Bank failures can have significant consequences for creditors, including international bank creditors. Italy’s banking law is primarily governed by the Testo Unico Bancario (TUB), which consolidates the provisions related to banks and financial intermediaries. The TUB is complemented by the Italian Civil Code and various EU regulations, including the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) Regulation.
Several Italian banks and credit institutions have faced substantial fines for various wrongdoings over the years. These penalties have been imposed by national and international regulatory bodies, including the Bank of Italy, the European Central Bank (ECB), and the European Securities and Markets Authority (ESMA). Some of the most notable cases include:
UniCredit: In 2019, UniCredit, Italy’s largest bank, was fined €1.3 billion by the U.S. authorities for violating sanctions against Iran and other countries. In 2020, UniCredit was fined €27.5 million by the ECB for governance and risk management deficiencies.
Banca Monte dei Paschi di Siena (MPS): In 2013, MPS faced a €3.9 billion bailout by the Italian government due to a series of scandals involving hidden losses and derivative trades. The bank has also received several fines from regulatory authorities, such as a €5 million penalty from the Bank of Italy in 2014 for inadequate risk controls.
Intesa Sanpaolo: In 2014, Intesa Sanpaolo, the second-largest bank in Italy, was fined €6.8 million by the Italian Competition Authority for anti-competitive practices in the credit derivatives market. In 2016, the bank was also fined €30 million by the ECB for violating reporting requirements.
Banco Popolare and Banca Popolare di Milano: In 2015, both banks were fined a combined €6.8 million by the Bank of Italy for violating anti-money laundering (AML) regulations.
These banks were not shut down despite severe wrongdoings because regulators often consider the potential consequences of closing a large bank, such as systemic risk, financial instability, and the impact on the economy. Instead, regulators have opted for penalties, recapitalizations, and restructuring measures to address the issues and improve the banks’ governance and risk management practices. Additionally, these institutions have taken steps to replace management teams, strengthen internal controls, and implement remedial measures to prevent future misconduct.
Bank failure in Italy is defined as a situation in which a bank is unable to meet its obligations, has its authorization withdrawn, or is deemed to be failing or likely to fail by the supervisory authorities. The Bank of Italy, as the national supervisory authority, determines bank failure in coordination with the European Central Bank (ECB) and the Single Resolution Board (SRB).
The Bank of Italy has the legal mandate to supervise banks, assess their viability, and determine their failure or likelihood of failure. Upon the determination of bank failure, the SRB, as the resolution authority, steps in to manage the resolution process. After the conclusion of bank failure, the resolution process may involve a variety of measures, such as bail-in, sale of the business, establishment of a bridge institution, or asset separation. Common reasons for bank failure in Italy include poor asset quality, inadequate capitalization, and weak governance.
The Bank of Italy’s supervisory and resolution planning activities aim to preserve critical functions and ensure the continuity of organizations during financial distress. This involves ongoing monitoring, assessment of capital and liquidity requirements, and the development of recovery and resolution plans. The SRB, in coordination with the Bank of Italy, takes the following steps when a bank within its jurisdiction fails:
- Assessment of the bank’s situation and determination of whether resolution is in the public interest.
- Selection of the most appropriate resolution tools, such as bail-in, sale of the business, bridge institution, or asset separation.
- Implementation of the resolution process and monitoring of its effectiveness.
Italian law protects account deposits through the Fondo Interbancario di Tutela dei Depositi (FITD), which covers deposits up to €100,000 per person per institution. Other creditor interests are protected based on the hierarchy established under the BRRD, which prioritizes secured claims, followed by unsecured claims and subordinated debt.
The Bank of Italy ensures the orderly exit of non-viable firms by supervising the orderly liquidation process, managing the reimbursement of depositors, and coordinating with other relevant authorities. Bank liquidation in Italy follows the provisions of the TUB, the Italian Civil Code, and the BRRD. The liquidation process entails the appointment of a liquidator, the valuation of the bank’s assets and liabilities, and the distribution of assets to creditors based on the established hierarchy.
Italy’s bank failure mechanism is designed to protect the interests of creditors, including international bank creditors, through a robust legal framework, supervisory and resolution authorities, and deposit protection schemes. By understanding the steps involved in bank failure determination, resolution, and liquidation, international creditors can better manage their exposure to Italian banks and safeguard their interests in case of bank failures.