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Implementation of the BRRD II in Italy: key points to note

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06 December 2021

On 1 December 2021, Legislative Decree No. 193 of 8 November 2021 (the Decree) implementing Directive 2019/879/EU (the BRRD II) into domestic law entered into force. Below is a short summary of some key issues to consider.

Background 

The bank recovery and resolution directive (the BRRD) was adopted in spring 2014 to provide authorities with:

  • comprehensive and effective arrangements to deal with failing banks at a national level; and
  • cooperation arrangements to tackle cross-border banking failures.

The BRRD requires banks to prepare recovery plans to overcome financial distress. It also grants powers to national authorities to ensure an orderly resolution of failing banks with minimal costs for taxpayers. The new rules set up a national resolution fund that must be established by each EU country. All financial institutions have to contribute to these funds. Contributions are calculated on the basis of the institution's size and risk profile. The EU's bank resolution rules ensure that the banks' shareholders and creditors pay their share of the costs through a "bail-in" mechanism. If that is still not sufficient, the national resolution funds set up under the BRRD can provide the resources needed to ensure that a bank can continue operating while it is being restructured.

On 23 November 2016, the European Commission proposed amendments to the BRRD. The amendments include measures that will further strengthen the European resolution framework and the ability of relevant authorities to achieve resolution outcomes that are effective in safeguarding financial stability and public funds. The BRRD II Directive was published in the Official Journal of the EU (OJ) in June 2019. It entered into force on 27 June 2019. 

Member States were expected to adopt and publish the measures necessary to comply with the BRRD II Directive by 28 December 2020 and to apply those measures from the same date, with the exception of certain measures listed in Article 3. Due to the lack of, or delay in, the notification of national transposition measures or their incompleteness, an infringement proceeding for non-communication of the national transposition measures was pending against 21 Member States, including Italy until the adoption of the Decree.

On 29 September 2020, a European Commission notice (2020/C 321/01) relating to the interpretation of certain legal provisions of the BRRD II Directive in response to questions raised by Member States' authorities was published in OJ. The notice also considers the interaction of certain aspects of BRRD II with the Capital Requirements Regulation (575/2013) (CRR), the CRD IV Directive (2013/36/EU) and the Single Resolution Mechanism Regulation (806/2014) (SRM Regulation).

The notice includes questions and answers relating to various matters, including the:

  • power to prohibit certain distributions;
  • powers to suspend payment or delivery obligations;
  • selling of sub-ordinated eligible liabilities to retail clients;
  • minimum requirement for own funds and eligible liabilities; and
  • bail-in tool.

New ranking for subordinated instruments of banks which do not qualify as own funds

The Decree introduces point c-ter under Article 91 paragraph 1-bis of Legislative Decree no. 385 of 1 September 1993, as amended from time to time (the Italian Banking Act) transposing Article 48(7) of the BRRD II[1]. The amended Article 91 provides for the following ranking:

i. subordinated instruments which do not qualify (and no part thereof is recognized) as own funds items (elementi di fondi propri) shall rank senior to own funds items (including any instruments only partly recognized as own funds items) and junior to senior non-preferred instruments (strumenti di debito chirografario di secondo livello);

ii. if own funds items cease, in their entirety, to be classified as such, they will rank senior to own funds items but junior to senior non-preferred instruments.
The new provisions will also apply to instruments issued before the Decree came into effect (1 December 2021).

New minimum denomination requirements

Pursuant to Article 44a of the BRRD II, Member States may set a minimum denomination of at least EUR 50,000 for eligible liabilities, taking into account market conditions and that Member State’s practices as well as existing consumer protection measures within that Member State’s jurisdiction.

The Decree introduced a new Article 12-ter into the Italian Banking Act, providing for a minimum denomination of EUR 200,000 for all subordinated debt instruments (originally there was no minimum denomination requirement under Italian law for this type of instrument) and EUR 150,000 for senior non-preferred debt instruments (strumenti di debito chirografario di secondo livello) (originally the minimum denomination for senior non-preferred debt instruments was EUR 250,000).

New article 12-ter applies to subordinated and senior non preferred debt instruments issued by: (a) Italian banks, (b) Italian holding companies of banking groups and companies within a banking group, (c) companies included in the consolidated supervision and (d) companies having their registered offices in Italy and included in the consolidated supervision in another Member State, pursuant to article 2 of Legislative Decree no. 180 of 16 November 2015, as referred to in new Article 12-ter of the Italian Banking Act.

Restrictions on the sale to retail investors of subordinated and senior non-preferred instruments not complying with the new minimum denomination requirements

The Decree introduces a new article 25-quater into Legislative Decree no. 58 of 24 February 1998, as amended from time to time (the Italian Financial Service Act). This provides that contracts entered into by retail investors for investment services concerning subordinated and senior non-preferred instruments issued after 1 December 2021 by banking entities and by third-country banking entities (both EU and extra-EU) may be declared null and void where the relevant instruments do not comply with the minimum denomination requirements imposed under new article 12-ter of the Italian Banking Act.

This provision applies regardless of any different minimum denomination requirements that may be provided for under the legislation of the relevant foreign country.

Other provisions 

The following provision which precluded the possibility to place senior non preferred debt instruments with non qualified investors (article 1, paragraph 1105, of Law No. 205 of 27 December 2017) was repealed by Article 5 of the Decree:

«Art. 1. 1105. The individual face value of second-tier unsecured bonds, as provided for in article 12-bis of the Italian Banking Act, is at least equal to EUR 250,000. The placement of these debt instruments, in any form whatsoever, can only be reserved for qualified investors».

For further information or clarifications, please do not hesitate to contact us.

[1] Article 48(7) of the BRRD II requires each Member State to ensure that claims resulting from own funds items (elementi di fondi propri) (including instruments only partly recognised as own funds) items have, under national laws governing normal insolvency proceedings, a lower priority ranking than any claim that does not result from an own funds item

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