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Regulatory framework

Key policies

What are the principal governmental and regulatory policies that govern the banking sector?

The main principles of the Italian system are 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 in the European Union. Therefore, the Italian banking system complies with the mutual recognition of banking authorisation granted to EU member states.

The exercise of banking activities by authorised EU banks, both in relation to the freedom of establishment and the freedom to provide a service, requires a preliminary 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, entitled to conduct 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 loans and other forms of financing, payment services, issuing of e-money and, pursuant to specific rules, the provision of investment services). Italian banks may be incorporated as companies limited by shares or as cooperative banks in the alternative form of a cooperative bank or a cooperative credit bank;
  • financial intermediaries: were 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 - 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 banking industry in Italy is governed by two main legislative acts: Legislative Decree No. 385/1993 (Italian Banking Act) (TUB) and Legislative Decree No. 58/1998 (Italian Financial Act) (TUF).

The TUB regulates the banking business and other financial intermediaries, as well as other entities operating in the banking sector. The TUB is also the principal legislative source for the framework of the powers and responsibilities of the regulatory authorities in Italy.

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 supervisory instructions for banks. The Circular will soon be amended with reference to the authorisation procedure for banks to provide investment services (see Update and trends);
  • 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 Bank of Italy and its governor-general; the relationships, responsibilities and mutual cooperation of the two main public authorities 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. 231/2007, as amended by Legislative Decree No. 90/2017 that implemented Directive 2015/849/EU (Fourth Anti-Money Laundering Directive) 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 by cancelling from the list of reserved activities (towards the general public) equity investment and currency exchange services;
  • 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;
  • Legislative Decree No. 129/2017, which, in Italy, implemented the MiFID II ‘legislative package’ that consists of Directive 2014/65/EU on markets in financial instruments (MiFID II Directive) and Regulation (EU) No. 600/2014 (Markets in Financial Instruments Regulation) (MIFIR). MiFID II replaces former applicable EU legislation and aims to further improve market transparency and the level of investor protection while fostering competition in the financial services industry; and
  • Legislative Decree No. 218/2017 implementing Directive 2015/2366/EU on payments services in the internal market (Payment Services Directive 2) (PSD2), that repeals the first Payment Services Directive 2007/64/EC (PSD). Among other things, PSD2 is meant to extend the provisions set out in the PSD by regulating new market players and enhancing consumer protection, competition, and market standardisation. Legislative Decree No. 218/2017 has introduced, in line with other EU legislation, new services which will allow the bank’s customers to avail themselves of third-party providers (TPP) to execute payment transactions or perform other activities which previously fell within the sole purview of banks.

In Italy, an important regulatory role is played by the Bank of Italy. In carrying out this role, the Bank of Italy has adopted several regulations setting forth the requirements for pre-contractual transparency, the organisation and effectiveness of the alternative dispute resolution system provided by the TUB, the authorisation and supervision procedures for all supervised entities, etc.

Regulatory authorities

Which regulatory authorities are primarily responsible for overseeing banks?

The Bank of Italy is primarily responsible for supervising banks in Italy. It exercises supervisory and regulatory functions through a range of administrative, regulatory, and control powers.

The Bank of Italy is also in charge of the supervision of:

  • financial intermediaries entitled to provide financing;
  • e-money institutions; and
  • payment institutions.

Additionally, 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 Credit and 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. Since Directive 2013/36/EU (Capital Requirements Directive IV) (CRD IV) entered into force, the CICR’s role has been materially reduced.

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. Instead, they are protected through a mechanism that was originally set up on a voluntary and private basis, even though it performs a public function. The deposit protection schemes currently in force are the Inter-Bank Fund for the Protection of Deposits, to which all Italian banks (and, in some cases, 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 compensation is provided, currently limited to maximum €100,000. The Bank of Italy is entitled to modify this limit to reflect variation in 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.

Even though deposits are not insured by the government, the government has taken steps to protect the sector. For example, the Italian government recently set up a public guarantee system in support of banks in crisis. In the light of increasing exposure from 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 banks. The GACS aims to dismantle NPLs. Under the GACS, the Italian government 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.

Additionally, Italian banks may sometimes receive precautionary recapitalisation. For example, at the end of 2016, Banca Monte dei Paschi di Siena (MPS), a significant Italian bank, asked the European Central Bank (ECB) for access to ‘precautionary recapitalisation’ measures in accordance with the provisions set forth in the BRRD. Precautionary recapitalisation consists of an injection of funds into a solvent bank by an EU member state when this is necessary to remedy a serious disturbance in the economy of the member state and preserve financial stability.

