Legislative Decree No. 385 of 1 September 1993 (the Consolidated Law on Banking) grants the Bank of Italy supervisory powers for banks, banking groups, financial companies, e-money institutions and payment service providers. These powers are exercised in the pursuit of distinct but related objectives. The most important prudential aspects of the supervision of Italian banks and banking groups are addressed within the framework of the Single Supervisory Mechanism (SSM) by the European Central Bank and the national supervisory authorities (for Italy, the Bank of Italy). The SSM has been fully operational since 4 November 2014; its tasks are carried out through the Supervisory Board (SB) made up of representatives of the national supervisory authorities (NCAs) and six permanent members. The SB formulates proposals for the adoption of decisions by the Governing Council of the ECB.
The Bank of Italy’s supervision of banks is designed to promote sound and prudent management, the transparency of operations and of the services provided, and fairness in bank-customer relations. The objectives of transparency and fairness cover banking and financial operations and services, consumer credit and payment services. Investment services and activities are excluded from the Bank’s field of competence as are the placement of financial products (such as bonds) for investment purposes. Responsibility for safeguarding the stability, efficiency and competitiveness of the financial system as a whole is entrusted by Parliament to the Bank of Italy.
Legislative Decree No. 58 of 24 February 1998 (the Consolidated Law on Finance) also assigns supervisory tasks to the Bank of Italy for securities investment firms (SIMs) and asset management companies (SGRs); in this sphere the Bank of Italy endeavours to limit risk and to ensure the stability and sound and prudent management of banks, while Italy’s Companies and Stock Exchange Commission (Consob) oversees the transparency and fairness of investment practices.
Italian law also assigns the Bank of Italy a central role in combating money laundering and the financing of terrorism: it issues secondary legislation, oversees compliance with the rules and adopts corrective measures and sanctions in respect of the supervised entities. The Financial Intelligence Unit (FIU), wholly independently run and operating autonomously within the Bank of Italy, collects reports on suspicious transactions, analyses them and transmits them to the competent authorities.
The Bank of Italy bases its supervisory action on a set of rules and oversight tools designed to safeguard the functionality of the entire financial system. Stability’s first line of defence is a solidly built, clear and uniform regulatory framework for intermediaries performing the same activities. The second line of defence comprises adequate information flows and in-depth analyses – conducted both off-site and at banks’ premises – of any changes in their risk profile and interventions consistent with the results of these analyses. The third defence consists in sanctions of both a punitive and corrective nature, to ensure compliance. The fourth and final defence is constituted by the crisis management procedures designed to guarantee business continuity and prevent contagion to other operators. The rules for managing bank crises were recently modified by Legislative Decree 180/2015, transposing the Bank Recovery and Resolution Directive (BRRD) into Italian law.
In today’s globally integrated banking and financial markets, it is vital that supervisory authorities cooperate and coordinate their actions with a view to making more information available and to avoid duplicating controls. For this reason the Bank of Italy works in tandem with the other Italian and international supervisory authorities, on a bilateral basis and through its membership of committees.
EU member countries are redoubling their coordination and cooperation efforts, with an increasing emphasis on centralized planning and decision-making. For the euro area (and for future members of the single currency area) a common system of banking supervision has been achieved with the introduction of the Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM). The establishment of the SSM and SRM has had major implications for institutional and operational arrangements throughout the area, entailing as it does the joint exercise of the main powers of supervision and crisis resolution.
Within the SSM decisions on the fundamental steps involved in regulating banks’ market presence and the supervision of the most important prudential matters are taken by the ECB and the national supervisory authorities. In addition to making a significant contribution to the supervision of the banks established in their own countries, the NCAs play a part in the decisions taken by the SSM governing bodies vis-à-vis all euro area banks, including those established and operational in other States.
The SSM directly oversees all ‘significant’ euro-area banks, which have been identified on the basis of specific criteria. The other, ‘less significant’, banks are supervised by the national authorities in accordance with the SSM guidelines, and can also be subject to direct supervision in the cases provided for under European law.
The Single Resolution Mechanism (SRM) became fully operational on 1 January 2016. It is another highly-structured system comprising the national resolution authorities (NRAs) and a centralized body, the Single Resolution Board (SRB), with representatives from the NRAs and six permanent members. Working in close cooperation with the SSM, it is responsible for centralizing crisis management for ‘significant’ banks in the euro area or for banks operating at international level, overcoming the problems of procedural fragmentation along national lines. Within the SRM, the Bank of Italy has been designated national resolution authority.
