The Banking Regulation Review: Italy

Introduction

The Italian banking sector proved very resilient throughout the second year of the pandemic, thanks to the extraordinary measures adopted by the Italian government. The postponement of the debt moratoria to the end of 2021, the more than €200 billion under the National Recovery and Resilience Plan (NRRP) to support reforms to be implemented between 2021 and 2026 and the progress in the vaccination campaign contributed to strengthening consumer and business confidence, boosting investments and marking the growth of the local economy over the past year. Against this background, the Italian GDP rose by over 6.5 per cent in 2021.

The upturn in the economy and the supporting measures issued by the government, including those regarding climate change and digital transition, mitigated the impact of the pandemic on the quality of banks' assets. Sales of unlikely-to-pay portfolios and other non-performing loans continued, thereby contributing to the stable decrease of banks' non-performing exposures (NPEs). Capital ratios, which have almost doubled over the past 10 years, are still on the up: at the end of 2021, the CET1 ratio averaged 15.3 per cent, up from 15.1 per cent at the end of 2020.2

The consolidation of the banking sector continued throughout 2021 and the beginning of 2022. Various leading players acquired and merged several banks to expand their geographical presence (e.g., Crédit Agricole Italia) or enhance their expertise in niche markets (e.g., Banca Ifis). In April 2021, Intesa Sanpaolo (ISP) completed the aggregation process with UBI Banca, and one month later Banca Ifis acquired a going concern of Aigis Banca, preventing the social and economic consequences of the Aigis Banca's crisis as a result of the latter's exposure towards the German bank Greensill Bank AG, insolvent since March 2021. Over the past year, Crédit Agricole Italia has continued its expansion in the Italian market by launching in June 2021, just a few months after the voluntary tender offer launched on Credito Valtellinese SpA, a voluntary tender offer on Crédit Agricole FriulAdria's shares. These transactions have been successfully completed, bringing Italy in line with the transnational trend of having larger, stronger banking groups, and the trend will continue as additional transactions are expected to take place during 2022. In August 2021, the Ministry of Economy and Finance (MEF) and Unicredit called off negotiations over the sale of Banca Monte dei Paschi di Siena (MPS), and the MEF will now seek an extension of the deadlines agreed with the European Commission authorities to reprivatise MPS. Meanwhile, BPER entered into an agreement for the acquisition of a controlling shareholding amounting to approximately 80 per cent of Banca Carige's share capital, currently held by the FITD, the Italian deposit guarantee fund.

From a regulatory standpoint, in November 2021, the Banking Act3 was reformed to align it with the provisions of CRD V and CRR II. The reform will strongly impact the authorisation procedures for the acquisition of qualifying shareholdings in banks, banking groups and financial holding companies (see Section II). In 2021, the Bank of Italy also updated its supervisory instructions, implementing CRD V provisions concerning corporate governance and remuneration and incentive policies (see Section III.ii).

In the finance industry, the combination of the pandemic and the lockdown drove banks and financial intermediaries to speed up the digitalisation process. This had a major impact on customers' payment habits, with a strong increase of online payments and transactions, and on the credit process, with new techniques to assess the creditworthiness based on automated processes and third-party provider mechanisms. At the same time, the digital revolution gave wider room to cyberattacks and malware, forcing players to move towards safer digitalisation processes.

To monitor more closely the fintech wave, in 2021 the Bank of Italy set up the 'Milano Hub', the innovation centre built to support the digital banking evolution, attract new talent and support the fintech banks that were born during the covid-19 era (e.g., AideXa).

The chart below details the CET1 ratio of the four biggest banking groups in Italy as at 31 December 2021.

Banking groupCET1 ratio (per cent)
UniCredit*15.03
Intesa14
BPM13.4
MPS12.5

*UniCredit is included in the list of global systemically important banks published by the Financial Stability Board in November 2021.

Source: quarterly financial reports

The regulatory regime applicable to banks

In addition to the EU legislation (specifically, the Capital Requirements Directive (CRD IV,4 as amended by CRD V5), the Capital Requirement Regulation (CRR,6 as amended by CRR II7) and the Single Supervisory Mechanism (SSM) Regulation8), the principles governing banking activities and investment services are contained respectively in the Banking Act and the Italian Financial Act.9 In the past, both acts underwent an in-depth review to, inter alia, implement PSD2 and the second Markets in Financial Instruments Directive (MiFID II),10 and align national legislation with the Markets in Financial Instruments Regulation.11

The regulations implementing these principles are primarily set by the Bank of Italy, in particular through the issuance of Circular No. 229 of 21 April 1999 and Circular No. 285 of 17 December 2013, as subsequently amended (the Supervisory Instructions); and by Consob, the independent public authority responsible for regulating the Italian securities market, notably through intermediaries, issuers and market regulations. Further rules can be set by the Ministry of Economy and Finance (MEF) and the Inter-ministerial Committee for Credit and Saving (together with the Bank of Italy, Consob and the MEF, the supervisory authorities).12 Specific powers in the anti-money laundering (AML) field are ascribed to the Financial Intelligence Unit.

The laws and regulations on banking and financial markets govern lending, deposit taking, securities activities and cross-border operations. A specific set of provisions lays out the conditions and limits under which certain activities (e.g., lending-based crowdfunding) fall outside the savings collection regime, and thus these can also be performed by non-regulated entities. Lending activities can be carried out by banks, financial intermediaries, insurance undertakings, special purpose vehicles (subject to limitations), EU alternative investment funds and Italian investment funds, if certain requirements are met.