In July 2017, the European Commission approved the precautionary recapitalisation of MPS through €5.4 billion in state aid. On 28 July 2017, in accordance with Law Decree No. 237/2016, the MEF approved through Ministerial Decree, inter alia, an increase in the capital of MPS 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.

Finally, on 8 January 2019, the Italian government issued Law Decree No. 1/2019 that provides the possibility of public support for Carige Bank providing for a public guarantee on the bonds issued by the bank up to a maximum of €3 billion. Furthermore, Law Decree No. 1/2019 allows the Italian government to subscribe future capital increase of Carige Bank up to a maximum amount of €1.3 billion.

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 No. 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 direction 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 through the application of 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 through the application of 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 direction and control duties within the bank, as well as a company of the banking group, can enter into obligations with the bank only with the prior authorisation of the board of directors.

In December 2011, the Bank of Italy approved the rules implementing CICR Resolution No. 277/2008. According to these rules:

  • in the approval of transactions with ‘related entities,’ the role of independent directors of the bank is particularly relevant as the bank must form an executive committee (internal to the board of directors) exclusively composed of independent directors who are requested to communicate their opinion with regard to the relevant transaction by means of an express declaration at the time of the vote of the board of directors regarding the transaction; and
  • the bank will set internal procedures to regulate transactions with related entities.

Regulatory challenges

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, 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 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 offering the public money transfer services by payment institutions);
  • the recent introduction of a new set of rules adopted by the Bank of Italy regarding transparency and fairness duties for consumer credit entities;
  • the need for financial intermediaries to adapt their business, their corporate structure (as well as internal compliance functions) to the new legal framework implemented after the adoption of Legislative Decree No. 141/2010 and the Decree of the Ministry of Economics and Finance No. 53/2015;
  • the duty to comply with CICR Resolution No. 644/2012 which, by implementing new article 117-bis of the TUB, adopted new rules for limits and criteria for fees applied by banks in financing contracts in case of overdraft by the customer;
  • the implementation of the BRRD, introducing a new and more incisive bank resolution framework; and
  • the implementation of Directive 2015/2366/EU on payment services in PSD2 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. In this regard, banks will have to equip themselves from a legal standpoint to operate in this new ‘open banking context’ and try to find a compromise between the need for innovative technologies and the need to pay attention to legal compliance and contractual relations with 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.

Consumer protection

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 informing 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;
  • in accordance with the original contract terms, or upon unilateral amendment by the bank of the contractual conditions, the consumer may cancel 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.

More detailed rules for consumer protection are contained in the Bank of Italy’s Resolution of 29 July 2009, concerning ‘Provisions on transparency of transactions and banking and financial services. Correct conduct between intermediaries and customers’, which implemented initial provisions through a set of highly detailed rules to ensure bank customers are informed in a fair, transparent and complete manner. This Resolution is particularly focused on the duty of banks and intermediaries to comply with specific obligations with respect to 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 periodic communications; rules regulating unrequired marketing messages; disclosure duties with respect to the economic conditions of any kind of contract; implementation of internal procedures for receiving and managing customer complaints, etc.

In addition, 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 non-compliance of certain financial intermediaries and e-money institutions that did not provide accurate pre-contractual information on the cost and interest rate applied to 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 consumer mortgage loans.

The new legal framework increases 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 collateral; and
  • the assessment of the consumer’s creditworthiness.

The new legal framework also tries to prevent situations of over-indebtedness of the borrowers.

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 interest in transactions concerning 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 credit card loans, cannot produce further interest except from a default interest, and it is calculated exclusively on the capital.

Legislative Decree No. 129/2017, which implemented the MiFID II ‘legislative package’, has increased transparency as well as consumer protection. Banks have to provide customers more information of higher quality when they purchase an investment instrument and they have to clearly identify the target group of investors for each product, with an appropriate level of risk and advisory services for each of them.

In January 2018, the public authority responsible for regulating 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 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 July 2018, the Bank of Italy started a public consultation procedure on the proposed amendments of the Resolution of 29 July 2009. The expected amendments, related to the implementation of the PSD2, concern transparency for payment services (see Update and trends).

Future changes

In what ways do you anticipate the legal and regulatory policy changing over the next few years?

Over the next few years, some legal and regulatory interventions are expected in Italy, especially in the following three macro-areas:

  • the regulation and supervision on the new fintech players, as a consequence of the further implementation of the PSD2 Directive, concerning transparency for payment services;
  • increased protection against large exposures for banks and investment firms; and
  • the regulation of bank recovery and resolution.

