On 1 October 2018, the amendment no. 23 of 25 September 2018 to the Circular no. 285 of 17 December 2013 (Disposizioni di vigilanza per le banche) (Circular no. 285) entered into force, which revises the rules regarding covered bonds in order to allow smaller banking institutions to issue them.
The new provisions
Until now, the issuance of covered bonds was only permitted to banks belonging to banking groups which, at the time of issuance, had their own funds of not less than 250 million euro and a total capital ratio at a consolidated level not lower than 9% (Capital Requirements). The selling banks also had to meet the Capital Requirements at the time of the transfer, but only to the extent that such banks were different from the issuing bank and did not belong to the same banking group.
The amendment of Circular no. 285, enacted following a public consultation, provides for the possibility of establishing a covered bond programme by banks that do not comply with the Capital Requirements (and, in particular, banks with their own funds of less than 250 million euro).
In particular, pursuant to Circular no. 285 (as amended):
the issuing bank that does not meet the Capital Requirements may establish a covered bond programme upon notification to the Bank of Italy (accompanied by a report from the compliance function) which gives evidence, among others, of: (i) the goal pursued through the issuance of covered bonds, the related risks and the impact on the current and future financial-economical balance of the bank; (ii) the adequacy of the policies, the risk management systems and the organisational and control procedures aimed at ensuring an orderly and safe execution of the covered bond programme in the event of insolvency or resolution of the bank; (iii) the adequacy of professional skills in the field of covered bonds developed by the personnel responsible for the administration and the control of the programme; (iv) compliance with the limits on the disposal of eligible assets provided for by Circular no. 285; and (v) compliance with the provisions concerning the composition of the segregated assets and the minimum collateralisation (collateralizzazione) provided for by the Decree of the Minister of Economy and Finance dated 14 December 2006, no. 310;
b. after 60 days from the aforementioned communication without the Bank of Italy having commenced a procedure aimed at ascertaining the existence of the requirements referred to in paragraph (a) above, the establishment of the covered bond programme may be submitted for approval by the competent bodies of the bank. Following this approval, the bank will be able to proceed with the first issuance based on the programme.
Furthermore, with the amendment of Circular no. 285, the Bank of Italy has introduced new provisions concerning selling banks (other than the issuer and those not belonging to the latter’s banking group) that do not comply with the Capital Requirements. In particular, these selling banks will also have to make a prior communication to the Bank of Italy (in the manner and within the terms established for issuing banks) giving evidence for (i) the goal pursued through the issuance of covered bonds, the related risks and the impact on the current and future financial-economical balance of the bank, (ii) the adequacy of the policies and the internal control systems, and (iii) compliance with the limits on the disposal of eligible assets already provided for by Circular no. 285.
The Bank of Italy’s intervention is in line with the principles expressed by the European Parliament and the Council in the “Proposal for a Directive of the European Parliament and the Council on the issue of covered bonds and covered bond public supervision and amending Directive 2009/65/EC and Directive 2014/59/E” published on 12 March 2018. It should be noted that, under this proposal, the EU legislator highlighted the difficulty for small banking institutions to issue covered bonds in a size that would be marketable to third party investors, hoping that the national authorities would authorise the establishment of joint programmes by two or more smaller banking institutions.