The Italian government has taken important steps to stabilize troubled Italian banks by approving Law Decree No. 237/2016 (the "Law Decree")[1].

The Law Decree authorizes the Italian government to support Italian banks through:

  • the issue of a State guarantee over new liabilities in the form of debt securities and emergency liquidity assistance ("ELA") facilities;
  • precautionary recapitalization measures, which require burden sharing by private investors in line with EU State aid rules.

A €20 billion fund has been budgeted by the Italian government to finance these measures. State guarantees of recent debt issuances (by Banca Monte dei Paschi di Siena ("MPS"), Banca Popolare di Vicenza and Veneto Banca) have already been granted, while precautionary recapitalizations are expected to follow shortly.


Privately-sponsored or market-driven solutions – such as the Atlante fund and the attempted private sector rescue of MPS in 2016 – have failed to untangle the knots of the Italian banking system.

After the rejection of the referendum to overhaul the Italian Constitution in December 2016 and subsequent resignation of Prime Minister Renzi, the Italian government took action to address the Italian banking issues.

The Law Decree empowers the Italian government to (i) issue guarantees over newly issued debt securities and ELA facilities with the Bank of Italy and (ii) directly intervene in the capital of banks through precautionary recapitalizations.

Using public funds is not a simple path to take given EU rules on State aid and bank recovery and resolution[2] (see our alert "Italian banks: Thoughts on recapitalisation and sharing the burden"). State guarantees and precautionary recapitalizations may be considered extraordinary public financial support ("EPFS") under the BRRD. Approval of such measures may be granted by European governments only to remedy serious disturbances in the national economy and preserve financial stability[3]. Accordingly, EPFS measures must receive prior approval of the European Commission ("EC") in accordance with EU State aid rules. In this respect, investors holding hybrid capital instruments and subordinated debt are required to share the burden of precautionary recapitalizations as a condition for any capital injection by an EU Member State[4].

The need to comply with the EU framework has led to the introduction of an intricate legal framework under the Law Decree, with a complex allocation of responsibilities divided among EU and Italian institutions.