Open Review of Management, Banking and Finance

«They say things are happening at the border, but nobody knows which border» (Mark Strand)

Banking market and the lack of clients’ protection. Paper from the conference «Bail-in and protection of savings»

by Aldo Angelo Dolmetta 

Abstract: In November 2015, the Italian Government started a «resolution procedure» involving four central-Italy banks, which were basically insolvent.

In doing so, it applied the «burden sharing principle», thus bringing forward the entry into force of Bail-in Regulation (BRRD, which formally came into force on January 1st, 2016). Departing from the «four banks» affair’s actual dynamics, this article deal with the systemic background behind the crisis the banking industry is currently going through: which is found in the absence of a law-in-action control on single banking operations’ quality. Examples of this case-law permissive trend are provided. Furthermore, the very legitimacy of the Italian Government’s and the Bank of Italy’s conduct is questioned, as far as the compliance with Italian Constitution is concerned. In particular, the administrative order according to which the annulment of the entire share capital and of subordinated bonds was provided is considered in the light of private property’s constitutional guarantee.

1.- The facts which occurred last November, relating to the central Italy so called «four banks», witness several level of unease, which go beyond what is merely contingent or episodic. Indeed, they go deep down: into the system’s interstices and, therefore, the society’s ones.

These levels of unease all relate to the diverse aspects, which comes along with the «four banks» affair. In other words, and to put it from a diachronic perspective: they unroll though the past, the present and the future of the affair itself.

The core themes are triple: the first one regards banks’ management; the second one is about investment in securities (issued by banks, too); the third one relates to banks’ crisis regulation. Moreover, one further aspect has to be added to the above-mentioned ones (which indeed partially overlaps with them): it is the conduct of the Italian Banking Authority and the Italian Government.

2.1.- As far as banks’ management theme is concerned, first comments of the «four banks» affair seem to reflect a fully traditional perspective among scholars. Such a perspective seems to show two only alternatives: either the narrow bank, that is the bank that doesn’t risk and, therefore, is useless (or very little useful; nevertheless, insufficient); or the bank whose stability is questionable, which is the bank you cannot and must not trust.

We have to ask ourselves if this perspective is truly necessary. In point of fact, the whole problem about bank crises (and it doesn’t matter if it’s about the «four banks», or others) cannot be taken for granted, as a fact that exists just because it happened. On the contrary, it also (I should say, firstly) has to be considered as something which is avoidable, from an ex ante standpoint. In sum, it has to be addressed from the perspective of banks’ and their risks’ governance.

Of course, the mentioned crisis cannot only depend on market risk (and on the unpredictability of its factors). In fact, it can also depend on a poor, reckless, crony-oriented management. The «four banks» affair seems to paradigmatically match with the one that regards non-performing loans. Which, precisely, have to be considered both in their origination phase and in their subsequent monitoring, long before foreclosure (and this be said regardless of the obscurity of the notion itself of «non-performing loan»; and regardless as well of the impact which could have the State warranty provided by last Wednesday banking «maxi decree»).

In these days, press reports tell us that the Bank of Italy has performed, on each one of the «four banks», several inspections: having then noted and reported anomalies and irregularities. That being so, a clearly fundamental question is inevitably raised (but such a question is bound – at least today – for no answer): why did not any action follow the reporting?

I am talking, here, of prompt and early action: the one that could have been less destructive than the actual one, for quality and quantity.

2.2.- One more point has to be stressed. Regardless of any shortcomings of the institutional control level, it has to be pointed out how widespread the lack of controls over product offered by banks on the market is. The lack of control not only relates to an ex ante perspective, referred to a certain «type of product» at its general level[1]. Indeed, it also involves decentralized control, carried out on single operations regarding single clients.

The level of control performed by law in action (: ex post) on concrete banking operations’ dynamics is still set on a permissive approach. Situations of bank’s conduct patent inefficiency are brought in front of courts (banking ombudsman included[2]). Still, these situations are often not properly sanctioned.

Two brief examples will suffice, in this respect. The first one is when a bank, which aims to recover his credit, is not able to show the court all the statements relating to the credit: but nevertheless wins the case (so called «saldo zero»: see Territorial Court of Brindisi, January 13th, 2014, available on The second one is about careless handling of mortgages, with improper land valuation reports, or no reports at all. Such conducts are not sanctioned at all, as far as the mortgage contract validity is concerned (in this respect, it has to be recalled the renowned decision of the Italian Supreme Court, November 28th, 2013, n. 26672)[3].

