See also the interview given by the Governor of the Bank of Italy, Ignazio Visco, in the Corriere della Sera on 23 December 2019 and the Testimony of Alessandra Perrazzelli before the Chamber of Deputies as part of the review of draft law C. 2302.
1) Is it true that the Bank of Italy obliged BPB to acquire Tercas?
No. Banks are wholly autonomous undertakings and are treated as such by the Bank of Italy. Decisions on, for example, acquisitions, are the sole purview and responsibility of their governing bodies. If a bank gets into difficulty, and it is impossible to carry out a market recapitalization or independent revitalization plan, it is commonplace for the Supervisory Authorities to explore the possibility of the ailing bank's purchase by other banks, as mergers can create synergies and save costs, thereby safeguarding the business continuity of the ailing bank and strengthening the banking system as a whole.
In the case in point, in the summer of 2013 the Bank of Italy received an expression of interest in Tercas by another bank, which subsequently withdrew the proposed acquisition in October 2013. At the end of the same month, the Bank of Italy examined an expression of interest by BPB's management, who subsequently decided to carry out the operation based on its own independent assessment, negotiating and obtaining from the Interbank Deposit Protection Fund (FITD) the contribution deemed necessary for the acquisition. Initially estimated at €280 million, this figure was subsequently raised to €330 million, following a specific due diligence and talks between BPB and the FITD.
2) Why did the Bank of Italy lift the restrictive measures previously imposed on BPB and authorize the acquisition of Tercas in 2014?
To answer this question it is necessary to recall a number of decisions taken in respect of BPB in previous years.
In April 2009, the Bank of Italy called on BPB to abstain from business development initiatives, given the need for the bank to strengthen its organizational and control arrangements following the acquisition of Cassa di Risparmio di Orvieto. In December 2010, an inspection identified intermediate levels of difficulty at the bank. The need for an incisive reorganization was highlighted; the Bank of Italy confirmed its request to refrain from any further business development until such time as its instructions had been implemented in full and in any event for a period of 24 months.
Given the picture that emerged from the inspection, coupled with the unsatisfactory nature of the bank's responses to the findings and the fact that BPB itself declared it did not consider itself bound by this request, in July 2011, pursuant to the provisions of Article 53 of the Consolidated Law on Banking, the Bank of Italy banned BPB from opening new branches and making acquisitions, and imposed a specific capital requirement against operational risks. It was clarified that the revocation of these measures was conditional on the elimination of the problems at the bank identified at that time.
As a result of the ban on expansion, the planned merger of BPB with another popolare bank did not come to pass (for which in 2010 BPB's Board of Directors conferred an exploratory mandate on the Chairman and CEO) nor did the acquisition of a qualified holding in a financing company, for which BPB had lodged an application in March 2011.
In June 2012, the BPB approved the 2012-16 industrial plan. According to the plan, the Group would acquire additional financial resources amounting to €500 million, in order to ensure the alignment of the capital ratios to Basel 3 standards and to enable the definition of a growth strategy.
In 2013, the BPB was the focus of an inspection of loan loss provisions and a subsequent targeted inspection of credit risk, corporate governance, internal controls and compliance-related areas. The last inspection highlighted how some progress had been made in the main critical areas identified in 2010, with special reference to partial changes in the Board of Directors, the restructuring of the Head Office and the strengthening of control functions. On the other hand, however, it identified persistent areas of weakness; with reference only to the specific capital requirement against operational risk imposed by the Bank of Italy, it highlighted how its removal was predicated on further efforts to develop suitable methods for managing and controlling the risk itself and to raise the quality of the human resources involved.
The inspection report was given to BPB on 23 October 2013. By way of response to the findings, the bank set out the planned corrective measures and related timeframe. At the end of October, BPB formally notified the Bank of Italy of its interest in acquiring Tercas. This followed the announcement, in early October, of the withdrawal from the acquisition of Tercas by another bank. In signalling its interest in Tercas, the BPB asked the FITD to intervene in support of the operation, initially estimated at €280 million.
