provisions were issued against 47 natural persons and two legal entities, the latter mainly sanctioned because of breaches of anti-money laundering provisions, for a total amount of €930,000. Furthermore, the Bank of Italy has started some extraordinary administration procedures against banks and other non-banking entities. At the beginning of 2016, the Bank of Italy had 11 special administration procedures open relating to banks, asset management companies and other intermediaries, with only one procedure initiated in relation to a small bank.
Two of the procedures were closed with the intermediary’s return to ordinary administration, five with their liquidation and two with mergers into their respective parent companies. At the end of the first quarter of 2017, three special administration procedures are still ongoing, of which two are in relation to banks.
In what circumstances may banks be taken over by the government or regulatory authorities? How frequent is this in practice? How are the interests of the various stakeholders treated?
Further to the privatisation of the Italian banking sector, which took place in the 1990s, the system as a whole tended to prevent state-owned capital from flowing into the bank’s capital. Even during this period of crisis, public control (both in terms of governance and participation in the capital of the bank) is relatively limited.
In case of a crisis, if no other solution to restore the institution is viable, the Bank of Italy starts the procedure of resolution by identifying the specific measures to be taken (see question 15).
In any event, any loss suffered by the shareholders, partners or creditors will never be greater than the one suffered in the event of liquidation of the bank.
In the framework of the new Single Resolution Mechanism at European level (Regulation EU No. 806/2014), an intergovernmental agreement established the Single Resolution Fund (SRF) (active since 1 January 2016), which is funded with contributions from banks for total amount of €55 billion.
EU member states shall grant bridge financing to the SRF and, with regard to Italy, by decrees of the MEF, the supply of bridging finance up to €5,735 million will be disposed.
Moreover, the government, by means of recent Law Decree No. 237/2016 (see question 4), established a €20 billion fund, which will act as guarantor for future bonds issued by banks in crisis, in order to restore their medium- and long-term market-based funding capability.
Italian banks (or Italian holding companies of banking groups), which, based on the outcome of a stress test, need to strengthen their resilience by a capital increase are entitled to submit to the SSM a plan aimed at strengthening their capital.
Should the implementation of the plan fail, the bank can request the MEF to subscribe (or purchase) its shares. This request of capital intervention is submitted by the bank to the MEF, the Bank of Italy and to the SSM (as the case may be) and must indicate, inter alia, the amount of shares the bank expects to be subscribed by the MEF and the existing financial instruments already issued by the applicant bank to be converted into equity under the ‘burden sharing’ provisions.
With respect to relations between the intervention of public capitals into the stock capital of the banks, it must be underlined that no share of the banks can be subscribed or purchased by the MEF unless and until the ‘burden sharing’ mechanism is implemented. The burden sharing provisions contained in Law Decree No. 237/2016 provide for the conversion of different classes of instruments issued by the bank into ordinary bank shares or, alternatively, the cancellation of such instruments and the assignment to the respective holders of newly issued ordinary shares, with the purpose of limiting the use of public funds (the conversion is subject to, inter alia, the conversion of all other convertible financial instruments issued by the bank).
The conversion and the cancellation of financial instruments are made on the basis of the criterion of the ‘no creditor worse off’, according to which the relevant holder of the instruments cannot be treated worse than in a liquidation scenario.
What is the role of the bank’s management and directors in the case of a bank failure? Must banks have a resolution plan or similar document?
It is provided that, in case of crisis, banks can be subject to a specific extraordinary administration procedure (see question 16), which may be followed, in case of insolvency, by the special bankruptcy procedure provided for banks.
In respect of the bank’s management and directors, it should be pointed out that from the date that the decree starting insolvency proceedings is issued, the governing body, controlling body and any other bodies are relieved of their duties.
The relieved bodies are replaced with specific insolvency proceeding bodies. The Bank of Italy appoints one or more liquidator commissioners (extraordinary commissioners) who, while carrying out their functions, are supported by a monitoring committee, which also supervises the liquidators’ activity, provides opinions when required by the law and gives instructions on behalf of the Bank of Italy.
As a result of implementing the BRRD, it is provided that banks must have a resolution plan, approved by the Bank of Italy and regularly updated, specifying measures to be taken in the event of crisis (see question 15).