In our cultural environment we face the lack of an exogenous pressure on firms’ efficiency (once we could have called it «judicial and social control»). Still nowadays, the practitioner’s mind-set, when it comes to dealing with a bank, is to try and provide for an ex post protection: minimizing losses that could stem from misconduct, operation by operation (and this often happens under the hypocrite statement that this would be the only way to protect the general public of depositors and savers). In sum, we face the lack of an indirect corrective pressure in favour of fair business conduct[4]. Moreover, rewards of position that banks tend to accumulate are still protected, in the Italian law-in-action.

At the same time, scholars preach in favour of the return to «reasonable margins in the credit industry»; that is, the return to profits (but not necessarily to dividends). Very little focus is, instead, on reducing costs and wastefulness. And it’s not only about the amount of employees; but also, for instance, about real estate. Let’s think about – I am citing a real case – the historical palace in Milan, Piazza della Scala, who is named after the Italian bank of commerce: nowadays, this building hosts a bar, a restaurant, a museum.

3.1- Legislative act no. 208/2015 (so called 2016 «Stability act») has established, as it is renowned, a Solidarity fund, intended to indemnify investors who held subordinated bonds issued by the «Four banks»: the actual bringing into action of this fund hasn’t been completed, yet; the relevant «arbitration»[5] procedures haven’t started.

Under art. 1, comma 858 of the 2016 Stability act the right to be indemnified by the Fund is «subject to the ascertainment of liability due to breach of information, care, fairness and transparency duties set out by the Italian Financial Act».

My feeling – my fear, if you prefer – is that said provision will be construed as only referred to breaches of information duties. It can be legitimately questioned, however, that retail investors are effectively protected by a merely informational means. Regardless of the provision contained in art. 2411 of the Italian civil code – that in the year 2003 was considered one of the pillar stones of the revised Italian corporate law –, it nevertheless remains the case that the specific nature of subordinated bonds is inherently obscure to the average bank client (who has, in his life, a large amount of good reasons not to be aware of the difference between debt and equity, let alone the internal variation of that distinction). More importantly, even assuming he is made aware of what a subordinated bond is, he is anyway unable to follow the evolution of his investment and its risk over time: that is, he is not able to calibrate the timing of entry and exit from his investment.

Like even the European Commission currently seems to recognize, the only protection which is truly effective on retail investors is the suitability rule in product placement[6]; with all the consequences that it entails, as far as intermediaries are concerned. And even in this respect, some acquitting trends, which can be found among case law, are worthy of censure (at most, and with great difficulty, some court decisions rule that a generic statement of being properly informed doesn’t give proof that the bank complied with its duties of information: see Italian Supreme Court, April 17th 2015, n. 7922).

3.2.1.- Anyway, there is one more point that the «four banks» affair suggests, by way of its concrete dynamics. According to press reports, on Dec. 30th 2015, Fondazione Carife promoted a legal action before the Administrative Law Court (so called «Tar») against Bank of Italy’s administrative order providing the «reduction of the entire capital relating to stocks» as well as «the nominal value of tier-2 elements» (that is, subordinated bonds) with «subsequent extinction of the relevant administrative and pecuniary rights». It is reasonable to think that Fondazione Carife did so in order to question the legitimacy of the administrative order itself[7]; and to question the compliance with the Italian Constitution of both the Law Decree setting the bridge bank up and the ones (no. 180 and 181/2015, adopted last November) providing for the bail-in mechanism. I didn’t have the chance to read the very text of the legal recourse (the hearing originally scheduled on February 2nd was apparently postponed to March 1st); and I also have to say that my knowledge of what occurred in Ferrara and of Fondazione Carife as a shareholder is generic: the one of a common Italian citizen.

This being said, I nonetheless have to stress the significance of such behaviour by Fondazione Carife, for three different reasons.

3.2.2.- At least from a general standpoint, this fact shows that the problem concerning products’ suitability doesn’t only regard retail clients, but also involves professional clients such as Fondazione Carife: professional clients who are little willing to undertake trash securities (or, from an ex ante perspective, highly risky products).

