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03 May 2002
Prior to Decree 342/1999, such capitalization was permitted by the Civil Code, but only in limited circumstances. Nevertheless, Italian courts still tended to permit the capitalization of accrued interest if the bank and customer had entered into a contract that provided for this.
A significant change occurred in 1999, when the Supreme Court declared that such contractually agreed capitalization is not in compliance with the Civil Code.(1) This Supreme Court interpretation threw the Italian banking system into disarray, as it left all pending contracts which provided for the capitalization of accrued interest open to dispute.
In order to address this problem, the Italian government adopted Legislative Decree 342/1999, which established the validity of clauses providing for the capitalization of accrued interest in existing and new banking contracts.
However, the Constitutional Court(2) declared that the legislative decree was unconstitutional, because the Italian Parliament had neither allowed the government to give the decree retroactive effect nor confirmed the validity of clauses providing for the capitalization of accrued interest introduced prior to the decree's enforcement.
Despite these new rules established by the Supreme Court and the Constitutional Court, subsequent decisions of the courts of Florence and Rome have unexpectedly confirmed the validity of clauses providing for the capitalization of accrued interest which were adopted prior to the decree's entry into force. It is probable that the Court of Cassation will be requested to rule on these decisions in case of appeal.
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