While Consob continues to be responsible for the securities market, following the SSM's entry into force in November 2014, the tasks ascribed to the Bank of Italy changed as a consequence of the distinction between significant institutions (SIs) and less significant institutions (LSIs), and the key role played by the European Central Bank (ECB). Specifically, under the SSM:

  1. the ECB is responsible for:
    • supervising Italian SIs, with the assistance of the Bank of Italy;
    • resolving on applications to obtain and withdraw a banking licence, and the authorisation to acquire qualified or controlling shareholdings in banks, regardless of their significance (see Section VI); and
    • ensuring the effective and consistent functioning of the SSM and the Bank of Italy; and
  2. the Bank of Italy's tasks mainly consist of:
    • supervising LSIs;
    • monitoring all Italian banks in relation to transparency, consumer protection and AML matters; and
    • assisting the ECB in supervising Italian SIs.

The ECB also has supervisory powers granted under Italian law in relation to, inter alia, the following operations involving Italian SIs:

  1. outsourcing of activities;
  2. mergers and demergers;
  3. asset transfers and divestments; and
  4. amendments to by-laws.

Foreign banks may carry out business in Italy through the establishment of a branch, or on a cross-border basis, in accordance with a procedure that differs for EU and non-EU banks. EU banks can start mutual recognition activities after a notification procedure between the home country authority and the Bank of Italy, whereas non-EU banks can only operate after being duly authorised to do so and are subject to stricter requirements. Following the implementation of MiFID II, non-EU banks are now allowed to provide investment services for retail clients in Italy exclusively through the establishment of a branch.

Similar principles apply to Italian banks when they intend to undertake banking activities in other EU countries, including the Bank of Italy's authorisation for an Italian bank wishing to operate in a non-EU country.

Banking groups subject to ECB direct supervision are supervised by Banking Supervision Desk I; and all other banks are supervised by Banking Supervision Desk II and Bank of Italy branches. Both Desks have extensive powers that mainly result in supervising national and transnational groups on a consolidated basis, analysing risks and managing administrative proceedings.

As for Italy's banking structure, there are currently 59 banking groups13 and 90 banks not belonging to banking groups.14 The number of bank counters has been reduced by about one third.15 Regarding the presence of foreign banks, there are 81 Italian subsidiaries of foreign banks.16

Regarding legal form, 118 banks are incorporated as joint-stock companies, 238 banks are incorporated as cooperative credit banks (CCBs) and 19 are mutual banks.17

In November 2021, the Banking Act underwent a significant reform aimed at implementing the CRD/CRR package (as last updated) and the European authorities' guidelines. In this context, Legislative Decree No. 284 of 29 November 2021 amended the provisions on bank's qualifying holdings procedure by introducing new cases in which authorisation of the ECB is required, reformed the banking group's perimeter and regulation and increased the number of entities subject to the Bank of Italy's authorisation and supervision, including Italian and EU financial holding companies that control Italian banks.

Prudential regulation

i Relationship with the prudential regulator

The reach of the Bank of Italy's prudential supervision is extensive. This widespread and strong supervisory regime managed to better mitigate the consequences of the financial crisis than was seen in many other countries and encouraged significant capital increase transactions that led to an average increase of up to 15.3 per cent of the CET1 ratio for SIs.18

In implementing the CRD IV and CRR principles, the Bank of Italy exercised its discretionary power to further increase banks' minimum initial capital from €5 million (as provided by CRD IV) to €10 million and exempt banks belonging to a group from holding the liquidity requirements individually (see Section III.iii).

Currently, the supervisory review process consists of the internal capital adequacy assessment process (ICAAP) carried out by banks under the responsibility of their corporate bodies; and the Supervisory Review and Evaluation Process (SREP), entrusted to the Bank of Italy for LSIs and to the ECB for SIs. Whereas the ICAAP mainly aims to quantify the capital needed to face the risks of banking business (including country and transfer risks) and set liquidity management measures accordingly, the purpose of the SREP is to assess the suitability of these measures – both those of a capital and organisational nature – and establish the necessary relevant corrective actions (limitations to the distribution of own funds' financial instruments, imposition of own funds' add-ons and divestment of assets).

Starting from the 2016 SREP process, in addition to the imposition of the own funds' add-on (Pillar 2 requirements), the supervisory authorities may also issue Pillar 2 guidance that, in the event of non-compliance, would lead to intensified supervision and bank-specific measures designed to re-establish a prudent level of capital.

The supervisory review process is carried out in compliance with the proportionality principle, under which corporate governance and risk management processes and mechanisms for identifying the amount of capital due for risk prevention must be proportionate to the features, business size and complexity of each bank. The frequency and intensity of SREP must consider the systemic importance, features and any problematic issues of each institution.

ii Management of banks

Rules governing management and remuneration in banks and banking groups according to CRD IV are set under the Supervisory Instructions, as recently amended in July 2021. These rules strengthen corporate governance by setting, inter alia, further qualitative requirements to be met by banks' directors, self-assessment processes of corporate bodies and ad hoc committees for larger banks. They also introduce several limits to the amount and nature of variable remuneration.

In this context, in July 2021, the Bank of Italy updated the Supervisory Instructions, implementing CRD V provisions aimed at strengthening the existing rules concerning corporate governance of banks and banking groups according to the evolution of the EBA guidelines.

To prevent bad practices, which sometimes adversely affected the local banking industry, and encourage the presence of women within the banking boards of directors, the provisions provide for: (1) mandatory gender diversity rules; (2) ethical standards to be approved by banks; (3) the direct applicability to Italian banks of the CRD V provision on related-party transactions; (4) the broadening of the scope of matters ascribed to the board of directors; and (5) the duty on banks to issue internal regulations setting out the procedures for managing shareholder relationships.

Banks must comply with the gender provisions at the first full renewal of the board and, in any event, in June 2024 at the latest.

