Italy: Restructuring of Four Banks, 2015

The Italian government and Bank of Italy (BoI) presented a collective plan to resolve the crisis at four regional banks in Italy in November 2015, to safeguard the local economies in which these small and medium-size banks were located. The four banks had suffered from low or negative equity capital due to losses in loans to small and medium enterprises and retail clients and were placed under special administration between 2013 and 2015, with unsuccessful attempts to raise private capital. Italian regulators split each bank into a bridge or new bank, comprising all the good assets and liabilities of the original banks including customer loans and deposits, to ensure continuation of each bank's operating activities. For simplicity, the nonperforming loans (NPLs) of each bank were transferred to a single bad bank. Italy's National Resolution Fund--set up just before the resolution--was capitalized by contributions from the banking sector, provided a total of EUR 3.6 billion in 2015 to protect senior creditors and depositors, and recapitalize the bridge banks. Due to insufficient funds, the Resolution Fund received an immediate loan of EUR 4 billion from Italy's three largest banks, and another line of credit of EUR 1.65 billion expiring in 18 months, from Italy's state-owned lender, Cassa Depositi e Prestiti. Due to the absence of a transitional period that would have given banks time to build up liabilities available for bail-in, the Italian authorities chose to delay the full implementation of the European Union's Bank Recovery and Resolution Directive, which would have required the bail-in of at least 8% of liabilities, until January 1, 2016. The BoI's resolution plan provided capital to the bridge banks up to about 9% of risk-weighted assets and determined the write-down of all the equity and subordinated debt holders of the four banks. There was significant negative public reaction to the write-down of subordinated bonds held by mostly retail investors, which led to a compensation plan by the government. All four bridge banks were sold in 2017, with NPL tranches sold to a specialized fund, Atlante, and additional capital injections provided by the Resolution Fund. The BoI provided aid of nearly EUR 5.2 billion to the four banks from 2015 to 2017 and did not recover any capital in the sales.