On 16 November 2015, Italy implemented the European Bank Recovery and Resolution Directive (“BRRD”)1 through the publication in the Italian Official Gazette of the Legislative Decrees no. 180 and no. 181 (the “Decrees” and, respectively, the “Decree 180” and “Decree 181”).

While Decree 180 is aimed at implementing BRRD provisions on resolution, and identifies Bank of Italy as the resolution authority for Italian banks, Decree 181 amends certain provisions of the Italian Consolidated Banking Act2  and the Italian Consolidated Financial Act3, dealing in particular with recovery plans, early intervention and creditors’ hierarchy in bank insolvency proceedings.

In broad terms, the Decrees seem to be very much in line with the BRRD provisions.

Among the different resolution tools provided in the BRRD, the bail-in tool has a potential adverse impact directly on bondholders’ rights and banks’ funding costs on the markets. The bail-in tool enables authorities to recapitalise a failing bank through the write-down of liabilities and/or their conversion to equity4. The write-down will follow the ordinary allocation of losses and ranking in insolvency. Equity has to absorb losses in full before any debt claim is subject to write-down. After shares and other similar instruments, it will first, if necessary, impose losses on holders of subordinated debt and then evenly on senior debt-holders.

The Decrees contain some noteworthy details, namely an “extended” depositor preference in the insolvency ranking, and a specific provision concerning the institutional protection schemes’ and cooperative mutual solidarity systems in the bail-in context.

In addition, with a view to spot further particularities of the Italian implementation of the bail-in tool, it is worth mentioning the recent warnings issued by the Italian securities and markets regulator (CONSOB) in respect of the impact of BRRD rules (particularly in relation to bail-inable instruments) on investment services.


The Decree 1815  amends rules concerning creditors’ hierarchy in bank insolvency proceedings. In accordance with article 108 BRRD, preference is granted to covered deposits (i.e. those benefitting from the protection of the deposit guarantee schemes provided by Directive 2014/49/EU) and non-covered deposits by individuals and small and medium- sized enterprises.

However, Decree 181 goes beyond the preferential treatment afforded by article 108 BRRD, by establishing also that all other deposits (i.e. not only those preferred pursuant to article 108 BRRD) shall rank senior to other unsecured debt, immediately after covered deposits, deposit guarantee schemes and the part of individuals’ and SMEs deposits exceeding the guaranteed threshold (i.e. EUR 100,000). This will result, for example, in senior unsecured  bondholders’ claims ranking below all deposits, including large corporate and interbank deposits.

The rationale for this extended depositor preference seems to be twofold. On one side, it should facilitate the bail-in of the unsecured debt instruments ranking below all deposits, shielding the resolution authority from claims for violation  of the “no creditor worse off ” principle6. On the other side, the bail-in of such unsecured debt instruments is perceived to carry a lower contagion risk and to have a less disruptive impact on the real economy when compared to the bail-in of a more stable source of funding such as deposits.

Nonetheless, to be eligible for the purposes of the for thcoming Total Loss Absorbing Capacity (“TLAC”) requirement, such unsecured debt instruments should  be subordinated to all TLAC excluded liabilities, not only deposits7.

The statutory subordination to all deposits other than those covered by article 108 BRRD will enter into force in resolution and liquidation proceedings commenced after 1 January 20198. As suggested by CONSOB and by the Italian Banking Association (ABI), such a postponement should partially reduce the negative impact on holders of bank debt instruments who have purchased such securities before the entry into force of the Decrees. The diagrams illustrate the pecking order applicable in Italy before and after 1 January 2019 respectively.

Diagram 2

Ranking of senior unsecured debts until 31 December 2018:

Click here to view diagram.

Diagram 3

Ranking of senior unsecured debts from 1 January 2019:

Click here to view diagram.


The Decree 180 provides a specific paragraph apparently relating to the role of the institutional protection scheme (IPS) and cooperative mutual solidarity system in the context of the application of the bail-in tool. Article 52, paragraph 7 of Decree 180 provides that, unless otherwise specified, in case of liability subject to the bail-in tool, the exercise of the bail-in tool does not affect the rights of the creditor against any jointly liable debtor, any guarantor or other third party obliged to fulfill the obligation relating to such written-down liability. Moreover, the right of recourse by such joint debtor or guarantor against the entity under resolution, or against entities that are part of the same group, is permitted within the limits of the amounts due after the application of the bail-in tool.

Such paragraph seems to take into account the important function played by banks’ mutual solidarity system. For example, in July 2015, during the liquidation process of Banca Romagna Cooperativa, a small Italian mutual bank, shareholders and junior bondholders were “bailed-in” but did not suffer any loss as the Italian mutual sector’s Institutional Guarantee Fund decided to reimburse them to preserve the reputation of the sector9.

Such guaranteed liabilities cannot be considered as secured liabilities excluded by the application of the bail-in tool. Indeed, as clarified by the European Banking Authority (“EBA”)10  “guarantees or liabilities guaranteed by third party are not considered as secured liability in the meaning of article 43(2)(b) [of BRRD] because that concept must be interpreted as covering only liabilities secured/guaranteed by assets of the institution under resolution”.

Such a provision seems thus to meet the concerns raised by co-operative banks in order to consider the peculiarities of their mutual solidarity system and is also consistent with BRRD provisions11.


Following the first application of the rules envisaged in the Decrees12, CONSOB has stepped in and issued Communication no. 0090430 dated 24 November 2015 (the “Communication”) with a view to warning market operators of the impact of the BRRD rules in the context of the provision of investment services to clients.

Pursuant to the Communication, bail-inable securities issued by Italian issuers or foreign issuers subject to other European resolution authorities must be clearly identified by the intermediaries. These should alert their customers about  the potential risks and consequences relating to write-down and conversion to equity measures in the case of application of a resolution tool. The aim of this provision is to allow the investor to evaluate and understand the bail-in risks in order to take informed investment decisions. Investors (and prospective investors) should also be informed that public support to failing financial institutions must only be used after the application of the resolution tools.

The degree of information to be provided may vary according to the status of the client (professional or retail). While the intermediaries are free to choose the most suitable means to deliver the information, to minimise compliance risks, they should keep records in order to be able to show the delivery of such information to the clients. Pre-contractual information shall be supplemented and updated if necessary, for both new and current clients.

This duty relating to the update of the contractual information is also applicable to the ancillary service of safekeeping and administration of financial instruments. In the case of por tfolio management, the service provider can inform their clients through the periodic statement, while in the case of new contracts the clients can be informed during the pre-contractual phase.

Fur thermore, according to the Communication, intermediaries shall also review their internal procedures for the evaluation of suitability and appropriateness, considering the features of each type of financial instrument potentially affected by the BRRD rules.