Furthermore, according to the recent implementation of the BRRD by means of Legislative Decree No. 180/2015 (see question 17), the management of a bank shall inform the Bank of Italy (or the ECB) in good time if the bank is affected by an event of failure, also if merely potential.
Are managers or directors personally liable in the case of a bank failure?
According to the general principle of the liability of directors (pursuant to the provisions set out in the Italian Civil Code) and under rules provided by the Italian Bankruptcy Law, managers and directors may be personally liable under both civil and criminal law in case of a bank failure.
From a civil point of view, liability action can be addressed to the directors for violations relating to their duty to preserve the integrity of corporate capital and, more generally, in case of breaches of the duties provided by the law and the by-laws, should those breaches cause damage to the bank or to the creditors of the same. The directors shall be also bound to compensate the damages caused as a consequence of the above-mentioned breaches.
If the bank is placed under extraordinary administration or under a resolution measure (see question 16) liability action against the former members of the disbanded governing bodies (including the managing director) may be proposed by the extraordinary commissioners, who will first be authorised to do so by the creditors’ monitoring committee and the Bank of Italy.
Describe any resolution planning or similar exercises that banks are required to conduct.
At the end of 2015, Italy implemented the BRRD by means of Legislative Decree No. 180/2015 (see question 1) and issued a second decree (Legislative Decree No. 181/2015) amending the TUB and TUF in order to transpose the BRRD provisions on recovery and resolution plans.
Pursuant to Legislative Decree No. 181/2015, banks are required to adopt and regularly update specific recovery plans that shall set out measures to be taken for the restoration of their financial position following a significant deterioration. Such plans must be detailed and they are to be grounded on realistic assumptions applicable in case of severe and critical scenarios.
In a recovery plan the bank shall, inter alia:
- map its legal and business structure;
- identify the core business sectors that have to be preserved in case of crisis; and
- outline the scenarios that the plan intends to address.
In addition to the recovery plans, the two above-mentioned Decrees set forth that the Bank of Italy shall prepare a resolution plan, following consultations in which they have to set out the resolution measures that the Bank of Italy may implement.
The purpose of a resolution plan is to determine an institution’s critical functions, to identify and address any impediments to its resolvability and to prepare for its possible resolution.
The Bank of Italy is also in charge of the next execution of the resolution plan and, within this scope, it may adopt the following resolution tools:
- Sale of business: this tool has the scope to carry out a transfer of shares or other instruments of ownership issued by a bank under resolution, as well as assets, rights or liabilities, to one or more private purchasers that is not a bridge institution. This transfer may be carried out even without the consent of shareholders.
- Bridge institution: this instrument is functionally similar to the sale of business tool. Rather than transferring the significant asset of the bank in resolution to one or more private purchasers, the assets are transferred to an entity specifically set up by the Bank of Italy in order to preserve the bank’s functions and business. The Bank of Italy is entitled to appoint the members of the management body of the new entity and to approve its articles of association. Being an entity wholly or partially owned by public authorities and controlled by the Bank of Italy, the main purpose and scope of the bridge institution is to ensure that the essential financial and banking services continue to be provided to the clients and that such essential activities will continue to be performed.
- Asset separation: the asset separation tool enables the Bank of Italy to transfer assets, rights or liabilities of the bank subject to resolution to a specific vehicle. This tool is used in conjunction with other tools to prevent an undue competitive advantage. Indeed, the vehicle manages the assets transferred with the scope to maximise the value through a possible sale or the winding-up and its capital shall be wholly or partially owned by one or more public authorities and controlled by the Bank of Italy.
- Bail-in: this tool implies that the stakeholders shall contribute to solve the bank crisis according to the level of risk of their financial instruments and investments. The bail-in, therefore, ensures that stakeholders and creditors of the failing institution may suffer losses and may be burdened with a portion of the costs arising from the failure of the institution with the aim of facing the insolvency, recapitalising the bank and restoring its viability. In order to protect holders of covered deposits, the bail-in tool does not apply to deposits protected under Directive 2014/49/EU (ie, covered deposits, secured liabilities and to other exceptional cases specified in Legislative Decree No. 180/2015).
Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?
The legal and regulatory capital adequacy requirements divide into two types:
- requirements to be fulfilled in order to obtain a licence for banking activities; and
- requirements to be fulfilled during the course of business (regulatory capital).
