Italy

Author: | Published: 9 Jul 2001
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Market structure and trends

By stating that "Banking is an entrepreneurial activity", the Banking Act of September 1 1993 (the Banking Act) reflects the fact that banking in Italy has changed radically in recent years. Traditionally a public concern characterized by government interests, banking in Italy is today a competitive and entrepreneurial activity. The Italian banking system has been greatly simplified through a move from diverse types of specialist credit institutions to the current style of Italian banks – the banca universale. Since 1990, the development of banking groups has been encouraged in Italy with different financial activities being carried out by a single bank or by different legal entities within the same group.

The changes that have taken place in the Italian banking system over the past decade and which are still continuing today, are both quantitative and qualitative.

Since the process of privatization during the 1990s, the reorganization of the Italian banking system has progressed fast and the number of banks had fallen from 1,176 in 1989 to 872 in 2000; banks involved in mergers and acquisition accounted for 40% of the aggregate value of the transactions within the Italian market. As a result, many Italian banks are now of a comparable size to their main European competitors.

From a qualitative perspective, it should be noted that foreign competition, particularly from EU banks, has increased in the domestic market, forcing local banks to develop new areas of business (eg asset management and corporate finance) and high value-added financial services. Moreover, medium-sized banks are now becoming the major players in the reorganization process.

The main regulatory bodies and their powers

The main regulatory bodies in the banking sector are: the Inter-ministerial Committee for Credit and Savings (Comitato Interministeriale per il Credito e il Risparmio – the CICR); the Ministry of Treasury; the Bank of Italy; and the Commissione Nazionale per le Società e la Borsa (Consob).

The CICR is the highest supervisory authority in the fields of credit and protection of savings. Members of the CICR include, among others, the Ministry of Treasury, the Ministry of Finance and the governor of the Bank of Italy, who attends meetings without having a right to vote.

The CICR's main task is to set the general guidelines that the Bank of Italy must follow when adopting regulations or other measures applicable to banks. When it resolves on matters such as banking and financial intermediaries regulations, the CICR acts on the basis of proposals put forward by the Bank of Italy.

The Ministry of Treasury has wide powers and responsibilities in relation to banking and financial activities, including:

  • authorizing the establishment in Italy of the first branch of non-EU banks;
  • setting eligibility standards for shareholders of banks;
  • setting the degree of professional experience and the integrity requirements for directors and executives of banks and other financial intermediaries; and
  • issuing decrees which impose administrative sanctions on banks.

The Bank of Italy is Italy's central bank. Its functions comprise currency issue, banking and financial supervision, market oversight, safeguarding competition in the credit market, economic and institution analysis and, jointly with the European Central Bank, overseeing payment systems.

The Bank of Italy implements the general guidelines issued by the CICR by adopting regulations applicable to banks, including regulations governing capital adequacy, risk exposure, equity interests, administrative, accounting, organization and internal controls. Further, the Bank of Italy supervises banks by granting authorizations for, among other things, significant investments by banks. The main supervisory powers of the Bank of Italy are discussed below.

In addition to its supervisory and regulatory role, the Bank of Italy is the lender of last resort for Italian banks and acts as banker to the Italian Treasury. It also operates services for the banking industry as a whole, most notably the Centrale dei Rischi, a central information database on credit risk that can be accessed by banks.

Consob was established in 1974 as a public authority responsible for regulating the Italian securities market and for protecting investors. Consob's aims include, among other things, ensuring:

  • transparency and correct behaviour by securities market participants;
  • disclosure of complete and accurate information by listed companies; and
  • accuracy of the facts represented in prospectuses related to the offering of securities to the investing public.

Types of financial institutions, and key legislation and developments

Banking is reserved to undertakings authorized to engage in such activity and which are admitted to the register of banks maintained by the Bank of Italy. In addition to traditional banking activities, banks may engage in other financial activities that are instrumental to their core business as indicated in the Banking Act.

In the past decade, the Italian legislator and the industry authorities have responded to the positive developments in the banking industry by passing some important pieces of legislation or regulations amongst which, most notably, are the 1991 Law on Factoring, the Banking Act, the 1998 Unified Law on Financial Intermediaries, and the 1999 Securitization Law.

Other important sources of banking law include the Bank of Italy's Supervision Regulations, and various legislative decrees implementing EU directives and relating to such matters as mutual recognition, capital adequacy and consolidated accounting and supervision, money laundering, consumer credit and cross-border payments.

In addition to banks, other types of financial institutions may operate in the banking industry including operating as part of a banking group. To avoid the abusive exercise of banking activities, only financial intermediaries entered in a register maintained by the Ufficio Italiano Cambi (UIC) at the Ministry of Treasury can carry on activities such as acquiring holdings, granting loans, leasing, factoring and providing money transmission, and foreign currency trading services. To be included in the official register, financial intermediaries must satisfy certain criteria such as structural requirements, capital adequacy, and professionalism and integrity requirements.