Corporate governance requirements

To ensure sound and prudent management and to achieve their business goals, Italian banks are required to:

  1. choose between three management structures:
    • a traditional system (the most common structure) encompassing a shareholders' meeting, a board of directors and an auditory board;
    • a monistic system, whereby the control committee is appointed within the board of directors; and
    • a dualistic system (adopted by only a few large Italian banks to date), which has a separate management board and supervisory board; and
  2. identify the bodies responsible for the three main prudential functions:
    • strategic supervision, which concerns the identification of the bank's targets and supervision over their satisfaction (by examining and resolving upon financial and business plans, and strategic transactions);
    • management (including the general director), which concerns the practical management of the bank to meet the targets set out by the strategic supervision body; and
    • internal control, which concerns the supervision of the regular performance of the administration activity, and the adequacy of the organisation and accounting systems of the bank to the bank's targets.

Banks are required to choose a management structure that is in line with their business and medium to long-term strategic goals and that safeguards the effectiveness of the internal controls system. A specific assessment must be conducted on the structure's implementing costs to ensure their sustainability.

The composition of the corporate bodies (both executive and non-executive) must be commensurate with the complexity and size of the business, and diversified in terms of age, gender, skills and experience. Each member is required to be fully aware of the powers and tasks ascribed; act in the interest of the institution, without being influenced by the shareholders and fulfil professional requirements tailored to the bank's features. In November 2020, the MEF issued a decree on suitability requirements for members of corporate bodies and key function holders of banks and the main categories of intermediaries. The decree aims to strengthen the standards of suitability as it includes detailed criteria to assess, among other things, the integrity, professionalism, competence, independence and time commitment of those persons.

In May 2021, the Bank of Italy issued the new 'fit and proper' procedure for the banks' corporate bodies members. For the appointment of representatives chosen by the shareholders' meeting, the fit-and-proper assessment is carried out by the corporate body within 30 days of the appointment. Where the appointment is not up to the shareholders' meeting, the fit-and-proper assessment must be carried out by the corporate body and the Supervisory Authority before completion of the appointment.

The appointment procedure must also consider the interlocking ban,19 which prevents members from holding similar positions in competitor banking, financial or insurance undertakings or groups.

Corporate bodies are subject to a periodic self-assessment process aimed at verifying the proper qualitative and quantitative composition of each body and encouraging the active participation of each director. The process is described in a report at the request of the Bank of Italy.

Further rules for larger banks (in terms of assets, size and complexity) are provided to ensure ad hoc committees (internal controls and risks, remuneration, appointments), and succession plans for the positions of chief executive officer and general director, to ensure business continuity and prevent economic and reputational effects. The above-mentioned update of the Supervisory Instructions further strengthened the governance principles by preventing the same individual from being appointed as chair of the Risk Committee and chair of the board of directors or of other committees.

Specific provisions to align the special rules on CCBs with the rules on cooperative banking groups were introduced in the Supervisory Instructions, concerning, among other things, capital structure and shareholder categories, articles of association and extraordinary transactions, and territorial competence.

If the top management does not fully comply with the corporate governance principles, the Bank of Italy has the power to remove from office members of the corporate bodies when the sound and prudent management of a bank is compromised.

Remuneration policies

The management body is in charge of setting remuneration policies in line with the risk appetite and long-term interests of a bank, and coherent with its capital and liquidity ratios. Incentive mechanisms that may lead to breaches of the regulations or taking large risks are forbidden.

The Supervisory Instructions, in compliance with CRD IV provisions and recommendations issued by the European Banking Authority (EBA) and Financial Stability Board policies, provide that, among other things:

  1. the ratio between fixed and variable remuneration cannot exceed 100 per cent. The ratio may be increased up to 200 per cent if it is provided for in the articles of association and approved by a shareholders' resolution with a qualified quorum. The latter must be based on a proposal made by the strategic supervision body outlining the concerned personnel, the rationale of the decision and its compatibility with the prudential rules;
  2. at least 50 per cent of the variable component must consist of shares or equivalent ownership interest, which, in any case, the Bank of Italy can prohibit, depending on the bank's specific status;
  3. malus and clawback arrangements also apply to the incentives due or paid to personnel who contributed to the bank or its customer suffering significant losses, or who acted fraudulently, or acted contrary to laws, regulatory or statutory provisions or ethics codes; and
  4. remuneration and incentive clauses that do not comply with EU and local regulations are void and automatically replaced by the parameters set out by these regulations.

Banks apply the above requirements in accordance with their features, size and complexity of their business, based on their classification as minor banks or banks other than minor banks. Non-minor banks must fully comply with the remuneration rules, whereas minor banks benefit from some exemptions.

In November 2021, the Bank of Italy amended the remuneration rules under the Supervisory Instructions according to the new CRD V provisions and EBA guidelines to introduce: (1) the gender-neutral remuneration policies; (2) new provisions on risk takers; (3) further specification on the application of the proportionality principle; and (4) the identification of circumstances under which the variable component of remuneration may be exempted from the more detailed rules on deferral.

iii Regulatory capital and liquidity

Italian banks must hold regulatory capital at least equal to the minimum capital necessary to be authorised to exercise their activity (€10 million, except for cooperative banks, for which the minimum capital required is €5 million). This capital must consist of:

  1. 4.5 per cent of CET1 ratio;
  2. 6 per cent of Tier 1 ratio (a favourable tax regime applies to additional Tier 1 items);
  3. 8 per cent of total capital ratio; and
  4. any additional capital requirements imposed under the SREP (see Section III.i).