So the whole reasoning gets back to its starting point. If securities industry’s future appears to be an equity-based one (see the joint statement by French and German Ministers of Treasury, as reported by Scalfari in an article on the newspaper La repubblica on February 10th, front-page and 33), the relevant risk has to be made fairly commensurate to each single operation. In particular, the ex ante risk of poor, reckless, dreamy management has to be reduced as much as possible. At the same time, the action of banks’ whole board of directors has to be controlled [in this regard, some encouraging hints can be found in a recent decision by Italian Supreme Court, November 25th, 2015, no. 24048, about financial derivatives (which showed up to be unsuitable) entered into by a company, and non-executive directors’ liability].

Otherwise, what we have is not an imprudent investment; rather, it is non-repayable money, given the absence of any control on its an and quomodo.

3.2.3.- Having said this, it has to be distinctively considered that – as far as Carife S.p.A. management is concerned – Fondazione Carife couldn’t ever be put on the same level of any other professional client. In fact, it is sure that (to some extent, which I couldn’t exactly say) it Fondazione Carife concurred, as a controlling shareholder, in producing the damage. In my opinion, there is no reason why this joint responsibility should not be recognized).

One last point which is noteworthy is that Carife’s legal action seems to get the most important point concerning what Bank of Italy and the Italian Government did on November 27th. The «four banks» remaining assets were taken away from shareholders’ and subordinated bondholders’ entitlements in order to be transferred to the bridge bank and, as a consequence, offered on sale along with the bank itself.

This is a real expropriation, as a matter of fact. In the specific sense that the annihilation of a patrimony intended to cover liabilities (that is, the very notion of patrimony, as considered by art. 2740 of the Italian civil code) towards creditors and shareholders – which is, by the way, something very different form the reduction to zero of a share capital – ensues from an ex ante and conjectural evaluation that, besides, is functionally oriented to the immediate transfer of the bank (more properly: its firm) to the best bidder (and that being said regardless of the «choice» about which criteria have to be used in order to assess a bank’s loss-making situation)[8].

Given all this, it seems difficult to me not to support the opinion expressed by who claims that the Authority’s conduct is in contrast with the Italian Constitution (such as it is – according to press reports – submitted in the legal recourse brought by Fondazione Carife). This is, above all, an illegal limitation of the very nature of the investment made by clients through the purchase of equity and subordinated debt instruments: at the end of the day, a condition of risk was turned, by said Decree, into a condition of complete and permanent loss.

4.1.- Regardless of all this (when possibile), I still wonder if the Italian Government and the Bank of Italy could not, at the moment when they intervened such in a radical and punitive way towards investors, have taken care of the investors themselves. That is, to provide for and immediately put into action a «Solidarity Fund» (aut similia) back in late November.

Why did not they do this? Why the issue of «betrayed investors» came up later, after the fact? Besides, why such a long time is going by before the indemnity «arbitration» is actually made operating (good or bad it is, three months have already gone by)?

4.2.- It was noted – the gap in the reasoning is purposely harsh, in order to stress the significance of the point I have just considered – that bail-in regulation shows an inherent contradiction[9]: it is built on the cornerstone of a «mature» market situation, that is able to find within itself the most proper response to a single bank crisis (crisis which, in said view, is occasional by definition): in short, a market that is full of insolvent banks’ potential purchasers. But this in not the case: from here the contradiction stems.

In fact, the present Italian situation is not the one assumed by bail-in regulation, as it is showed by the fact that not only any real bidder is apparently missing, but also several more banks are sailing through dangerous, if not very dangerous, seas[10]. Therefore, the point (made by Capriglione) is worthy of support: with the further clarification that bail-in regulation’s sole (or main, anyway) concern seems to be the earliest resolution of the crisis (the «market hole»), by offering the banks’ assets to the public of potential purchasers.

However, if the normative system doesn’t match the real and actual system, there is no doubt that the first one has to be changed, in order to make it fitter to the second one. Natura non facit saltum[11].

It was noted that the bail-in rationale is a «negative» one: States (both at a worldwide and a European level, Italy included) don’t have the economic resources to front banks’ crises through bail-out intervention anymore [12]. One may wonder if such a reason actually implies the adoption of a bail-in oriented paradigm[13]. In any case, a thought is here needed, which is intended to be reflected into the latter. A situation of scarcity[14] entails – by its own nature – as much care and caution as possible, for all the aspects that are involved in such problem. That is: as concerns crisis prevention, crisis resolution, and transition from the old to the new regulation regime (once again: natura non facit saltum).

