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06 March 2009
Guarantee of Banks' Liabilities and Liquidity Enhancement Measures
Emergency Liquidity Assistance
Extraordinary Administration Procedures and Temporary Management Rules
In response to the problems affecting the international banking system and the lack of confidence pervading the European financial markets, in October 2008 the government passed urgent measures in Emergency Legislative Decrees 155/2008 and 157/2008. On December 4 2008 Parliament definitively approved the provisions of the decrees, which came into force on December 5 2008 in Law 190/2008. Additional measures to ensure adequate liquidity levels for Italian banks were introduced in Legislative Decree 185/2008 and were converted into law on January 28 2009 in Law 2/2009.
The measures have two main objectives. First, they introduce provisions to protect and enhance the stability of the banking system by (i) assisting in the recapitalization of Italian banks faced with a shortage of capital, and (ii) improving the banks' liquidity. Second, they are intended to preserve and enhance public confidence in the stability of the banking system.
The Ministry for Economic Affairs and Finance is empowered to underwrite, or guarantee the underwriting of, newly issued shares in banks incorporated in Italy (or Italian banking groups' holding companies) if the Bank of Italy determines that such banks or groups are at risk of capital inadequacy.
The Bank of Italy will evaluate:
Law 190/2008 specifies that the underwriting transactions and the granting of guarantees must take account of market conditions. The provisions of Italian law on compulsory takeover bids and the regulations limiting acquisitions of bank capital do not apply to shares held by the ministry. Such shares must be preferred shares (ie, ranking ahead of all other classes of share in the distribution of dividends). Furthermore, the law specifies that the shares may not:
Underwriting financial instruments
Law 2/2009 empowers the ministry to underwrite eligible financial instruments issued by an Italian bank at the latter's request, provided that its shares are listed on a regulated market. This facility is available until December 31 2009 and is also open to listed holding companies of Italian banking groups.
Such financial instruments:
The ministry may not agree to underwrite such instruments until the Bank of Italy has assessed the economic terms of the proposed transaction and the eligibility of the financial instruments in the issuer's regulatory capital.
On February 25 2009 the ministry issued an implementing decree (approved by the European Commission on February 20 2009) that specifies criteria, conditions and procedures for the operations described in the law.
The state objective of the implementing decree is to provide banks with an alternative means of funding in order to encourage lending to consumers and businesses while providing an adequate return for the investor.
The subscription of the securities is conditional on the bank's compliance with two criteria. First, the bank must execute a memorandum of understanding with the ministry to set out its policy and terms for lending to consumers and small and medium-sized enterprises. Second, it must adopt a code of ethics that, among other things, limits the remuneration of senior management and brokers.
In addition, the decree provides that: (i) the document returned to the ministry must be in line with the pro forma 'prospectus' attached to the decree; and (ii) at least 30% of the financial instruments must be underwritten by private investors (which is termed the 'private quota'), provided that at least 20% of this private quota is underwritten by private investors other than shareholders which, at the time of issue, held more than 2% of the issuer's corporate capital. Ultimately, the ministry and the Bank of Italy must be satisfied that the transaction is in line with market conditions and that such conditions do not "materially alter the incentives for private investors".
State intervention must be limited and the support provided must be strictly necessary for the institution to survive the present market conditions.
A bank must apply to the ministry and the Bank of Italy at least 30 days before the scheduled issue date. Its application must include the resolution issued by the relevant corporate body of the bank and details of:
In order to grant banks adequate access to medium-term financing, the ministry is authorized to take specific action in respect of liquidity and financial support. In particular, Law 190/2008 empowers it to:
These assistance measures are available only once the Bank of Italy has assessed the applicant's capital adequacy and its capacity to meet its obligations; they may be granted to banks which have already received recapitalization contributions. The ministry's claims arising from such transactions will be secured - by statutory provision of law - by a general lien on all movable and immovable assets of the relevant bank which takes priority over any other existing and future lien or security on the same assets.
On November 27 2008 the ministry issued an implementing decree which, among other things, sets thresholds which may not be exceeded as a consequence of the assistance measures. For example, it states that:
The decree also sets general conditions for (i) the nature of the state guarantee, which must be enforceable at first demand, irrevocable and not subject to exceptions, and (ii) the financial instruments that are eligible for swaps or refinancing transactions.
In order to encourage and simplify access to the Bank of Italy's financing, Law 190/2008 provides for emergency measures in favour of banks incorporated in Italy, as well as Italian branches of foreign banks, in the event of a severe liquidity crisis. It provides that where the Bank of Italy grants a loan secured by a pledge or a security assignment over receivables, the relevant security interest: (i) is deemed to be duly perfected and enforceable against a third party on the date of execution of the security agreement - with no need to comply with the formalities of the Civil Code - and by the provisions of the financial guarantee agreements; and (ii) is not subject to claw-back rules under insolvency law.
Moreover, until December 31 2009 the ministry has the discretion to issue a state guarantee in favour of Italian banks and branches of foreign banks in Italy to secure the financing granted by the Bank of Italy in the event of such banks suffering a liquidity crisis.
Law 190/2008 provides for measures to strengthen government control of Italian banks facing a liquidity crisis. The ministry is entitled to apply extraordinary administration procedures and assume temporary managerial control of Italian banks or Italian banking groups in the event of a liquidity crisis or other similarly serious problem that could jeopardize the stability of Italy's financial system. Previously, such procedures could be applied and such control exercised only in the event of serious administrative irregularities, illegal actions or capital losses.
In accordance with the conclusions of the Council for Economic and Financial Affairs, the law addresses the strengthening of bank deposit guarantee systems. The ministry is entitled to issue a state guarantee in favour of depositors for a period of 36 months from October 9 2008 with respect to deposits (eg, current accounts, savings accounts and registered certificates) held by Italian banks. The state guarantee - a maximum amount is not mentioned in the law - appears to be intended as a complement to and a means of integrating the existing depositors' guarantee schemes under the Consolidated Banking Act, which already secure over €100,000 for each depositor.
The new legislation gives the ministry broad powers to stabilize and resolve temporary but serious liquidity problems experienced by Italian banks. However, much of the detail about the exercise of such powers, as well as the criteria, conditions and methods that the ministry will apply, remains to be clarified in secondary legislation (ie, ministry decrees) which is still in preparation. Time will tell whether these financial assistance measures have the desired effect on Italy's unstable financial sector.
For further information on this topic please contact Magda Serriello and Marco Gatta at Gianni Origoni Grippo by telephone (+39 06 478 751) or by fax (+39 06 487 1101) or by email (email@example.com or firstname.lastname@example.org).
(1) This article states that shares which, under the relevant bylaws, confer no voting rights or confer such rights only on certain matters or subject to certain conditions may not represent more then 50% of the institution's entire corporate capital.
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