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 resolution2 (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 stability3. 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 State4.
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.
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1 The Law Decree was enacted by the Italian government on December 23, 2016 and converted into Law No. 15/2017 by parliament on February 17, 2017.
2 See, respectively, the Communication of the European Commission on the application, from August 1, 2013, of State aid rules to support measures in favour of banks in the context of the financial crisis (the "Banking Communication") and Directive 2014/59/EU (the "BRRD").
3 See Article 32(4)(d) of the BRRD (implemented in Italy by Article 18 of the Italian Legislative Decree No. 180 of November 16, 2015 – the "BRRD Decree") as well as Article 18(4)(d) of the SRM Regulation (EU) No. 806/2014, according to which EPFS may take the form of (i) a State guarantee to back liquidity facilities provided by central banks, (ii) a State guarantee of newly issued liabilities, or (iii) an injection of own funds or purchase of capital instruments (subject to certain conditions, including that the bank is not failing or likely to fail). According to the BRRD, such measures shall be (i) confined to solvent banks, (ii) conditional on final approval under the EU State aid framework, (iii) of a precautionary and temporary nature. In addition, they must be proportionate to remedy the consequences of the serious disturbance and shall not be used to offset losses that the bank has incurred or is likely to incur in the near future.
4 According to the Banking Communication, State aid can only be granted on terms which involve adequate burden sharing by existing investors. Adequate burden sharing normally entails, after losses are first absorbed by equity, contributions by hybrid capital holders and subordinated debt holders. Hybrid capital and subordinated debt holders must contribute to reducing the capital shortfall to the maximum extent, in the form of either a conversion into Common Equity Tier 1 ("CET1") or write-down of the principal of the instruments. Contribution from senior debt holders (including deposits, bonds and all other senior debt) is not required as a mandatory component of burden sharing under State aid rules. An exception to the burden sharing requirement can be made where implementing such measures would endanger financial stability or lead to disproportionate results in accordance with para. 45 of the Banking Communication.
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