The SRM and NRAs can avail of a range of tools introduced by the BRRD. These include the possibility of transferring the accounts of troubled banks to third parties or to special-purpose vehicles to ensure the continuity of vital business functions (in this instance by establishing a bridge bank), procedures to sell off non-performing assets (via a bad bank), or a bail-in, involving the transfer to shareholders and creditors of the losses that emerge following a crisis, designed to prevent or limit the need for public support, which is only contemplated in exceptional circumstances. The European rules also provide for the establishment of a Single Resolution Fund (SRF) financed by the contributions of euro-area banks, without recourse to taxpayers’ money (http://www.bancaditalia.it/media/approfondimenti/2015/gestione-crisi-bancarie/index.html).
In addition to on- and off-site controls to verify compliance with the conditions for exercising banking and financial activities, the Bank of Italy’s supervisory action extends to the adoption of administrative measures that may be favourable or unfavourable to the supervised entities. The administrative proceedings undertaken can be activated at the request of a third party or by the Bank on its own authority and are subject to the general provisions of Law 241/1990 on administrative proceedings and the Bank of Italy measure of 25 June 2008 which, in both instances, identifies the units responsible for the preliminary investigation and the timeframe for completion.
All the proceedings are based on the principle of separating the investigative and decision-making stages: the first stage is completed by the offices of the Directorate General for Financial Supervision and Regulation which, based on all available qualitative and quantitative information, carry out the technical analysis of the facts and prerequisites for intervention; the second stage is conducted by the Bank of Italy’s Governing Board, a collegiate body to which Law 262/2005 assigns responsibility for the adoption of external measures in connection with the Bank’s institutional functions. These measures may have favourable or unfavourable legal repercussions for the supervised entities.
The most noteworthy measures involving banks are authorizations, sanctions and provisions relating to the management of crisis situations.
1) Authorizations are measures issued once the Bank of Italy or the ECB are satisfied as to the existence of the legal prerequisites for conducting certain activities or establishing certain practices. This often requires the application of very detailed and technically complex assessment criteria.
For example, to authorize the subscription of large equity holdings in a bank it is necessary to first ascertain that the applicant meets the necessary requirements in terms of reputation, experience and financial soundness, and is not involved in money laundering activities or the financing of terrorism.
Authorizing a bank to acquire holdings in other banks or financial companies entails verifying that it is in possession of the necessary financial, technical and organizational resources. The Bank of Italy must also ascertain that the acquisition of the holding will not pose any obstacle to its supervisory action.
The granting of authorization to redeem subordinated bonds is subject to verification by the Bank of Italy that the operation does not jeopardize compliance with the prudential rules obliging banks to maintain sufficient capital adequacy ratios.
Authorizations must always be requested ex ante; none of the initiatives subject to prior approval may be undertaken before the Bank of Italy or the European Central Bank has issued the relevant measure.
If the necessary prerequisites do not subsist at the investigative stage, authorization can be denied; even if granted, it may be accompanied by recommendations and requests for action to remedy any shortcomings identified.
2) Following the launch of the SSM on 4 November 2014, sanctioning powers are apportioned between the ECB and the Bank of Italy. For ‘significant’ banks in particular, the ECB can impose pecuniary sanctions on legal entities for violations of directly applicable European rules (EU regulations, ECB regulations or decisions); in the other cases (infringements of national laws, including those transposing European directives, violations by individuals, and for non-pecuniary sanctions) sanctions are imposed by the national supervisory authorities at the request of the ECB. For ‘less significant’ banks the ECB has the power to apply pecuniary sanctions directly only for violations of the regulations and decisions it has issued; in all other cases the power to impose sanctions lies with the Bank of Italy. All the sanction proceedings under way prior to the entry into force of the SSM fall within the exclusive competence of the Bank of Italy.
Sanction proceedings are complex and strictly defined by Law 689/1981 and the Consolidated Law on Banking, as well as by the Bank of Italy’s instructions on sanctions and administrative sanction proceedings, inspired by the principle of adversarial proceedings and the right of the parties involved to defend themselves.