Additional requirements are:

  1. liquidity coverage ratio (100 per cent);
  2. leverage ratio (3 per cent based on the Basel Committee's framework, not yet implemented as a minimum requirement); and
  3. buffers, as follows:
    • capital conservation buffer: 2.5 per cent;
    • countercyclical capital buffer: from zero to 2.5 per cent; the Bank of Italy has maintained the countercyclical capital buffer rate (for exposures to Italian counterparties) at zero;
    • global systemically important institution (G-SII) buffer: only UniCredit SpA has been identified as a G-SII and is required to maintain an ongoing capital buffer of 1 per cent of its total risk exposure; and
    • other systemically important institution (O-SII) buffer: four Italian banking groups – UniCredit, Intesa Sanpaolo SpA, Banco BPM SpA and Banca Monte dei Paschi di Siena (MPS) – have been identified as O-SIIs and will have to achieve a buffer of 1 per cent, 0.75 per cent, 0.25 per cent and 0.25 per cent, respectively, by 2022 (the buffer from 1 January 2022 to 1 January 2023 is 1 per cent for UniCredit, 0.75 per cent for Intesa, 0.25 per cent for Banco BPM and zero per cent for MPS).

In this context, Italian banks have also strengthened their capital due to the implementation of the CRD V and CRR II provisions on the total loss-absorbing capacity, the net stable funding ratio (NSFR) and the leverage ratio.

Italian banks belonging to a banking group are exempted from the application of the liquidity coverage requirement on an individual basis, while banking groups – subject to certain conditions – are exempted from calculating the leverage ratio of exposures to entities that belong to the same group and are incorporated in Italy.

In 2020, the ECB and the Bank of Italy issued several measures to support banks to fund the real economy and address operational challenges brought about by covid-19. These include allowing banks to operate temporarily below the level of capital set under the Pillar 2 Guidance, the capital conservation buffer and the liquidity coverage ratio, and to partially use capital instruments that do not qualify as CET1 capital (for example, Additional Tier 1 or Tier 2 instruments) to meet the Pillar 2 Requirements. These measures provided significant capital relief to banks and supported the economy during the crisis. The ECB expects that by January 2023, banks will operate with capital levels above those defined by their respective Pillar 2 Guidance.

Due to the pandemic, in December 2020 the Bank of Italy recommended that LSIs refrain from recognising or paying dividends and interim dividends out of profits in 2021 and, if necessary, limit dividends to a maximum of 15 per cent of the 2019–2020 profits or 20 basis points of the CET1 ratio. In July 2021, the Bank of Italy repealed this recommendation thus enabling Italian banks to pay dividends starting from 1 October 2021. Despite the formal revocation of the ban, best practice suggests that local banks share the payment process with the regulator in advance. Moreover, in August 2021, the ECB and the EBA published the stress tests' results on the major European banks, which showed the degree of resilience of EU banks over a three-year horizon during which they suffered severe shocks because of covid-19. Despite the unprecedented shock of 2020, the CET1 ratio recorded at the start of the three-year horizon of the stress test (15.3 per cent, transitional) was notably above the value reported at the starting point of the previous test (14.4 per cent, transitional restated). Moreover, the CET1 ratio recorded by banks at the end of the stress-test horizon exceeded their overall capital requirements. This data is testament to the continued efforts of EU banks to greatly strengthen their capital position.

Within the prudential regulations, a key role is ascribed to management of the liquidity risk, both as a funding liquidity risk and market liquidity risk. To prevent these risks, Italian banking groups, Italian banks not belonging to a group and Italian branches of non-EU banks (in the latter case, in accordance with the proportionality principle20) are mainly required to identify and measure their exposure to a liquidity risk, establish a liquidity risk's tolerance threshold and carry out stress tests to assess the adequacy of the liquidity reserves on an ongoing basis.

iv Recovery and resolution

Italy implemented the Bank Recovery and Resolution Directive (BRRD) through Legislative Decrees Nos. 180 and 181 of 16 November 2015, which set out the BRRD rules and updated the Banking Act and Financial Act accordingly. The Bank of Italy has utilised the BRRD's resolution toolkit once by placing four regional banks under resolution a few days after the regulatory framework was introduced.

The four bridge institutions established by virtue of the resolution were sold to UBI Banca SpA and BPER Banca SpA two years after the resolution process began, at the end of a competitive bidding procedure, for a symbolic purchase price.

In addition to the BRRD implementing regulations, Italian banks are still subject to the local regime, which, depending on the nature of the bank crisis, envisages:

  1. special administration: a short-term temporary measure aimed at verifying the possibility of restoring adequate capital buffers, and sound organisation and business conditions when the infringements in the bank's management, the breaches of the applicable regulations or the losses are serious but not irrevocable (as at January 2021, two banks were under special administration); and
  2. compulsory administrative liquidation: to be applied when a crisis appears to be irreversible and the conditions for resolutions are not fulfilled, and which is a direction to close down a bank and allow the competent court that handles the process to satisfy most of the creditors of that bank.

In September 2020, the Bank of Italy adopted new rules on recovery plans to implement EU Regulation No. 348/2019, which grants resolution authorities certain discretionary powers in determining the qualitative and quantitative criteria to be applied when assessing whether a bank can adopt simplified recovery plans.

In 2021, the Italian government introduced additional provisions to the above legal framework to: (1) set out the requirements that liabilities must meet to be eligible for inclusion in the minimum requirement for own funds and eligible liabilities (MREL), and the consequences of a breach of the MREL requirement; (2) ascribe the resolution authority the power to prohibit the payment of dividends and other 'distributions' of capital resources capable of reducing a given bank's ability to absorb losses, in the event of non-compliance with the capital requirements under the CRD and the CRR; (3) detail the rules on the contractual recognition of bail-in; (4) adjust the sanctions framework to BRRD II; and (5) set out different minimum denominations for subordinated bonds (known as junior bonds) and bonds representing second tier unsecured debt (known as senior non preferred bonds) for the protection of non-professional investors.