As for capital requirements for access to banking activities, banks must be incorporated with a minimum capital of €10 million for banks incorporated as companies limited by shares, and with a minimum capital of €5 million for banks incorporated as cooperative or mutual banks. This minimum capital must be fully paid in.
With respect to regulatory capital requirements during the course of business, Italian legislation complies with the standards and criteria set out in Basel II and Basel III. These requirements are based on the general criteria according to which banks must have a capital at least equal to the minimum capital required for access to the banking activity (ie, the incorporation capital).
Furthermore, banks must also align their regulatory capital and the availability of liquidity with the structure of their risk allocation.
Regulatory capital is structured on three different levels (tiers). Tier 1 (basic assets) and Tier 2 (additional assets) are calculated on the basis of the sum of positive and negative financial items. Italian regulation also allows banks to use Tier 3 assets, which are constituted by medium- to long-term subordinate loans, but only to cover certain kinds of market risk.
How are the capital adequacy guidelines enforced?
The enforcement of capital adequacy guidelines is based on the banks’ obligation to calculate their regulatory capital on a quarterly basis with respect to individual banks and on a six-monthly basis with respect to banking groups, while the consolidated data of the end of the financial period are calculated according to the criteria of reporting for the financial statements for the relevant accounting period.
The adequacy of the regulatory capital is also based on an ongoing enforcement based on the supervisory review process, which comprises two levels:
- internal capital adequacy assessment process (ICAAP), which relates to banks that internally assess their current and prospective capital adequacy; and
- supervisory review and evaluation process (SREP), carried out by the Bank of Italy, which examines the ICAAP and gives an overall assessment on the bank and its activity and may, if necessary, issue corrective measures.
By means of SREP, the Bank of Italy not only verifies a bank’s compliance with the capital adequacy requirements but makes an evaluation of the corporate governance system and of the functionality of its internal bodies as well of the effectiveness of its internal supervisory capacity.
Should the SREP reveal anomalies, the Bank of Italy orders the bank to adopt corrective measures.
What happens in the event that a bank becomes undercapitalised?
Should a bank become undercapitalised and, in general, when it finds itself in a situation of non-compliance with the regulatory provisions on capital adequacy, it may be subject to several potential interventions from the supervisory authorities (with different responsibilities between the Bank of Italy and the MEF), which may vary depending on the seriousness of the infringement ascertained.
First, the Bank of Italy may prohibit, by means of an extraordinary provision, the commencement of new operations. This is aimed at preventing capital inadequacy from spiralling out of control.
If an irregularity ascertained under the capital adequacy profile is particularly serious or when such inadequacy involves the risk of degenerating into a significant financial loss, the MEF, upon proposal of the Bank of Italy, may order the dissolution of the administrative and directive bodies of the bank and directly appoint an extraordinary commissioner (see question 13).
Finally, if the capital adequacy infringement is exceptionally serious, the MEF, upon proposal of the Bank of Italy, may even adopt an order for administrative forced liquidation.
What are the legal and regulatory processes in the event that a bank becomes insolvent?
A distinction must be made between situations of financial difficulty that are not yet serious enough to be likely to cause the irreversible insolvency of a bank, and cases of actual irreversible insolvency.
If the Bank of Italy deems, after a prudent assessment, that the financial crisis of a bank is particularly significant but not irreversible, the extraordinary administration procedure may be started.
As a result of the recent implementation of the BRRD, this procedure contemplates that Bank of Italy, and no longer the MEF, adopts a provision by means of which it orders the dissolution of the directive boards and the appointment of extraordinary commissioners.
By means of Legislative Decree No. 180/2015, a new regulatory procedure to manage a bank crisis was introduced. Indeed, if neither the extraordinary administration procedure nor other measures allow to overcome the bank failure, the Bank of Italy adopts a resolution programme, identifying the specific measures to be taken (see question 12).
Should a bank’s crisis degenerate into an actual irreversible situation of insolvency, pursuant to Italian law, the only possible remedy is the insolvency procedure.
With respect to a banking group, the extraordinary administration of the lead company is provided also when a company of the banking group is subjected to an insolvency procedure and that circumstance may significantly alter the financial and business balance of the group.
Recent and future changes
Have capital adequacy guidelines changed, or are they expected to change in the near future?