An investigation of irregularities is launched whenever the Bank’s supervisory activities – during off-site or on-site controls or following transparency and anti-money-laundering checks at the individual branches of banking and financial intermediaries – reveal issues that could amount to a violation of the rules governing the operations of intermediaries. If potentially sanctionable practices are identified, the Bank will initiate proceedings.
At this point the Bank formally notifies the violations of the parties deemed responsible, who are given an opportunity to defend their position by preparing counter-observations, requesting access to procedural acts and/or hearings at the offices of the Supervision Directorates of the Bank of Italy.
During the preliminary investigation, all the evidence is analysed and, also in light of the counter-arguments presented, careful consideration is given to the allegations refuted and responsibilities involved; in the largest or most complex cases (such as those related to systemically important banks or complex or new corporate structures), the assessments are made by a collegiate body comprising representatives of the various Supervision Directorates.
In accordance with the principle of separating the investigative and decision-making stages, the final proposal is transmitted, together with the acts of the proceedings, to the Governing Board; having consulted with the General Counsel of the Bank of Italy on the legal aspects of the proposal, the Board meets and adopts a reasoned decision, applying the recommended sanction in accordance with the limits set by law, or dismissing it if the counter-arguments of the defendant/s have been accepted. If deemed opportune, the Governing Board can request additional inquiries.
Decisions are notified promptly to the parties concerned, who can appeal in the manner and timeframe established by law.
3) Under the supervisory practices followed within the previous regulatory framework, which for the most part continued after the launch of banking union, a banking crisis such as that at the four banks placed under resolution on 22 November 2015 is managed according to very well-defined procedures.
a) Problematic situations generally emerge as a result of a supervisory inspection – which, in addition to routine controls, can be carried out for other reasons such as the negative outcome of an off-site analysis, following legal events, or the emergence of external information – revealing serious problems such as poor organization, poor practice (or violations of rules and regulations) when assessing loan applications.
b) The next step is a formal communication, called an intervention letter, which is transmitted to the board of directors of the bank concerned together with the inspection report, listing the corrective measures to be adopted. These can vary according to the shortcomings identified and may include: measures to curtail risk (such as limits on credit disbursement and territorial expansion, increased capital requirements etc.), requests to replace corporate officers, revise industrial plans, make capital increases or enter into mergers with other banks. At this stage of the process, the bank inspected is still compliant with the capital requirements.
c) If, subsequently, the Bank of Italy has reason to believe that the corrective measures were not taken by the bank or were inadequate, it generally takes further steps (inspections or more intervention letters). If these actions fail to result in the even gradual elimination of the problems identified and there is the risk of a further deterioration, the Bank will carry out a ‘conclusive’ inspection. If the inspected bank’s board of directors and management continue to react inadequately to the Supervisor’s requests and the situation actually deteriorates, the Bank of Italy will assess whether the legal conditions subsist for starting the extraordinary administration procedure i.e. serious capital losses are expected and/or there are grave legal irregularities/violations that threaten the functionality of the governance structures of the bank and thus its very stability.
d) If it is concluded that the conditions for extraordinary administration exist, the Bank of Italy requests the Ministry of Economy and Finance to appoint an external examiner and issues a decree to this effect: the board of directors and board of auditors are dissolved and replaced by extraordinary commissioners and by a specially appointed supervisory committee. The commissioners are tasked with ascertaining whether the bank can restore normal operations, including via a merger with another intermediary, or whether it must instead be liquidated. It should also be noted that the extraordinary administration procedure is a very strong course of action. Until such conditions subsist (serious capital losses and/or serious violations) the Bank of Italy cannot intervene by right with regard to a private entity for preventive purposes: were it to do so, it would be acting outside the powers granted it by law.
e) If the inspections reveal cases of administrative irregularities committed by individual officers, sanction proceedings against them can be initiated as described above. In the case of a criminal offence, the inspection report is sent to the Public Prosecutor’s Office for examination.
Action take in relation to the four banks under resolution
Banca delle Marche
An inspection reveals the first serious problems. In the case of Banca delle Marche, between 2010 and early 2011 three inspections were carried out in rapid succession, each examining one specific aspect of operations. On all three occasions, the inspectors returned a ‘partially unfavourable’ judgment (4 on a scale of 1 to 6, with 6 being the most negative outcome).
