Directive 2014/59/EU (the "BRRD” or Bank Recovery and Resolution Directive), establishing a framework for recovery and resolution of banks and investment institutions, was implemented in Italy with the Legislative Decree Nos. 180/2015 and 181/2015
The aim of the BRRD Directive is to provide the national authorities with means allowing an early and effective intervention, minimizing the impact of banks’ distress on the economy and the financial system and avoiding disorderly liquidations which could amplify the relevant effects and costs.
Legislative Decree No. 180/2015 ("BRRD Decree") incorporates the previsions of the BRRD Directive regarding resolution and governs resolution plans, the commencement and the conclusion of resolution procedures, the adoption of resolution measures, the management of international group situations, the powers and duties of the national resolution authority and the national resolution fund.
Legislative Decree No. 181/2015 ("Amendments Decree") amends the Bank Code (Testo Unico Bancario or “TUB”) and the Finance Code (Testo Unico della Finanza or “TUF”) to introduce the previsions of the BRRD Directive on recovery plans and the new regime of resolution. The rules of intervention powers by Bank of Italy are aligned with current European law, and the rules of liquidazione coatta amministrativa are adapted to the new legal framework.
Both Decrees are in force.
The main innovations
The Role of Bank of Italy
According to the BRRD Decree, Bank of Italy is the national authority entrusted with the powers – in case of insolvency or distress of a bank or financial entity – to prevent and manage financial distress situations, as well as to resolve banks and financial entities. Within Bank of Italy an appropriate Resolution and Crisis Management Unit has been set up.
Recovery plan and resolution plans
Banks shall prepare in advance a recovery plan which shall select the available remedies in order to restore the financial situation of the bank in the event of a significant deterioration: banks shall map their legal structure and business, identify “core" areas to be preserved and others to be sold in the event of disruption of normal activities, and outline scenarios that the recovery plan intends to address. Bank of Italy shall instead prepare a resolution plan providing for the actions that the same Bank of Italy can implement in case of disruption, in order for the bank to be resolved in an orderly manner through the means and resolution powers provided for by the new rules.
Resolution can be adopted in case of disruption or insolvency, when the situation cannot be remedied in the short term by a restructuring or a recapitalization, and is an alternative to liquidazione coatta amministrativa of the bank or entity, when the latter could be detrimental to the stability of the system or to public interests.
Resolution is a restructuring process managed by Bank of Italy, through means contemplated by the BRRD Directive, aimed at avoiding interruption of the banks’ basic services, at rebalancing the situation of business units which may be sustainable and at liquidating others. In this context, Bank of Italy can:
- sell or assign part of the assets or activities;
- temporarily assign assets and liabilities to a “bridge bank” for a subsequent sale on the market;
- assign non-‐performing loans or receivables to a “bad bank” (which shall then proceed to liquidate them);
- proceed to the so-‐called “bail-‐in” which is defined as “the reduction or conversion to equity of the rights of shareholders and creditors”.
By this remedy, resources necessary to reinstate a proper level of capitalization and financial stability of the bank or financial entity are found within the same: Bank of Italy can indeed order the write-‐off and the conversion of certain liabilities of the entity subject to resolution. It will no longer be the State to take responsibility for any losses, but instead – according to a precise ranking set by the new rules – shareholders and bondholders, and ultimately customers. The BRRD Decree excludes from bail-‐in certain liabilities, including notably deposits up to EUR 100,000, certain liabilities towards other banks and guaranteed liabilities such as covered bonds. Bank of Italy may also order that additional liabilities be excluded from bail-‐in in certain circumstances.
Residual losses can be transferred to a resolution fund which can contribute up to a maximum of 5% of total liabilities, provided that at least 8% of total liabilities was subject to bail-‐in.