In the light of this, the Bank of Italy has started public consultation, which normally precedes the approval of final regulations, on:

  • the amendments to the Supervisory Measures for payment and e-money institutions (Bank of Italy Resolution of 17 May 2016), through Directive 2015/2366/EU;
  • amendments to the ‘Provisions on transparency of transactions and banking and financial services. Correct conduct between intermediaries and customers’ (Bank of Italy Resolution of 29 July 2009) through Directive 2014/92/EU (Payment Account Directive) (PAD);
  • implementing provisions for the TUF, for the full receipt in Italy of the MiFID II ‘legislative package’;
  • amendments to Circular No. 288 of 3 May 2015 ‘Supervisory measures for financial intermediaries’ regarding the prudential treatment of investment schemes related to large exposures, through Delegated Regulation (EU) No. 1187/2014.

Supervision

Extent of oversight

How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?

There are three types of bank conduct supervision employed by the Bank of Italy:

  • 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; and
  • inspection supervision: this covers the Bank of Italy’s power to carry out on-site inspections.

Regulatory supervision

While exercising regulatory supervision, the Bank of Italy adopts provisions to ensure:

  • 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.

Inspection supervision

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.

Consolidated supervision

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.

In general, 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.

Enforcement

How do the regulatory authorities enforce banking laws and regulations?

The supervision exercised by the Bank of Italy over banking activity by supervised entities is quite pervasive and includes the duty to provide periodic 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 increasing 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 avoid the adoption of sanctions); 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 bank’s 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 the Capital Requirements Directive 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 on 4 November 2014.

Therefore, recent years have seen intense cooperation between the ECB and the Bank of Italy, which is the Italian competent authority in relation to the SSM. More specifically, 13 banking groups in Italy have been subject to the ECB’s direct supervision since December 2016.

The new provisions have provided important clarifications with regard to the procedure, by setting thresholds, based on the companies’ turnover, for the establishment of sanctions and by setting forth the requirements for the temporary suspension of banking activity.

What are the most common enforcement issues and how have they been addressed by the regulators and the banks?

The following data is based on the 2017 Bank of Italy annual report, which also includes references from early 2018.

During this period, the Bank of Italy:

  • played an active part in the SSM, where more than 8,000 actions were undertaken, including periodic and targeted assessments, meetings with company representatives, requests for information or warnings, out of which 95 inspections were carried out, 32 of which at ‘significant’ banks. In particular, six inspections were carried out to verify compliance with anti-money laundering rules and five to verify compliance with the transparency and fairness of the relationships between intermediaries and customers;
  • issued 35 sanctions, against 205 natural persons and 18 legal entities, the latter mainly sanctioned because of breaches of anti-money laundering provisions (14 cases). The total value of applied sanctions was approximately €10 million in 2016;
  • overall, 22 sanctions involved credit institutions, three of which are significant, while the remaining 13 concerned other intermediaries (securities firms, payment institutions, e-money institutions and others); and
  • had four special administration procedures still open, three of which were closed with the intermediary’s return to ordinary administration while, in one case, compulsory liquidation was opened.

Resolution

Government takeovers

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 the 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 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 capital into the stock capital of bank, 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.

Bank failures

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.

With regard to the bank’s management and directors, 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 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 implementation of the BRRD, banks must have a resolution plan, approved by the Bank of Italy and regularly updated, specifying measures 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 promptly inform the Bank of Italy (or the ECB) regarding any actual or potential failure of the bank.

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 arises for violations relating to the directors’ 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 are liable for 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 actions against the former members of the disbanded governing bodies (including the managing director) may be proposed by the extraordinary commissioners, who must be authorised to do so by the creditors’ monitoring committee and the Bank of Italy.

Planning exercises

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 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 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 require that the Bank of Italy 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 execution of the resolution plan and, within this scope, it may adopt the following resolution tools:

  • Sale of business: this allows the 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 assets 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 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 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. 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).

Capital requirements

Capital adequacy

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 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. Basel III’s core principles were mainly implemented at EU level through Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms (Capital Requirements Regulation) (CRR) and by Capital Requirements Directive IV. From a local perspective, the Bank of Italy exercised some discretionary power in accordance with CRD IV through Circular No. 285/2013. Technical rules and standards set by the CRD IV and CRR legal framework are usually mandatory for Italian banks to the extent they are specified in the relevant EU regulation as being without prejudice to the discretionary powers granted to EU member states, where applicable.