Action taken. Discussions with the directors and management intensified from 2012 onwards, with increasingly frequent requests from the Bank of Italy to deal with the problems it had identified. In particular, the Banca delle Marche was asked to bring its loan-to-deposit ratio to more prudent values and to consider an increase in capital, which in early 2012 was raised by €180 million. Consob, which had to authorize the publication of the capital increase prospectus, was informed of the outcome of the three inspections at the end of December 2011. Based on these same inspection results, at the start of January 2012 Banca delle Marche was asked to take corrective action. The emergence, during an inspection at a different bank, of some anomalous transactions involving Banca delle Marche’s Managing Director, led to the bank being asked in June 2012 to find a replacement more quickly. The new Managing Director was appointed in the following September.
Conclusive inspection. In November 2012 there was a new inspection to check adequate provisions had been made against credit risk. Banca delle Marche’s corrective actions were judged to have been highly inadequate and so in March 2013 the inspection was extended to the other risk profiles. It ended in September 2013 with the inspectors returning an ‘extremely unfavourable’ judgment (6 on a scale of 1 to 6). Consob was informed of the outcome of the inspections.
Special administration. In the light of the inspectors’ preliminary report, on 27 August 2013 the Bank of Italy, citing the urgency of the situation, placed Banca delle Marche in temporary administration in order to ensure business continuity; it was officially placed under special administration on 15 October 2013 for serious capital losses and serious irregularities.
Sanction proceedings. The first sanction proceedings were initiated following the 2010 inspection and were concluded in September 2011 with the imposition of sanctions on 17 managers for a total of €208,000. Following the irregularities discovered during the 2013 inspection, in the autumn of the same year new sanction proceedings began, concluding in August 2014 with the imposition of pecuniary sanctions on 18 managers and former managers for a total of €4.2 million.
The inspection report is transmitted to the judiciary. On conclusion of the 2013 inspection, the final report was sent to the Public Prosecutor’s Office of Ancona, with which the Bank of Italy’s inspectors closely cooperated. The reports on the 2010-11 inspections had been sent previously to the Ancona Office.
Banca Popolare dell’Etruria e del Lazio
An inspection reveals the first serious problems. Initially the inspection that began in December 2012 examined whether the bank’s provisions were adequate. In March 2013 it was extended to include all the risk profiles and it ended in September 2013 with a ‘predominantly unfavourable’ judgment (5 on a scale of 1 to 6). The inspection brought to light the inability of the corporate bodies to restructure the bank and a sharp deterioration in its loan portfolio. The bank’s capital, however, was still above the regulatory minimum and in August 2013 it increased its capital by €100 million.
Action taken. In December 2013, the board of directors was sent the inspection report and an intervention letter calling for decisive corrective measures and, above all, the bank’s merger with a group capable of providing the necessary capital and professional resources. Consob received excerpts from the report on the 2013 inspection and was informed of the request that the bank join forces with another group and of later developments.
Conclusive inspection. The inspectors noted that the bank’s efforts were insufficient, in that the board of directors, half of whom had been reconfirmed in May 2014, and top executives had failed to make the requested changes to management. Defending instead their local roots and independence the board turned down the only official offer made independently by the Banca Popolare di Vicenza. Consequently a new, wide-ranging inspection was carried out between November 2014 and February 2015. The inspection, concluding with an ‘unfavourable’ judgment (6 on a scale of 1 to 6), revealed both serious capital losses (such as to bring capital significantly below the regulatory minimum) and grave irregularities.
Special administration. Given the conclusions of the last inspection, the bank was placed under special administration on 10 February 2015 on the basis of a preliminary report by the inspectors.
Sanction proceedings. TThe first sanction proceedings were started following the 2013 inspection, which took place between December 2013 and September 2014 and concluded with the imposition of pecuniary sanctions on 19 people for a total of €2.5 million. Following the second inspection, new sanction proceedings were initiated in Spring 2015 and will end in March 2016.
The inspection report is transmitted to the judiciary. The critical points that emerged from the last inspection were reported to the Public Prosecutor’s Office of Arezzo while the inspection proceeded. The Bank of Italy had already begun to work closely with this Office in the autumn of 2013.