In addition to banks and financial intermediaries, other financial institutions operate in the banking industry:

  • SIMs or società di intermediazione mobiliare are undertakings authorized to provide investment services within the Unified Law on Financial Intermediaries which services include dealing on its own and customers' account, the placement of securities and the management of individual client portfolios;
  • SGRs or società di gestione del risparmio are asset management companies authorized to manage collective portfolios including investment funds; and
  • SICAVs or società di investimento a capitale variabile are open-ended investment companies having as their exclusive object the collective investment of their capital, raised by continuously offering their shares to the public.

SIMs are authorized by Consob, after consulting with the Bank of Italy, to provide investment services. The Bank of Italy, after consulting Consob, authorizes the activities of SGRs and SICAVs. In each case, the relevant financial institution is entered in a special register maintained by the Bank of Italy.

Establishing an operation

Banks are authorized by the Bank of Italy where the following conditions, that aim to ensure the sound and prudent management of the banking business, are met:

  • the applicant is either a company limited by shares or a cooperative company limited by shares;
  • the applicant's registered seat and main administrative office are in Italy;
  • the applicant's share capital is not less than euro2 million, in the case of a cooperative company limited by shares, and euro6.3 million, in the case of a company limited by shares;
  • a programme describing the initial activities is presented;
  • the applicant's shareholders satisfy the integrity requirements;
  • the shareholding limits set forth in the Banking Act are met;
  • the managers of the applicant satisfy experience and integrity requirements; and
  • there are no relationships that may hinder the actual performance of the supervisory role of the Bank of Italy, between the applicant and other persons.

In accordance with the home country rule, EU banks wishing to carry out banking business in Italy are exempted from the above authorization regime. The establishment of an EU bank's first branch in Italy must be preceded by a notification to the Bank of Italy from the competent authorities of its home country. The Bank of Italy and Consob may notify the EU bank and the competent home country authorities of any conditions that are to be imposed on the activities of the branch for the benefit of the public. Activities subject to mutual recognition may be carried out by EU banks without establishing a branch in Italy, provided that the Bank of Italy has been duly notified by the competent home country authorities.

A different regime applies to the establishment in Italy of the first branch of a non-EU bank. Such a branch must be authorized by a decree of the Ministry of Treasury, issued in agreement with the Ministry of Foreign Affairs and in consultation with the Bank of Italy.

E-banking

The increasing use of the internet and other forms of information technology in the provision of financial services has had very little direct effect on the face of financial services law. The response of the regulators has been to apply existing laws to financial services provided through these relatively new media. In particular, according to Consob, "use of the internet as a means of communication with customers does not exempt intermediaries from the obligation to apply the existing rules for the supply of investment services although it may require special methods of compliance owing to the nature of the technique used to establish contact".

However, Italian financial services laws will usually apply where the contents of financial services websites are aimed at Italian investors.

Particular attention in the context of financial services provided online must be given to:

  • paperless contracts – contracts made by banks and financial institutions with their customers must be reduced to writing and customers must be given a copy. Contracts formed over the internet must comply with Italian laws on digital signatures and customers must be able to print them out;
  • information required from customers – Italian money laundering and financial services laws require banks and financial intermediaries to identify and collect data from customers, to operate systems which record significant transactions, to report suspicious transactions, and to obtain information as to the financial objectives and experience of customers;
  • information to be given to customers – financial institutions must inform investors of the nature, risks and implications of transactions; warn investors when investments suffer significant losses; and warn investors when they intend to make unsuitable investments. Customers must be able to download and save in a permanent form order confirmations, transaction confirmation notices and periodic reports sent to them through the internet. Banks are also required to give customers notice of terms and conditions, and statements in relation to continuing contractual relationships; and
  • system efficiency – financial intermediaries are required to have resources and procedures capable of ensuring the efficient provision of services and to promptly carry out orders given by investors.

Buying financial institutions

The acquisition of an equity interest in a bank requires the approval of the Bank of Italy where, as a result of the acquisition:

  • the acquirer would obtain a shareholding of more than 5%, 10%, 15%, 20%, 33% or 50% of the voting share capital of the bank;
  • the acquirer would have control of the bank;
  • the total interest of the acquirer in the bank would exceed one of the limits established by the Bank of Italy or would otherwise confer control; or
  • the acquirer would have a controlling interest in a company which itself either holds an interest in a bank that exceeds 5% of the bank's voting share capital or otherwise confers control.

The Bank of Italy grants authorization where conditions likely to guarantee the sound and prudent management of the bank are satisfied: once given, authorization may be suspended or revoked. If the applicant is a person of a non-EU state that fails to satisfy reciprocity, the Bank of Italy will forward the application to the Ministry of Treasury, upon whose proposal the Prime Minister may deny the authorization.