After having applied for a precautionary recapitalisation under Law Decree No. 237 of 23 December 2016, in July 2017 MPS completed a total recapitalisation of €8.8 billion covered through burden-sharing and the state's subscription of newly issued MPS shares. As a result, the state currently holds 64.2 per cent of MPS's share capital. Then, in 2021 the Italian government and UniCredit called off the negotiations for the acquisition by the latter of the state-owned controlling shareholding in the bank, after attempts to reach a deal over a costly recapitalisation fell through. As a result of the termination of the negotiations, the ECB, the Single Resolution Board and the EU Commission are currently assessing the feasibility of MPS' 2022–2026 business plan, in compliance with banking and applicable state aid regulations.

In January 2019, the ECB placed Carige under special administration. In December 2019, the FITD, among others, participated in a €700 million capital increase, thereby becoming Carige's main shareholder and allowing the bank to return to ordinary administration. In February 2022, BPER entered into an agreement for the acquisition of a controlling shareholding equal to approximately 80 per cent of Carige's current share capital held by the FITD.

Furthermore, at the end of 2019, BPB was placed under special administration due to asset losses, and the FITD intervened to restore the bank's capital and prevent potential adverse consequences arising from its precarious condition. BPB, following the transformation into a joint-stock company, returned to ordinary administration in October 2020 and was acquired by the state-owned bank Medio Credito Centrale SpA.

In May 2021, Aigis Banca SpA was placed in compulsory administrative liquidation, and the FITD intervened in the transfer of Aigis Banca's assets and liabilities to Banca Ifis, which took over Aigis Banca's contractual relationships with customers.

Conduct of business

Appropriate conduct of business is guided by the principles of 'sound and prudent management' and 'proportionality'. Banks comply with the sound and prudent management principle when they:

  1. contain the typical risks related to their banking activity (credit risk, market risk, liquidity risk and operational or legal risk);
  2. maintain predetermined liquidity and risks ratios;
  3. ensure the service's continuity to customers; and
  4. perform their activity prudently and efficiently.

The proportionality principle is complied with when banks set up their measures, procedures and systems in accordance with the size and complexity of their businesses and clients.

During the past few years, both the supervisory authorities and the EU legislator have referred to the foregoing principles when issuing their laws with the aim of regulating the banking sector more strictly, as well as of preventing minor banks from being subject to the stringent requirements provided for major institutions.

This approach has led credit institutions to diversify their internal structures and procedures to safeguard all types of client and adhere to mandatory out-of-court settlement systems, as seen in the subsequently adopted measures on transparency, investment services and AML, and in the banking and financial arbitrators' fields.

As a result, the Italian regulatory framework has been subject to an in-depth review to ensure appropriate implementation of the EU provisions regarding (among other things) investment services, AML, transparency and payment services. This has led to, inter alia:

  1. strengthening corporate governance and internal controls with the aim of increasing the protection of clients, with a focus on both investors and retail clients. This has led to the updating of company policies and, in some cases, wider reorganisation of internal procedures. Additional controls and constraints apply to the outsourcing of control and key functions because of their increased significance, particularly in the context of smaller banks. The new regulations mainly aim to minimise the risk that the outsourcee might jeopardise the bank and its clients, and enable the bank, in turn, to discharge its responsibilities;
  2. amending the anti-money laundering regulations to include the use of smartphone and new technologies in fulfilling the customer due-diligence duties, and providing additional measures to adequately face the risks arising from both the financial stress caused by Covid-19 and the significant increase in e-commerce; and
  3. detailing the transparency requirements according to the new payment services introduced by PSD2 and their risk level, thus providing for appropriate customer protection depending on the sophistication of the product. Additional transparency duties have been introduced in terms of the information to be provided to consumers, especially with respect to the economic features of lending agreements.

Conduct of business is also subject to disclosure duties towards the supervisory authorities, clients and the public, entailing both preventive and ex post information reports.21 The Bank of Italy and Consob are, in turn, allowed to request further data and clarification related to the information provided and, if necessary, order inspections and internal investigations.

A breach of the rules governing conduct of business may involve civil, criminal and administrative liability for both the banks and the individuals committing such violations, based on the following principles:

  1. civil liability is governed by the Italian Civil Code and may be classified, as per general principles, as contractual, non-contractual or pre-contractual liability:
    • contractual liability mainly occurs when a bank does not comply with the provisions set out in the single contracts executed with its customers, or it breaches the best execution duties under MiFID II;
    • non-contractual liability mainly refers to the liability provided by Article 2049 of the Civil Code, under which employers and principals may be deemed responsible for damage caused by their employees and agents during the fulfilment of their professional duties;22 and
    • pre-contractual liability occurs where contracts between a bank and its customers are not executed as a result of the unfair conduct of the bank;
  2. criminal liability primarily covers any unauthorised banking and financial activity. During the past few years there has been an increase in other crimes, such as obstructing the supervisory authorities' exercise of powers and the occurrence of transnational financial frauds, which entailed a review of deposit guarantee schemes at an EU level. The main rules are provided under the Italian Criminal Code, the Italian Civil Code and the Banking Act. At the beginning of 2016, most of the criminal sanctions established for breaching AML regulations were replaced by administrative sanctions (see Legislative Decree No. 8 of 15 January 2016). Although criminal liability is personal, a bank can incur administrative liability when its corporate bodies and top management commit a crime in the bank's interest and no adequate measures were implemented to prevent this crime, in accordance with the criteria under Legislative Decree No. 231 of 8 June 2001; and
  3. administrative liability mainly consists of the liability of banks, corporate bodies, top managers and heads of internal functions that breach certain provisions concerning, inter alia, the integrity and reputation requirements and the regulatory fulfilments.

