Open Review of Management, Banking and Finance

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

Instability threatens Italy’s banking reform

by Patrizio Messina

Abstract: The objective of this paper is to analyse the potential impact that the current wave of banking sector reform is having on Italy. In particular, the regulatory reforms affecting the so called “Banche Popolari” and “Banche di Credito Cooperativo”, together with the procedure for the resolution of the Italian regional banks and finally the Garanzia di Cartolarizzazione delle Sofferenze (GACS) are examined.

Summary: 1. Introduction. – 2. The mutual banks reform. – 3. The cooperative banks reform. – 4. Banking resolution procedures. – 5. The Italian state guarantee scheme for NPLs.

1. It is necessary to examine and assess the potential legal risk of the political instability on economic development and the financial markets in Italy following the referendum result on December 4 2016 rejecting former Prime Minister Matteo Renzi’s proposed reforms of the Italian Constitution. We will focus on the potential impact of recently enacted legal reforms in respect of mutual and cooperative banks, recovery and resolution procedures involving four regional Italian banks and the Italian State guarantee for securitisations of non-performing loans. As a consequence of the referendum result, although not required by law, the Italian prime minister has announced he will step down[1].

2. With regard to the mutual banks reform, the Italian government issued the Law Decree of January 24 2015, No 3, as converted into law, with the aim of consolidating and reinforcing the banking sector, on March 24 2015. The discipline reformed the legal framework applicable to Italian mutual banks (Banche Popolari), by providing that the biggest mutual banks with total assets exceeding €8 billion ($8.4 billion) (on an unconsolidated or consolidated basis) must transform into S.p.A. – società per azioni (companies limited by shares). To implement such legislation, on June 9 2015 the Bank of Italy published the 9th update to the supervisory provisions for banks referred to in Circular no. 285 of December 17 2013,introducing new provisions regarding mutual banks.There are 10 Italian mutual banks affected by this reform: Banca Popolare di Milano, UBI, Creval, Banco Popolare, Banca Popolare di Sondrio, BPER (all of which are companies listed on the Italian stock exchange) and Banca Popolare di Vicenza, Veneto Banca, Popolare di Bari and Popolare dell’Alto Adige. Almost all of such mutual banks has already completed the transformation process, with the exception of Banca Popolare di Sondrio and Popolare di Bari, which are currently in the process of implementing the transformation.

The legal framework related to the mutual banks reform is already completed and applicable to the Italian mutual banks, and there are no additional legislative measures that need to be introduced.

However, there is an aspect which remains uncertain with reference to the reform, relating to the possibility of postponing or suspending indefinitely the reimbursement of withdrawal rights to shareholders at the time of the transformation in S.p.A. On December 2 2016, following request including by certain consumer associations, the Italian Council of State ruled to suspend such provision, deferring the issue to the Constitutional Court, to evaluate its conformity with the Italian Constitution.

The relevant provision is contained in the Italian Banking Act and provides for ‘the right to redeem shares in the event of withdrawal, even after transformation, death or exclusion of a member is limited, according to the Bank of Italy provisions, also as an exception to the law, where necessary to ensure the computability of the shares of the quality of primary regulatory capital of the bank’.

Notwithstanding the foregoing, it seems that the mutual banks reform will go ahead, since the remaining aspects have not been affected by the Council of State ruling. What is likely to happen is that the mutual banks transformation might cost more than expected, in order to meet the reimbursement requests for withdrawal.

Should the Constitutional Court state that this provision is to be considered as non-compliant with the Italian Constitution, the new Italian government will need to devise a solution in order to manage such issue.

3. The country’s cooperative banks reform is also worth examining. On February 10 2016, the Italian government approved Law Decree 18/2016, which introduced some important reforming measures for the cooperative banks (BCCs), with the aim of eliminating structural weaknesses in the cooperative banking system and creating a group of BCCs under the control and direction of a holding company.

The cooperative banks system is based on a network comprising less than 400 cooperative banks, called Banche di Credito Cooperativo, Casse Rurali, and Casse Raiffeisen in Alto Adige, and several service companies, all of which work together to guarantee a complete and diversified range of products, in keeping with the values and identity of a cooperative. The most important feature of these cooperative banks is that of being local, mutual, not-for-profit cooperatives. The associative structure is subdivided into three levels: local, regional (local federations) and national (Federcasse)[2].

This Law Decree came into force upon publication in the Official Gazette on February 15 2016 and was converted with Law 49/2016 on April 8 2016. To implement such legislation, on November 2 2016, the Bank of Italy published the 19th update to the supervisory provisions for banks referred to in Circular no. 285 of 17 December 2013, by which it introduced new provisions for BCCs[3].

The reform provides that each BCC must join a cooperative banking group or become an S.p.A. The parent company of a cooperative banking group must have at least a €1 billion ($1.06 billion) capitalisation and obtain the Bank of Italy’s approval. It has powers of direction and intervention on the BCCs, which however will be autonomous in the conduct of their business.

In addition, group governance will be regulated by so-called cohesion contracts. Such contracts will regulate the powers of the parent company and also provide that the parent and the BCCs are jointly and severally liable as regards the obligations assumed by the parent and the BCCs.