In November 2013, the Bank of Italy authorized the FITD, but not BPB, to intervene in respect of Tercas based on an initial proposal that the FITD itself had put forward in support of BPB; however, the intervention was not made. Thereafter BPB initiated talks with the FITD regarding the appropriateness of such an intervention.
In February 2014, the Bank of Italy requested an update on the initiatives planned by BPB to remedy the shortfalls that emerged during the inspection, also requesting a specific verification by the bank's Internal Audit function and the Board of Statutory Auditors on the appropriateness of these initiatives to address the weaknesses identified. BPB's response in April 2014, which included a quality assessment review of the Internal Audit function conducted by a consultancy firm, highlighted the substantive adequacy of the measures adopted as well as compliance with the proposed timeframe. Given the findings of the inspection, the actions taken by the bank and reports provided by the Internal Audit function and Board of Statutory Auditors, in June 2014 the abovementioned restrictive measures were lifted.
In July 2014, having assessed the feasibility of the operation, the Bank of Italy authorized the acquisition of Tercas and the capital strengthening initiatives, some of which were to be carried out prior to the acquisition in order to maintain adequate capital ratios. The authorization was accompanied by instructions on technical and organizational matters and in the field of governance, including the rapid appointment of a CEO. The final structure of the operation envisaged a contribution of €330 million by the FITD, revised upward from the €280 million initially envisaged following a specific due diligence and talks between BPB and the FITD.
3) Is it true that the Bank of Italy authorized the operation because it had to recoup a loan disbursed to Tercas, offloading the risks onto BPB?
No. The Bank of Italy had granted Tercas a loan in the form of emergency liquidity assistance (ELA) on 20 December 2012 in accordance with Italian and European legislation. This type of loan, for which the national central banks are competent but which is subject to assessments by the Governing Council of the ECB, must be backed by adequate guarantees, which eliminate or at most make negligible the risk for central banks. The ELA to Tercas, which from an initial €660 million declined to €480 million, was repaid in full on 5 November 2013. At the same time, BPB granted a loan to Tercas for the same amount; the securities previously backing the ELA (mainly bank bonds guaranteed by the State and asset-backed securities, for a value of €500 million) were transferred to the new creditor BPB, which took over the loan without changing its risk profile.
4) What impact did the European Commission's decision have on the Tercas case?
The €330 million disbursed by the FITD to BPB as part of the Tercas acquisition was held to be State aid by the European Commission. The first informal statements to this effect date back to the spring of 2015, while the Commission's opinion was formalized in December of the same year. This is why the operation was only concluded after the Fund's intervention was made via the 'Voluntary Scheme' for an amount corresponding to that previously disbursed. This delayed the integration of Tercas into BPB, which did not take place until July 2016, rather than by the end of 2015 as originally planned, leading to uncertainty and far greater expenses.
The repercussions on customers' funding were significant and continued into 2016, in part owing to the growing fears of the customers of small and medium-sized banks that burden sharing would be applied, as happened in November 2015 for the resolution of the 'four banks' (Banca delle Marche, Banca Popolare dell'Etruria e del Lazio, Cassa di Risparmio di Ferrara and Cassa di Risparmio della Provincia di Chieti). In the two years 2015-2016, funding from Tercas's customers fell by more than one fifth and the BPB banking group's liquidity buffer decreased from €2 billion to just over €1 billion.
5) Is it true that the marked deterioration in BPB's credit quality and ultimately its crisis are due to the acquisition of Banca Tercas?