Cassa di Risparmio di Ferrara
An inspection reveals the first serious problems. . In the spring of 2009, in addition to various specific problems and irregularities, an inspection revealed the unsustainability of an overly ambitious plan for territorial expansion that had been initiated without due caution. The inspectors gave a ‘partially unfavourable’ judgment, corresponding to 4 on the new scale (ranging from 1 to 6) that had just been introduced at that time.
Action taken. Following the inspection, at the suggestion of the Bank of Italy, Cassa di Risparmio di Ferrara appointed a new Managing Director. In April 2010, it renewed seven of the eleven members on its board of directors, including the Chair and Vice-Chair. However, the bank’s capital continued to decline and so, as requested by the Bank of Italy in October 2010, it increased its capital by €150 million. On several occasions in 2011 and 2012 the inspectors reiterated the need to rationalize the group and to strengthen its organizational and governance structures. Due to the delay in meeting these requests and given the further worsening of credit quality, the Bank of Italy ordered further verifications.
Conclusive inspection. A further inspection carried out between September 2012 and February 2013, due to the clearly insufficient corrective measures adopted by the bank and to the further deterioration of the situation, ended with an unfavourable judgment (6 on a scale of 1 to 6) and the finding that credit risk was high, the capacity to generate income compromised, and the subsidiary Commercio & Finanza no longer sustainable. The inspection revealed that the bank’s capital was below the regulatory minimum. Consob was provided with the data on the largest loan loss provisions as quantified during the inspection.
Special administration. Following the findings of the last inspection, the bank was placed under special administration on 27 May 2013 due to grave irregularities and serious capital losses.
Sanction proceedings. Following the 2009 inspection, the first sanction proceedings ended in 2010 with the imposition of sanctions for a total of €340,000 on 14 managers. As a result of the shortcomings revealed in the last inspection, in April 2014 pecuniary sanctions were imposed on 15 of the bank’s managers for an amount totalling €1.1 million.
The inspection report is transmitted to the judiciary. At the end of the last inspection, a copy of the related report was sent to the Public Prosecutor’s Office of Ferrara; in June 2010 the investigating magistrates were also sent the documentation on the 2009 inspection.
Cassa di Risparmio di Chieti
An inspection reveals the first serious problems. Two difficult inspections took place in the spring of 2010 at the subsidiary Flashbank and in the spring of 2012 at the Cassa di Risparmio di Chieti. They concluded, respectively, with ‘predominantly unfavourable’ and ‘partially unfavourable’ judgments (5 and 4 on a scale of 1 to 6). Both inspections revealed problems of disorderly expansion, irregularities and bad management. The banks’ capital was still, however, above the regulatory minimum.
Action taken. There were urgent and increasingly frequent discussions between the Bank of Italy and the Cassa di Risparmio di Chieti, with requests for more information on both operational and technical issues (such as loans to related parties) and invitations to adopt specific and incisive measures to solve the problems uncovered. The bank’s responses, also outlined in a series of hearings with the bank’s managers, were nevertheless incomplete and evasive. The subsequent reply to the intervention letter from the Bank of Italy revealed the scarce incisiveness of the actions proposed to deal with the widespread weaknesses identified.
Conclusive inspection. This was carried out in the spring of 2014 and, in addition to a marked deterioration in the bank’s financial situation overall, it revealed irregularities and extremely serious violations of the rules, namely: the supply of persistently opaque information to the Bank of Italy; inconsistent decision-making processes; grave administrative anomalies; an absence of independent judgment on the part of the bank in relation to the Foundation that controls it; lax management of dealings with related parties. The inspectors gave a ‘predominantly unfavourable’ judgment (5 on a scale of 1 to 6).
Special administration. On the basis of the conclusions of the last inspection, the bank was placed under special administration on 5 September 2014 for serious irregularities and violations of the rules, as described above.
Sanction proceedings. There were two sets of proceedings: one following the 2012 inspection, which ran from September 2012 to June 2013 and ended with the imposition of pecuniary sanctions on 13 managers for a total of €150,000; the other as a consequence of the 2014 inspection, which ran from September 2014 to July 2015 and ended with the imposition of pecuniary sanctions on 13 managers for a total of €624,000.
The inspection report is transmitted to the judiciary. At the end of both the inspections, a copy of all the inspection documentation was transmitted to the competent judicial authorities (for the 2012 inspection, the Public Prosecutor’s Office of Milan; for the 2014 inspection, the Public Prosecutor’s Office of Chieti and of Rome).