The only aspect still to be implemented in the context of such reform is the one related to the constitution of the relevant holding company and whether there will be only one parent company for all talian BCCs, Iccrea Bank, which will be forming a sole group, or also Cassa Centrale Bank would act as parent company of a second separate BCCs group. In the case of single group, it will represent the third largest Italian banking entity and the first in terms of Italian capital.

Despite this, the legal framework is already in place and applies to the Italian BCCs, and there are no additional measures that need to be introduced or pending issues to be considered by the new government.

4.  With reference to the stability of the banking system and the measures set forth by the European Bank Recovery and Resolution Directive (BRRD) – establishing a common framework for the recovery and resolution of banks and large investment firms in all EU member states – on November 16 2015, the Italian government implemented the reform by the publication in the Italian Official Gazette of Legislative Decrees 180 and 181.

The BRRD was adopted in response to the public bail-outs of banks during the financial crisis. Its main objectives are to ensure the stability of banks and financial institutions in the single market through the harmonisation and improvement of tools for dealing with bank crises across the EU and to reduce the likelihood that a taxpayer bail-out is required. In the national context, four regional banks in central Italy (Banca delle Marche, Banca Popolare dell’Etruria e del Lazio, Cassa di Chieti and Cassa di Risparmio di Ferrara) have already been subject to a resolution measure, as provided by the BRRD and the Italian implementing legislation, as well as am ad hoc Law-Decree.

The Bank of Italy, as Resolution Authority, has adopted the relevant measures, creating a bad bank (which despite its name is not a licenced bank) which has become owner of all the bad debts, and four good banks or bridge banks, which have received all the respective balance sheet assets other than the loans classed as bad debts (ie those whose recovery is most doubtful).

The original four banks have been used as residual boxes, to be liquidated in the future, in which all the losses and their absorption instruments are confined. Each such bank will cease to exist as soon as it has sold or recovered the bad loans it owns.

The good banks (bridge banks) have kept the previous names but preceded by ‘new’ and they will continue the activity of the old banks following removal of the bad assets and recapitalisation. The solution adopted – chosen from several options which were found not to be compliant with state aid rules during discussions with the European Commission – seems to guarantee the business continuity and financial recovery of the four banks, in the interests of the local economies in which they are located.

The process to sell the good (bridge) banks (separately or together) to the highest bidder by transparent and market-based procedures is still ongoing. The legal framework on banks’ recovery and resolution has already been implemented in full and there are no pending issues to be considered by the incoming government.

5. The last legal measure to be analysed in the context of Renzi’s resignation is the state guarantee introduced for supporting the securitisation of non-performing loasn (NPLs). On February 14 2016, the Italian government issued Law Decree 18, which entered into force on February 16 2016 and subsequently converted by Law 49/2016 on April 8 2016, introducing the Italian government guarantee scheme for senior tranches of securitization asset-backed securities backed by NPLs (GACS)[4]. To implement such legislation, on August 3 2016, the Italian Finance Ministry (MEF) issued the relevant implementing decree.

The GACS allows banks to transfer NPL portfolios to an Italian securitisation special purpose vehicle (SPV) that finances the acquisition through the issuance of notes in different tranches. Banks will be required to appoint an external independent servicer to carry out loan recovery to prevent any possible conflict of interests. In case of deconsolidation of the underlying loans, the Italian government shall guarantee only senior tranches and only after the securities have received an investment grade rating from at least one rating agency. The Commission has confirmed that the GACS does not amount to state aid[5].

To date, only one Italian bank (Banca Popolare di Bari) has already applied to obtain the GACS. Although the legal framework is already completely implemented and applicable and there is no additional measure that needs to be introduced at national level, the GACS is not yet in operation, since the MEF is waiting for the Commission to give the green light to the appointment of the monitoring trustee before issuing the first guarantee. Pursuant to article 3 of Decree 18/16, the MEF must appoint, with the Commission’s approval, a qualified independent party to monitor the compliance of the GACS with the provisions of Decree 18/16 and with the decision of the Commission related to the granting of the GACS.

Pursuant to Decree 18/16, the MEF may issue GACS for a period of 18 months from February 16 2016. In accordance with article 3, paragraph 2, of the Decree 18/16, the MEF is entitled to extend, by ministerial decree, the period above for a further 18-month period. The extension is subject to the approval by the Commission but would in substance be a short and straightforward process. Such extension would, however, be a matter to be considered by the new government.

Patrizio Messina is Lecturer at LUISS Business School on Legal aspects of International Business & Finance

[1] See Le riforme delle banche Popolari e delle BCC, 27 luglio 2016

[2] See this website for an assessment of the causes of the reform

[3] The list of the banks belonging to the Gruppo  ICCREA is published at

[4] The definition of GACS is published at

Further consideration are published in P. Messina, G. Giannesi, “Garanzia sulla cartolarizzazione delle sofferenze (GACS): dal d.l. 18/2016 al DM 3 agosto 2016”, in Approfondimenti di Diritto Bancario, 11 November  2016,

[5] See also E. Brodi, S. Giacomelli, I. Giuda, M. Marcucci, A. Pischedda, V. Profeta, G. Santini, “Nuove misure per velocizzare il recupero dei crediti: una prima analisi del d.l. 59/2016”, in Banca d’Italia, Note di stabilità finanziaria e vigilanza, n. 4, 2016


This entry was posted on 15/12/2016 by in Banking.
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