In 2014, BPB's gross NPL ratio recorded an increase of 7 percentage points (from 14.8 to 21.8 per cent); around two thirds of this increase was attributable to the acquisition of Tercas. However, Tercas's legacy NPLs had already been largely written down by the temporary administrators: their coverage ratio stood at 51 per cent, higher than that of BPB (42 per cent) and than the average recorded that year by Italy's banking system (44 per cent). The ratio net of value adjustments rose by 3.3 points (from 9.5 to 13.1 per cent) and only half of this increase was due to the effects of the acquisition. Furthermore, 70 per cent of Tercas's NPLs were backed by collateral, compared with 37 per cent for BPB and 49 per cent for the system on average; in the years following the acquisition, this translated into structurally higher recovery rates for the bad loans inherited from Tercas (38 per cent), compared with those originating from the parent company (29 per cent).
In addition, in the four years 2015-18, the default rate for performing loans at the end of 2014 (i.e. shortly after the acquisition was finalized) was 15.6 per cent for loans originating from Tercas and Caripe, against 21.3 per cent for those previously in BPB's portfolio. Over the four years as a whole, the BPB group classified about €1 billion worth of loans as in default, of which only 27 per cent were attributable to credit positions acquired by Tercas and Caripe.
6) Why didn't the Bank of Italy intervene in 2016 after the inspection? Why was the bank not placed in temporary administration before now?
The Bank of Italy used all the supervisory tools available in relation to the problems identified during the 2016 inspection and to the developing situation at BPB. At each stage of the process, BPB was called on to take the necessary steps to strengthen its main technical profiles and to ensure adequate governance. However, it was not possible to proceed with temporary administration, as the legal premises to do so were lacking. Temporary administration is a particularly strong supervisory action, through which the governing bodies elected by the shareholders are removed, thereby greatly curtailing shareholders' rights. It can therefore only be adopted when the conditions are satisfied as clearly defined by law, i.e. for serious infringements of legislative, regulatory or statutory provisions, serious administrative irregularities or significant capital losses. BPB was placed in temporary administration when its losses reduced capital levels to below the minimum required by the prudential regulations. This situation did not arise until after the last inspection by the Bank of Italy had begun in June 2019, which also detected grave anomalies in loan management together with an inability to implement a credible recovery plan.
7) Is it true that the Bank of Italy underestimated the NPLs on BPB's balance sheet, that the NPL coverage ratios were low and that if BPB had written off the loans on its balance sheet correctly, the capital ratios would already have fallen below the regulatory requirements in 2016?
In June 2016, BPB had higher coverage ratios than those of the banking system as a whole (total NPLs amounting to 48.8 per cent, as against 46.8 per cent; of which bad and unlikely-to-pay loans equal to 63.9 and 30.6 per cent, as against 59.3 per cent and 28.5 per cent respectively). The lower coverage for past-due exposures (9.7 per cent, against 19.8 per cent) is attributable to the large share of secured loans (66.8 per cent of the total, mainly mortgage loans, against 56.9 per cent on average for the system).
During the 2016 inspection, the quality analysis of the credit portfolio was carried out as always on a sample basis. It should be remembered that the sample selected during the inspection is not representative of the portfolio as a whole. The riskiest positions are generally the ones analysed. The inspection report certified €1.6 billion worth of expected losses; contrary to what the press has recently reported, this amount was not indicative of a 'hole' in the bank's accounts, as almost all of it was accounted for by adjustments on loans already made in previous years. Some €27 million of bad loans and €170 million of unlikely-to-pay loans were identified in addition to those recorded in the supervisory reports; these were also fully entered into the bank's balance sheet and the corresponding positions were recorded correctly in the accounts. Overall, the additional value adjustments found during the inspection amounted to €38 million (which at the time corresponded to about 40 basis points in terms of the CET1 ratio), and were included in full in the bank's balance sheet for the year 2016.
