The Decree of the Minister for the Economy and Finance no. 310 issued on 14 December 2006 and the Bank of Italy supervisory regulations issued on 17 May 2007 finally complete the Italian rules governing covered bonds provided for by Articles 7-bis and 7-ter of Law 130/1999 on securitization introduced by Article 2, paragraph 4-ter, of Decree Law 35/2005 (the “competitiveness decree”) ratified by Law 80/2005.
It will now be possible for issues of these specific bonds to develop in Italy and become part of the larger European market which in recent times has taken on increasing importance, driven on the demand side by a need to diversify and protect investors and on the supply side by the scope for banks to exploit a series of regulatory advantages.
The paper starts with a description of the main features of covered bonds, which it sets in relation to the broader category of asset-backed securities (ABSs) while highlighting the substantial differences between the former and normal securitization bonds. It continues with a detailed examination of the complex legal rules, with special reference to the structure of transactions, the requirements for issuing banks and the role and nature of special purpose vehicles (SPVs), with a discussion of whether these entities should be entered in the register referred to in Article 107 of the Consolidated Law on Banking. The paper then goes on to look at the provisions regarding: eligible assets; the maximum ratio to the bonds guaranteed and obligations to supplement the assets; the separation of assets (compared with other similar cases of “guarantees” present in the Italian legal system); simplified rules regarding disposal; the function of servicer; the bankruptcy remoteness of transactions; the nature of the guarantee that the SPV must provide to bondholders (traced back to the so-called autonomous guarantee contract or garantievertrag). The last section is devoted to the prudential treatment and controls applicable to covered bonds. These are based not on authorizations but on issue thresholds, which vary with the level of banks’ capital and serve primarily to protect depositors.