As mentioned in question 6, sustainable solutions decided at EU level in response to the eurozone’s ongoing financial crisis to avoid the bankruptcy of banks have been implemented and more are expected in the near future. In fact, further to the implementation of the recent EU regulations aimed, inter alia, at restraining financial pro-cyclicality, as of 1 January 2014, the banks will improve the quality of their capital up to the common equity Tier 1, equal to 7 per cent of the risk-weighted asset, 4.5 per cent of which should serve as a minimum requirement and 2.5 per cent as a capital conservation buffer. Banks that fail to fulfil the capital buffer requirement will not be able to allocate dividends, variable remunerations and other elements used in the calculation of the required capital and must implement the measures necessary to re-guarantee the amount of regulatory capital.
Ownership restrictions and implications
Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes ‘control’ for this purpose?
As a general rule, there are no longer any particular limitations regarding the types of entities and individuals that may acquire a controlling interest in a bank.
Nevertheless, prior authorisation by the Bank of Italy is required in the following cases:
- acquisition of at least 10 per cent of the capital or of the voting rights (even by means of several subsequent acquisitions);
- acquisition of shares that causes one to exceed the thresholds of 20, 30 and 50 per cent of the capital or of the voting rights; and
- acquisition of control of a company that already holds a controlling interest or exerts a dominant influence on a bank and, in any case, when it provides at least 10 per cent of the voting rights;
- the interest exceeds 10 per cent of the consolidated own funds of the acquiring entity; and
- the interest implies the acquisition of most of the corporate capital (control) or of a dominant influence on a bank located in a country outside the European Union, which is not Canada, Japan, Switzerland or the United States.
If the acquisitions of an ownership in the capital of a bank is carried out for a value exceeding the threshold of 1 per cent of the bank’s own funds, the acquisition shall be reported to the Bank of Italy within 30 days from the execution of the relevant transaction.
Other specific quantitative restrictions are in force with respect to mutual and cooperative banks. According to these, in such banks the maximum stake, which can be owned by a single entity is such that the existence of a controlling shareholder is not permitted.
Are there any restrictions on foreign ownership of banks?
In Italy, there is no specific restriction on foreign ownership of banks.
However, if the acquisition for which the Bank of Italy’s prior authorisation is required (see question 21) is carried out by an entity (a natural or legal person) resident in a non-EU state that does not ensure reciprocity in favour of Italian citizens, the Bank of Italy must transmit the authorisation request to the MEF. The MEF, upon proposal by the prime minister, may prohibit and stop the relevant acquisition.
Implications and responsibilities
What are the legal and regulatory implications for entities that control banks?
See question 24.
What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?
A natural person who controls a bank (see question 26) shall comply with the requirements of integrity provided by the MEF.
Should a legal entity control a bank, the persons that carry out administrative, directive and controlling duties within the controlling entity, shall comply, on a continuing basis, with integrity, professionalism and independence requirements. Should the controlling entity be a bank or a financial company (see question 9 for the concept of a banking group), it will draft the consolidated financial statements of the group and adopt internal procedures to ensure correct observation of the instructions of the Bank of Italy.
Furthermore, for banking groups, the non-fulfilment of the obligations mentioned above implies the risk that the controlling entity may be subject to the extraordinary administration procedure.
What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?
If one of the companies of the banking group (see question 22) becomes insolvent, the Bank of Italy can also start the extraordinary administration procedure for the leading bank.
Changes in control
Describe the regulatory approvals needed to acquire control of a bank. How is ‘control’ defined for this purpose?
As mentioned in question 21, the acquisition of control of a bank must be previously authorised by the Bank of Italy. The Bank of Italy identifies the entities that are required to file the request for authorisation when the rights resulting from the interest are attributed to an entity other than the owner of the interest.
The issuing of the authorisation also depends on the classification of the applicant in terms of transparency of its assets, quality of the governance, soundness and fairness in business conduct and its relationship with other entities that may affect the effectiveness of the supervision.
For this purpose, the notion of ‘control’ is met when:
- an entity has the majority of the voting rights exercisable in the shareholders’ meeting;
- an entity has sufficient voting rights to exercise a dominant influence on the shareholders’ meeting; or
- an entity can exercise its dominant influence on the bank by virtue of a particular contract with the bank.