In the years following the 2016 inspection, the coverage levels gradually declined as a result of the bad debt sales (the NPL component that absorbs the biggest write-downs) made under the Italian guarantee scheme for non-performing loans (Garanzia sulla Cartolarizzazione delle Sofferenze - GACS), for a gross value of €1.5 billion in the three years 2016-18. Price Waterhouse Coopers (PWC) carried out specific analyses on the lending portfolio as part of its audit on the financial statements, certified with an unmodified opinion up to and including the year 2017. The analyses conducted by PWC in 2018, in cooperation with the bank, made clear the need for greater loan loss provisions. It should be remembered that the Bank of Italy does not certify financial statements.
Lastly, some articles in the press dwelt on some classification error percentages cited in the inspection report ('errors in 20 per cent of the cases analysed, with peaks of 30 per cent for loans secured by residential property'), saying that this meant performing loans needed reclassifying as non-performing. A more careful reading of the report shows that this interpretation is mistaken: this particular analysis only led to a very marginal increase in the capital requirement (€1.2 million).
8) Did the Bank of Italy carry out checks on BPB's capital increases in 2014 and 2015? Is it true that BPB financed the purchase of its own shares as other Popolari banks did?
In the two years 2014-15, BPB strengthened its capital position by €553 million overall, comprising new share issues and the placement of subordinated bonds. As regards the latter, the bank was reminded of the need to ensure that the placement was compliant with the provisions in force established by other authorities. As a result of these operations, the number of shareholders rose from 61,000 in 2013 to over 69,000 in 2015.
In the early months of 2016, the Bank of Italy requested that BPB's Internal Audit carry out an inquiry, for the purposes of sound and prudent management, into the possible links between loans and subscriptions of the abovementioned new shares and bonds (a loans-for-shares phenomenon commonly referred to as operazioni baciate). The inquiry brought to light operations of this kind worth €18 million, which were deducted from own funds (equal to €1,281 million as of 31 December 2015). Further inquiry was made by the Supervisory authority during the inspection carried out from June to November 2016, but no other material operations of this kind were identified (BPB was required to make additional deductions of just €2.5 million from own funds).
As part of the institutional cooperation with Consob pursuant to Italy's Consolidated Law on Finance, in 2016, the inspection examined a number of aspects relative to BPB's investment services. Irregularities were found in customers' investments (for example, in customer due diligence). Partly based on the findings sent by the Bank of Italy, Consob imposed administrative sanctions on BPB and on current and former bank officials. The bank appealed to Bari's Court of Appeal, which suspended the sanctions but later ruled them to be legitimate in July 2019.
9) Why did the Bank of Italy not intervene in setting the price of BPB shares?
Under the law, specifically Article 2528 of the Civil Code, the governing bodies, i.e. the board of directors and the shareholders' meeting, are responsible for setting the share price of unlisted popolari banks. The Bank of Italy has no direct power to decide on the price and therefore cannot assess whether it is appropriate. The checks done by the Bank of Italy, focusing on organizational and procedural issues, can help reduce the risk of distorted valuations but cannot comment on the share price set by the governing bodies.
In the course of the 2016 inspection, BPB's Internal Audit function was asked to review the methodology used to set the price of capital instruments issued by the bank. It emerged that in April 2014 the Board of Directors, before submitting a proposal on the share price to the shareholders' meeting for approval, for the first time sought the assistance of an external advisor and used a methodology developed by a leading audit firm (until 2014 it had used a method that was based on the valuation of the capital reserves).The Board proposed to confirm the price of €9.53 per share.
In June 2017, BPB listed its shares on the multilateral trading facility, Hi-MTF. The initial offering price (€7.50) was supported by the opinion given by the audit firm. The last price recorded on the Hi-MTF venue prior to Consob's order that trading in the shares be suspended was €2.38.
10) Is there any way for shareholders to be compensated?
Ways of providing compensation in cases of the irregular placement of capital instruments should be considered. In 2016 the Bank of Italy, at the request of Consob, carried out inquiries during which it uncovered regulatory violations in the way BPB provided investment services; as a result, Consob imposed sanctions on Banca Popolare di Bari and its management. The temporary administrators will look into the matter of compensation and will make any decisions concerning settlement agreements. Those who believe themselves to have been victims of irregular placement practices can of course take advantage of the in- and out-of-court protections available to them under the law.