With the implementation of CRD IV and the establishment of the SSM, since 2015 the regulatory framework on administrative sanctions has been focused on sanctioning the supervised entities and, subject to certain conditions, their corporate bodies and managers. More specifically, provisions governing administrative liability under the Banking Act provide pecuniary sanctions, with maximum fines of up to €5 million for individuals and up to 10 per cent of the total annual net turnover for legal persons.

Although the imposition of sanctions is determined in consideration of the extent and length of the breach, the economic status of the addressees and the damage caused to third parties, the supervisory authorities tend to sanction larger banks and intermediaries with fines ranging from €1 million to €3.5 million.

To minimise the risk of a breach of the applicable regulations, Italian banks are required to set internal whistle-blowing procedures that allow staff to flag any potential infringement of the law while keeping confidential the information concerning the involved individuals.

Funding

Italian banks fund their activities in a wide variety of ways in terms of sources (retail, wholesale and central bank liquidity), types of securities (shares, bonds, deposits) and funding technique (capital raising, plain bond issuance, securitisation transactions and covered bond offers).

The funding structure is usually influenced by the bank's specific characteristics (mainly size, incorporated business form and financial strength), the economic and financial environment and the monetary policy of central banks, including quantitative easing programmes. As a consequence, small banks tend to source funding through wholesale bonds far less frequently than medium-sized and large banks, and those channels that provide issuers with a lower cost of funding (such as secured financing) have been boosted in the past few years because of the financial crisis.

In November 2021, the growth in deposits has further reduced the funding gap (which is measured by the difference between the value of the loans and retail funding as a percentage of loan) by about 1.2 percentage points (to -11.8 per cent in September, 7 points lower than it was in February of last year). In June 2020, the NSFR, which is a binding requirement from 27 June 2021, stood at an average of 131 per cent for Italian banks, with none of the banks having a ratio below 100, which is the regulatory minimum.23

Since April 2020, the ECB and the Bank of Italy have adopted extraordinary and temporary easing measures to respond to the economic crisis caused by covid-19, including measures to increase the availability of assets that can be used as collateral for Eurosystem refinancing operations, by relaxing the eligibility and risk control criteria.

Bond issues on international markets supported the recovery seen from the start of 2019, following the easing of tensions on the government securities market. These issues are all eligible for use in the calculation of the minimum requirement for own funds and eligible liabilities subject to bail-in, part of which must include senior non-preferred or subordinated securities.

Control of banks and transfers of banking business

i Control regime

In the past decade, the acquisition process of stakes in Italian banks has undergone intense revision following an increase of investments of foreign banks in the Italian market and the (still undergoing) implementation of CRD IV and CRD V.

In line with the SSM principles, the following are now subject to prior ECB authorisation, following the Bank of Italy's assessment as they are considered to be the acquisition of a qualifying holding in a bank: the direct or indirect acquisition of a controlling stake, a considerable stake (i.e., a stake ascribing to the prospective shareholder a quota of voting rights or share capital of the bank equal to at least 10 per cent, 20 per cent, 30 per cent or 50 per cent), or a stake enabling the holder to exercise a significant influence over the bank's management. Following the implementation of BRRD, the Bank of Italy has become the competent authority when authorisation for one of the above stakes is granted in a resolution.

The procedure entails:

  1. the filing, by the prospective shareholder, of an application with the Bank of Italy outlining, inter alia, a detailed business plan attesting to the financial solidity of the acquisition project, the strategy that will be adopted to acquire the qualifying holding and the suitability of the prospective shareholder's group to ensure full compliance with the supervisory rules;
  2. the Bank of Italy's notification to the ECB of receipt of the application (unless the Bank of Italy requires any amendments or supplements to be made to the application);
  3. the Bank of Italy's assessment of the application, with a focus on:
    • the prospective shareholder's financial soundness, good reputation, integrity and professional requirements (see Section III.ii);
    • the suitability of the medium to long-term (i.e., three to five years) business plan; and
    • possible money-laundering issues;
  4. the Bank of Italy's filing with the ECB of a draft decision to authorise or oppose the acquisition of a qualifying holding; and
  5. the ECB's decision on the acquisition of the qualifying holding (based on EU and local regulations) and notification to the prospective shareholder.

The authorisation procedure takes 60 working days from the Bank of Italy's acknowledgement of the filing under point (a). The term can be suspended for up to 20 working days or – if the prospective shareholder is incorporated in a non-EU state, is subject to non-EU regulations or is not a supervised entity – 30 working days.

The authorisation is granted when the sound and prudent management of the target bank is ensured and the requirements under point (a) above are satisfied. The competent authorities' assessment covers elements such as the sustainability of financial leverage, the complexity of the corporate chain and the acquirer's ability to provide additional funds to target banks in a state of stress.

The new Bank of Italy Supervisory Instructions concerning the information and documentation to be filed with the supervisory authority as part of the qualifying holding procedure were published in October 2021. The Bank of Italy finally updated its previous regulations bringing them in line with current best practices, with the new provisions entering into force as of 1 April 2022. This includes clarifying, among other things: (1) the standard set of documentation and information to be submitted; (2) the information to be provided by investment funds and sovereign funds; and (3) the application of the proportionality principle with respect to, among other things, the extent of the assessment and the required information. In any case, even though this information and documentation require careful analysis to avoid any incompleteness, the soundness of the business plan, the corporate governance and the overall IT architecture remain the focal points in a change of control procedure.