The criteria 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 into 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, made up by medium- to long-term subordinate loans, but only to cover certain kinds of market risk.

In accordance with the Capital Requirements Directive IV, as implemented by Circular No. 285/2013, Global Systemically Important Financial Institutions (G-SIIs) must maintain, on a consolidated basis, a specific capital buffer, consisting of and supplementary to common equity tier 1. The amount of this buffer will vary from a minimum of 1 per cent to a maximum of 3.5 per cent of the total risk exposure amount, depending on the sub-category to which each G-SII is allocated.

The Bank of Italy has identified the UniCredit banking group as a global systemically important institution (G-SII) authorised to operate in Italy.

During the transitional period envisaged under CRD IV Directive, the UniCredit group is required to maintain a capital buffer for the G-SIIs, expressed in terms of common equity tier 1 (CET 1), equal to:

  • 0.75 per cent of its total risk exposure from 1 January 2018; and
  • 1 per cent of its total risk exposure from 1 January 2019.

Furthermore, the Bank of Italy has identified UniCredit, Intesa Sanpaolo and Banco BPM banking groups as other systemically important institutions (O-SIIs) authorised to operate in Italy in 2019. Compared with last year, the Monte dei Paschi di Siena group is no longer identified as an O-SII.

UniCredit, Intesa Sanpaolo and Banco BPM will have to maintain a capital buffer of 1 per cent, 0.75 per cent and 0.25 per cent, respectively, of their total risk-weighted exposure. As of January 2019, Monte dei Paschi di Siena will not be required to maintain any O-SII capital buffer.

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-month basis with respect to banking groups, while the consolidated data at 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.

Undercapitalisation

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.

Insolvency

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 the Bank of Italy, not the MEF, adopt a provision for 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 are sufficient to prevent the bank’s 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 subject 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. As part of the implementation of the recent EU regulations aimed, inter alia, at restraining financial pro-cyclicality, as of 1 January 2014, 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

Controlling interest

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 over 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 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 ownership in the capital of a bank are 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.

Foreign ownership

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 requires the Bank of Italy’s prior authorisation (see question 21) and 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, direction and control 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 an 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 start an extraordinary administration procedure for the leading bank.

Changes in control

Required approvals

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.

Foreign acquirers

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.

Filing requirements

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 law enforcement agency 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 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 Alessandro Corbò for his assistance with this chapter.

Update and trends

Update and trends

Recent developments

Trends in Italian banking regulation are mainly focused on three public consultation procedures started by the Bank of Italy, which normally precede the approval of the final regulations.

The first consultation procedure involves amendment of the Resolution concerning ‘Provisions on transparency of transactions and banking and financial services. Correct conduct between intermediaries and customers’, adopted by the Bank of Italy on 29 July 2009.

The expected amendments, related to the implementation of PSD2, which has been implemented by Legislative Decree No.218/2017, concern transparency for payment services. Following the changes introduced by PSD2, operators, whether banks or TPPs, must revise their transparency policies.

In particular, these amendments relate to the pre-contractual information and duties of specific communications to be given to consumers and to new rules on consumer complaints.

The second consultation aims to complete, in the matters of exclusive competence of the Bank of Italy, the adaptation of the legal framework to the MiFID II legislative package, already implemented at a legislative level in Italy.

To this end, a new regulation on the duties of intermediaries who provide investment services and/or perform investment activities is expected, with reference, inter alia, to corporate governance and general organisational requirements, remuneration and incentive systems, administrative and accounting procedures, internal audit.

Furthermore, Bank of Italy Circular No. 285/2013 will be amended with reference to the procedure of authorisation for the provision of investment services not only from Italian banks, but also from foreign banks in Italy and Italian banks operating abroad (cross-border operations).

The third consultation involves the proposed amendment of Bank of Italy Regulation of 18 December 2012, concerning ‘Provisions on sanctions and administrative sanction procedure’. The amendments aim to implement the changes introduced by Legislative Decree No. 90/2017 that implemented Directive 2015/849/EU on the prevention of the use of the banking and financial system for money laundering and terrorist financing. Other amendments would adjust the sanction procedure to what the TUF provides in implementation of the Directive 2014/91/EU (UCITS V) and of MIFID II.

With reference to the procedure for charging breaches, a new key element will be the formal notification of intermediaries by certified email.

The three consultation procedures ended, respectively, in September, October and May 2018 and, therefore, it is likely that the expected amendments will be finalised in the coming months.