The ‘control’ exercised through the dominant influence is presumed on the basis of the following (non-binding) legal presumptions:
- the entity owning the shares, on the basis of existing agreements, has the right to nominate or revoke the majority of the board of directors or of the board of statutory auditors or has the majority of the votes necessary to decide on the approval of the financial statement and on the appointment of directors;
- the entity owns an interest that entitles it to appoint the majority of members of the board of directors and of the board of statutory auditors;
- the existence of economic relations between the shareholders of the controlled entity which cause alternatively:
- the transmission of profits and losses;
- the coordination of management of the business activity with those of other business entities for a common purpose;
- the attribution of more powers than those directly deriving from the interest;
- the attribution of the power to choose the directors or the members of the supervisory board to entities other than the owner of the interest; and
- subjection to a common management.
Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?
The only difference between an Italian and a foreign acquirer is based on the need for the country of a non-EU acquirer that intends to acquire a capital participation in a bank higher than 10 per cent to ensure reciprocity in favour of Italian citizens.
Factors considered by authorities
What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank?
The Bank of Italy would consider the structure of the acquisition operation and the acquirer’s business strategy as well as the impact of the transaction on the prudential ratios of all the entities involved.
Alternatively, the assessment would focus on the relevant experience of the incoming management and the integrity of those who, in case of acquisition, would be entrusted with management and control duties in the bank.
Describe the required filings for an acquisition of control of a bank.
In evaluating whether to authorise a major shareholder of a bank or a bank holding company, as described in question 26, the Bank of Italy will consider the information contained, inter alia, in the following documentation:
For physical persons
- self-declaration certifying the absence of criminal convictions;
- anti-Mafia certificate from the competent prefecture or from the business registry of the relevant chamber of commerce (if applicable);
- outline of the business activity performed; and
- a list of interests directly or indirectly held.
For legal entities
- minutes of a meeting of the board of directors certifying the absence of criminal convictions against the directors and compliance with anti-Mafia requirements;
- a list of shareholders with more than 5 per cent of the capital;
- declaration of the directors with indication of the controlling entities; and
- a list of interests directly or indirectly held.
In addition, the acquirer must provide information about its economic equity situation (and, if appropriate, those of the other companies of the group), its business relations with the bank to be acquired and on the source of the financial funding available for the transaction.
Finally, the acquirer must provide the business plan for the transaction in order to allow the Bank of Italy to assess its stability and soundness.
Timeframe for approval
What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?
The time frame for the approval of an acquisition of a relevant shareholding subject to the Bank of Italy’s authorisation (see question 21) is the same for both a domestic and a foreign acquirer.
This time frame is defined in a regulation adopted by the Bank of Italy, which distinguishes between:
- acquisitions that are also subject to competition law, for which a time frame of 60 days for completion of the procedure is set; and
- acquisitions that are not subject to competition law, for which a time frame of 90 days for completion of the procedure is set.
* The authors would like to thank Pietro Pastorello and Alessandro Corbò for their assistance with this chapter.
Update and trends
Update and trends
Updates and trends
On 11 December 2017, the Italian government approved the text of the Legislative Decree that implemented PSD 2, repealing the PSD and adapting the national framework in order to make it compliant with the Regulation (EU) No. 2015/751 on interchange fees for card-based payment transactions (IFR).
PSD 2 is important for payment services providers (eg, banks, e-money institutions and payment institutions) and aims to promote the development of an efficient, secure and competitive retail payments market by enhancing payment service users’ protection, promoting financial services by making use of software and modern technology (fintech) and improving the level of security of electronic payments.
As a consequence of this legislative intervention, it is likely that in the next year, the banking market will be involved in a process of progressive change of several business models that have been adopted until now. PSD 2 will have several impacts on the banking system. The payments industry is currently undergoing significant transformation, in particular with respect to the increase of the services rendered by the fintech players as well with respect to the widening of digital payment technology. This new era for the payment services is expected to constitute a serious threat for the revenues and customer base of traditional financial institutions.
PSD 2 will put the banking system under considerable pressure. Therefore, it is likely that an important trend in Italian banking regulation over the coming months will be focused on the necessity to issue new provisions aimed at regulating the payment services, as well the possible interaction between traditional banking services and the new digital payment services.