In November 2021, the Banking Act was materially amended to finally align the Italian provisions on qualifying holdings and control regime to the ESAs' joint guidelines on prudential assessment of acquisitions and increase of qualifying holdings. The new regulatory framework focuses on, among other things, clarifying the notions of 'indirect qualifying holdings', introducing the 'multiplication criteria',24 and 'acting in concert', extending the scope of the authorisation to also include shareholder's agreements entered into without the acquisition by the parties of additional stake in the target bank. These new provisions mark a significant change from the past since, once the relevant implementing provisions by the Bank of Italy are published, transactions that were historically out of the scope of the Italian qualifying holding procedure will be subject to the ECB and Bank of Italy prior authorisation.

ii Transfers of banking business

Transfers of undertakings, going concerns or goods, or other obligations or rights (such as receivables, debts and contracts) identifiable as a 'bulk'25 (transfer), are governed by Article 58 of the Banking Act and Title III of the Bank of Italy Circular No. 229 of 21 April 1999.

The transfer process provides that the transferee, which may be, inter alia, a bank, an entity belonging to a banking group or a financial intermediary enrolled with the register under Article 106 of the Banking Act (financial intermediary), gives notice of the transfer to the competent companies register and publishes the notice in the Italian Official Gazette (notification duties).

The consent of the customers concerned is not required, but within three months of completing the notification duties, the parties to the contracts under the transfer may exercise the right of withdrawal if there is a grounded reason (in this case, the transferor is liable for any damage suffered by other parties because of the transfer). When the sum of the assets and liabilities transferred is greater than 10 per cent of the transferee's regulatory capital, the transfer must be authorised in advance by the Bank of Italy or by the ECB (see Section II).

The above-mentioned procedure allows banks to benefit from a simplified process that speeds up and reduces the costs of the transfer, ensuring at the same time that all charges and guarantees maintain their validity and priority once all the notification duties have been complied with, without any further formality being needed.

In 2020, banks continued to largely rely on this procedure to dispose of NPLs quickly and effectively, and, with the NPL ratio still being significant, this trend is likely to continue in 2021.

The year in review

The Italian banking sector entered the pandemic in a much better shape than in the past (i.e., greater capital buffers, reduced burden of legacy stocks of non-performing loans and improved risk management frameworks) due to regulatory reforms put in place in the aftermath of the 2008–2011 financial crisis and the achievements of the first seven years of Single Supervisory Mechanism (SSM) within the euro area.

Despite the extraordinary hurdles caused by covid-19, in 2021 Italian banks continued to strengthen their balance sheets and increase their capital adequacy, and thus proved that they remained able to support the real economy and were very resilient, as shown by the outcome of the recent EU-wide stress test.

Banks met the increase in corporate demand for funding. The availability of credit was favoured by the possibility of taking advantage of public guarantees on loans and by the ample recourse to Eurosystem refinancing.

The improvement in bank capital adequacy was significant, and the gap between the capital level of Italian significant banking groups and the average level of the other banks supervised by the SSM has essentially closed.

The pandemic has also not slowed down the decline of the NPE ratio, which has continued over the course of 2021. Disposals remained the main channel for reducing banks' NPEs: since 2016 sales reached almost €190 billion.

In this context, the banking sector demonstrated a strong trend towards consolidation and aggregation and continued to reorganise the distribution network by cutting the number of branches.

During 2021, Intesa Sanpaolo (ISP) completed the aggregation process with UBI Banca, which was merged into ISP on 12 April 2021. April 2021 saw the completion of Crédit Agricole Italia's voluntary public tender offer for Credito Valtellinese's shares launched on 23 November 2020. The merger between the two banks is expected to be fully completed in April 2022. During 2021, other voluntary public tender offers have been launched by Crédit Agricole Italia to acquire 17.2 per cent of Crédit Agricole FriulAdria's shares and by Sparkasse to acquire a controlling shareholding in Civibank, immediately after the latter completed its transformation into a joint stock company in May 2021. In May 2021 Banca Ifis acquired the business of Aigis Banca, while in August 2021 Zurich Insurance Company and Deutsche Bank entered into a business sale agreement as per which Deutsche Bank sold its financial advisory business consisting of 1,085 financial advisors, 97 employees and €16.5 billion in assets under management to Zurich Insurance Company.

The rationalisation of banking group's business and branch networks has mainly concerned large and medium banks, which since 2008 have reduced the number of the branches by just under 40 per cent.

PSD2 and the forced acceleration of digitalisation caused by the pandemic heavily accelerated the financial services industry. Through the PSD2 provisions, new authorised entities are now allowed to access banks' data and to offer products and services to banks' customers on a more level playing field for economic operators. As a result, traditional banking operators are responding with strategies to adapt their current business models through the development of platform services, acquisitions or partnerships with fintech companies, and the transformation into digital banks. Against this background, Nexi and SIA completed the merger procedure in January 2022, as a result of which Nexi is now a leading global paytech leader, and Aidexa was authorised as the first fintech bank in Italy.

Almost all larger banks and a third of smaller ones have planned or started projects for financial innovation applied to the provision of financial services (fintech). The main areas of interest are the improvement of customer service and using data for the fine-tuning of commercial strategies. About a third of banks expanded their investment plans compared with what was planned at the beginning of last year, mainly to better address the needs triggered the public health emergency.

In the wake of the fintech development, supervisory authorities set up the Milano Hub, the innovation centre built by the Bank of Italy to support the digital evolution of the Italian financial market and attract new talent and investment and the home of the regulatory sandbox. The regulatory sandbox is a controlled environment where supervised entities and fintech operators will be able to test, for a limited period of time, technologically innovative products and services in the banking, financial and insurance sectors.

Sustainable finance was a further hot topic on the banks' agendas, with the aim of better defining their environmental, social and governance (ESG) strategy and improving sound, effective and comprehensive management, as well as disclosure of climate-related and environmental risks under the current regulatory framework.