Measures in favour of current BPB shareholders (intended, among other things, to encourage participation in the shareholders' meeting that will have to approve the transformation of the bank into a joint stock company or SpA) are covered by a specific article of the framework agreement signed on 31 December 2019 between BPB, the FITD and MedioCredito Centrale (MCC). The effects of these measures on the estimated total capital requirements will depend upon the methods chosen: payment in cash would increase the bank's capital needs, while payment using capital instruments that can be included in own funds (e.g. shares) would be substantially neutral for prudential purposes.
11) Is it true that the Bank of Italy did not raise any objections to the agreement by which Aviva committed to acquiring BPB shares 'with account holders' money'?
At the start of 2016 BPB signed a distribution agreement with Aviva, which committed the bank to placing the English group's insurance products and Aviva to acquiring BPB shares on the secondary market for a total of €50 million by the date of approval of BPB's 2015 financial statements. Subsequently, a legal dispute arose between the parties, which was settled in the transaction that took place in October 2016 wherein Aviva purchased BPB shares using its own resources and not the funds of BPB's shareholders or account holders.
12) Why did the Bank of Italy not object to the return of Mr De Bustis as CEO of the bank?
The responsibility for choosing members of its corporate bodies lies solely with the company. The Bank of Italy checks whether the individual officers meet the requirements set by law.
The provisions in force (Treasury Minister's Regulation 161 of 18 March 1998, implementing Article 26 of the Consolidated Law on Banking) set out a binding list of cases for determining whether or not the requirements have been satisfied. The new European rules on bank corporate governance - which grant some discretion to supervisory authorities - were transposed into Italian law, but will enter into force once the implementing regulations are issued by the Ministry of Economy and Finance. The Bank of Italy has underlined, publicly and repeatedly, the importance of this issue. It should also be emphasized that even in countries where the European legislation is already applicable, there are very few cases of the coercive exercise of powers in the fit and proper assessment of bank officers. This is because negative decisions in this area are very harmful to the rights of individuals; purely discretionary measures tend to be successfully challenged in court, which has negative repercussions on the certainty of the regulatory framework, on the reputation of the supervisory authority and, in the final analysis, on the effectiveness of its action.
The Bank of Italy can exercise moral suasion and, in the case of BPB, it clearly conveyed to the Chairman of the Board of Directors its doubts about the appropriateness of Mr De Bustis's reinstatement three years after he had left the bank.
13) Why did the Bank of Italy not use its power to remove the top management of BPB despite having this power since 2015?
The power to remove one or more corporate officers was introduced into national law in 2015 with the transposition of CRD VI (see Article 53-bis, paragraph 1, letter (e) of the Consolidated Law on Banking). This power can also be exercised with respect to officers that meet the suitability requirements provided for by law (Article 26 of the Consolidated Law on Banking). There must, however, be objective proof, that keeping the officer on is harmful to the sound and prudent management of the bank. In the case of BPB, the conditions for using this tool were not satisfied.
In April 2019, the governance question was further complicated by conflict between Chairman Jacobini and CEO De Bustis. The return of De Bustis at the end of 2018 was greatly desired by Jacobini, despite the Bank of Italy having clearly expressed its reservations about the appropriateness of his reinstatement three years after he left the bank. The Bank of Italy's repeated calls to maintain internal cohesion at such a delicate phase for BPB went unheeded. Prior to the shareholders' meeting the Bank of Italy exerted pressure on the Chairman to resign from his position and then formally asked BPB's Board of Statutory Auditors and Board of Directors to appoint to the latter persons with appropriate authority, reputation and experience (the Board was partially renewed at the end of July 2019). Chairman Jacobini was reelected by the shareholders' meeting on 20 July but resigned on 24 July.