4.3.- One last point. In these days, there is much talking about «four banks» directors’ liability going on. Obviously, this is correct and fair. He who made mistakes must pay. Nevertheless, we shall bear in mind that this tool gave very poor outcomes, in its long-standing application: since it comes into action when…the horse has bolted to unreachable off-shore paradises.

So the time has come to think about something new and different: being aware, however, that the lack of new and better solution – that could efficiently replace directors’ liabilities – is going to increasingly emphasise the importance of direct and indirect controls over products offered on the market by each firm.

(*) Held in Trento, February 12th, 2016.

[1] On ex ante government on products, see the presentation by Antonucci. By way of explanation, one point is enough: the «four banks» affair shows once more how the management of conflicts of interest requires a radical solution, with a mandatory rule stating a «juris et de jure» presumption of transactional conflict.

[2] A lot of expectations are being raised by the establishment of the new «Consob ombudsman» (once dropped the unsatisfactory experience of the Arbitration Chamber, an effort is being made to basically replicate the scheme of the Banking ombudsman), even if the actual and effective put into action of the organism is going through several difficulties (see Dolmetta and Malvagna, Sul nuovo ADR Consob, forthcoming on Banca, borsa, titoli di credito).

[3] Under this regard, it is worth noting that art. 120-duodecies of the Italian banking act, which is going to be introduced in transposing into Italian law directive 2014/17/UE «on credit agreements for consumers relating to residential immovable property», states that «the valuation» of immovable property for mortgage lending «is conducted by appraisers who are professionally competent and sufficiently independent from the credit underwriting process so that they can provide an impartial and objective valuation, which shall be documented in a durable medium and of which a record shall be kept by the creditor». The same provision devolves to the Bank of Italy the implementation of this piece of legislation, (the provision is such as follows: «the Bank of Italy sets out executing provisions of the present article, also taking into consideration the «observatory on real estate market» database; as far as comma 1 is concerned, the application of self-regulation standards can be provided»).

[4] With all the consequences which it entails, as far as compliance is concerned.

[5] On the non-arbitration (nor adjudicative) nature of these procedures, see the presentation by Fiorio.

[6] Presentation by Antonucci insists on the importance of «probabilistic scenarios» assessment to be performed when products are placed.

With reference to the existence of a general and actually binding suitability rule covering all three financial market sectors (banking, securities, life insurance) see my work Trasparenza dei prodotti bancari. Regole, Bologna, 2913, 123 ff.

[7] Even if comma 854 of 2016 Stability act stated the abrogation of Law Decree November 22nd, 2015, no. 183, it nevertheless provided that «there in no prejudice to any acts and administrative orders and already produced effects and already born juridical relationships».

This being the case, it’s not clear what was actually repealed.

[8] As anyone can see, the concept just expressed is different from the one according to which «the involvement of subordinated bondholders in the bail-in process, which leads to the annulment of their entitlements in order to absorb losses, shouldn’t contradict the liability rule that qualitatively depicts that security» (in these terms, Semeraro’s presentation).

A different problem is, of course, the one about the «legitimacy» of the administrative body which ordered the above mentioned expropriation.

[9] See, in particular, Capriglione’s presentation.

[10] On the importance of «early intervention» measures according to BRRD, see the presentation by De Polis.

[11] According to what is reported by the newspaper Il Sole 24 Ore, January 31st, 2016, President Visco noted that bail-in regulation «needs to be revised».

[12] This is effectively noted in Santoni’s presentation.

[13] For instance, one could also think – as a direct remedy to the crisis bursting (that is, in addition to preventive measures) – of distributing losses among all other banks on the market [as a matter of fact, the cornerstone of such an idea con be found, as far as depositors (but not bondholders) are concerned, in the rule set out by article 96, co. 4 of the Italian Banking act].

[14] The reference is to «systemic» and objective scarcity, as opposed to distributive one.


Aldo Angelo Dolmetta, Full Professor of Private Law, Università Cattolica del Sacro Cuore, Milano, School of Law


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