From a regulatory standpoint, in 2021, Italy introduced or placed under consultation significant new regulations to meet the EU framework requirements and the ECB's and the EBA's guidelines.

In November 2021, the Banking Act underwent a significant reform to align the Italian provisions on, among other things, qualifying holdings procedures, control regime and banking groups to the EU framework, introducing the 'multiplication criterion' for the indirect acquisitions of qualifying holdings, specific provisions on acting in concert in the context of qualifying holdings procedures and a new authorisation regime for Italian and EU financial holdings, even for those entities already active in the Italian market before the reform. Further amendments relate to the implementation of the BRRD II regime in Italy. The Bank of Italy's implementing regulations are expected to be issued in 2022.

Another key regulatory area subject to significant changes in 2021 is the bank's governance framework, which saw, among other things (1) the introduction of gender quotas and gender-neutral remuneration policies that prohibit discrimination in remuneration between genders, (2) further specification on the proportionality principle, which categorises banks in accordance with their features, size and complexity of business and (3) the increase of the deferral period in respect of variable remuneration for all key personnel.

Outlook and conclusions

In the two years since the pandemic broke out, the Italian banking system has demonstrated strong resilience and capacity to support the economy while maintaining a robust capital position and asset quality.

The Italian economy grew at a sustained rate throughout 2021: GDP rose by over 6.5 per cent, a marked increase not witnessed in decades and mostly boosted by domestic demand. This steady recovery was widespread across various commercial sectors – especially at the industrial level, which now stands above pre-pandemic levels. Italy's significant progress in its vaccination campaign contributed to reopening businesses and increasing consumer and business confidence.

The country's economic prospects remain favourable: strong GDP growth is projected for the next few years, especially considering the benefits arising from the massive investment spending programmes in the pipeline. The package of reforms and investments outlined in Italy's NRRP, which envisages €205 billion in EU funds and an additional €30 billion in Italian resources to address, among other things, climate change and digital transition, could lead to a 3 per cent to 6 per cent GDP increase over the next 10 years.

In light of the above economic outlook and considering the significant amendments to banking groups' structures and governance, Italian banks face decisive challenges and opportunities in the near future. Italy's priorities for 2022–2024 are in line with those outlined by the SSM, that is:

  1. ensuring safe and prudent management of banks while addressing the pandemic's adverse effects;
  2. tackling emerging risks, for example, climate-related and environmental risks and cyberattacks;
  3. continuing the strengthening of the banking sector in order to address deficiencies in governance and profitability; and
  4. pursuing progress in banks' digital transformation.

In this context – and with a regulatory environment that is becoming more and more sophisticated and complex – technical knowledge and familiarity with Italian and European banking and financial regulations will be crucial.

Footnotes

1 Giuseppe Rumi is a partner, Andrea Savigliano is a managing associate and Giulio Vece is a senior associate at BonelliErede.

2 Bank of Italy Economic Bulletin, No. 1/2022.

3 Legislative Decree No. 385 of 1 September 1993.

4 Directive 2013/36/EU.

5 Directive (EU) 2019/878.

6 Regulation (EU) No. 575/2013.

7 Regulation (EU) No. 2019/876.

8 Regulation (EU) No. 1024/2013.

9 Legislative Decree No. 58 of 24 February 1998.

10 Directive 2014/65/EU.

11 Regulation (EU) No. 600/2014.

12 The supervisory authorities can be divided into two categories: the Bank of Italy (a company limited by shares whose main shareholders are the most notable Italian banking groups) and Consob, which represent the independent authorities; and the MEF and the Inter-ministerial Committee for Credit and Saving, whose members are directly appointed by the government. The coexistence of both independent and political authorities is aimed at ensuring the balance of public and private interests and guaranteeing that any legislative reform is shared by both government representatives and exponents of the banking market.

13 Data updated to January 2022; source: Bank of Italy registers.

14 Data updated to May 2021; source: Bank of Italy Annual Report.

15 Data updated to January 2022; source: Bank of Italy registers.

16 ibid.

17 ibid.

18 Data updated to September 2021; source: Bank of Italy Economic Bulletin, No. 1, 2022.

19 See Article 36 of Law Decree No. 201 of 6 December 2011, as converted into law by Law No. 214 of 22 December 2011.

20 According to the proportionality principle, in exercising its supervisory tasks over these entities, the Bank of Italy may consider policies and strategies adopted by parent companies to face the liquidity risk.

21 In 2020, Consob took several measures relating to the second Markets in Financial Instruments Directive aimed at regulating, above all, the information to be given to clients in the context of ex post reporting.

22 In the Italian banking sector, this kind of liability is frequently found in the working relationships between banks and their brokers regarding the activities carried out by the latter on behalf of banks.

23 Data updated to September 2021; source: Bank of Italy Financial Stability Report No. 2, November 2021.

24 This criterion assumes that non-controlling direct or indirect shareholder (acquirer) of the direct qualifying shareholder (acquirer) of the bank shall be deemed as indirect qualifying shareholder (acquirer) of this bank if, as a result of multiplication of holdings, it has (indirectly) 10 per cent or more of share in the latter. For example: 30 per cent shareholder of the direct acquirer of 40 per cent of shares in the credit institution should be deemed as an indirect acquisition of 12 per cent of shares in that credit institution and thus subject to ECB and Bank of Italy prior authorisation.

25 The contractual relationships may be identified as a bulk when they refer to, inter alia, receivables presenting a common distinguishing element (e.g., the assignment under ex-Article 58 of the Banking Act of all the receivables owned by a bank as regards a certain person or individual, companies that are part of a certain group and all the enterprises placed in a certain region).

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