A person who, directly or indirectly, has significant business interests outside of the banking and finance sector may not be authorized to acquire equity interests in a bank (i) that exceed 15% of the bank's voting share capital or such amount as would give him or her control of the bank, or (ii) that confer the power to appoint or remove a majority of the directors of the bank, such as to prejudice the bank's sound and prudent management. Equity interests exceeding such limits must be divested within the time limits indicated by the Bank of Italy.

Moreover, any agreement leading to the concerted exercise of voting rights must be notified to the Bank of Italy by the interested parties, or the bank to which the agreement refers. Where such an agreement jeopardizes the sound and prudent management of a bank, the Bank of Italy may suspend the voting rights of the parties.

In the case of a public tender offer, the offeror must indicate, in the notice to be filed with Consob, that the authorization referred to in the Banking Act has been duly requested from the Bank of Italy.

Competition rules

The Bank of Italy is responsible for enforcing rules on competition with respect to banks (which are contained in the 1990 Competition Law). The Bank of Italy is entrusted to control:

  • agreements that impede competition;
  • abuses of a dominant position; and
  • mergers and acquisitions that create or strengthen a dominant position with the effect of eliminating or restricting competition.

Action will be taken by the Bank of Italy after hearing the opinion of the Italian Competition Authority. If such an opinion is not issued within 30 days, the Bank of Italy may, nevertheless, authorize such action.

The Bank of Italy may, in agreement with the Competition Authority, authorize prohibited or restricted agreements, for a limited period of time, to guarantee the stability of the monetary system.

As far as mergers and acquisitions are concerned, the Competition Law establishes that an operation of concentration must be notified to the Bank of Italy, prior to its implementation, if:

  • the combined aggregate Italian turnover of the undertakings concerned exceeds euro378 million; or
  • the aggregate Italian turnover of the party being acquired exceeds euro37 million.

The Bank of Italy has the power to investigate banks for suspected abuses of the Competition Law. The bank under investigation is notified, and can make representations and have access to documents relating to the investigation that are not confidential. At the end of the investigation, the parties are summoned to attend a final hearing during which the findings of the investigation are discussed in the presence of the representatives of the Bank of Italy. If the Bank of Italy finds that an offence has been committed, it may impose a fine determined on the basis of the gross turnover of the bank concerned and depending on the seriousness of the offence. In the case that the bank fails to desist after the decision has been taken, further fines may be imposed and the Bank of Italy may even order the bank to cease operations for a period of up to 30 days.

Bank of Italy decisions may be appealed to the Latium Regional Administrative Tribunal and further appeals can be brought before the Supreme Administrative Court.

No criminal penalties are provided under Italian law for offences against the Competition Law.

Continuing bank supervision

According to the Banking Act, the purpose and scope of bank supervision is "the sound and prudent management of the persons subject to supervision, to the overall stability, efficiency and competitiveness of the financial system and to the compliance with provisions concerning credit". The Supervision Regulations regulate in detail three broad categories of supervision.

The first form of supervision is reporting requirements. Italian banks are obliged to periodically provide the Bank of Italy with the fullest information available on their organizational structures, as well as on their operations. In addition, both the statutory board of auditors and the auditors must, without delay, inform the Bank of Italy of each irregularity in the management of the bank, and of breaches of rules. For banking groups, the Supervision Regulations provide that periodic consolidated reporting requirements must be satisfied by banks. Each bank and holding company of a banking group is required to report statistical information, intra-group financial activities, names of the members of the board of directors, of the general manager and of the key management. A breach of the reporting requirements may give rise to fines, and may also constitute a criminal offence where the breach has the purpose of hindering the reporting requirements.

The second form of supervision is the inspection, which is mainly aimed at checking the accuracy of the documents filed with the Bank of Italy pursuant to the reporting requirements. At the end of the inspection, the Bank of Italy must release to the inspected bank a report containing its results. The inspected bank may communicate its objections before the Bank of Italy starts proceedings for the application of sanctions. The Bank of Italy may also carry out inspections of Italian branches of banks established in EU member states. In this case, however, in compliance with the home country control principle, the Bank of Italy requests the local supervisory authorities to carry out inspections on its behalf. Branches of EU banks in Italy are instead subject to inspection by either the supervisory authorities of their home member states, with prior notification to the Bank of Italy, or directly by the Bank of Italy at the request of the home member state's authorities. In the case of Italian branches of banks established in a non-EU member state, the Bank of Italy may establish, with the authorities of the non-EU member state, reciprocal arrangements relating to the manner in which inspections may be conducted.

The third form of supervision is the power to make regulations for which the Bank of Italy complies with the resolutions of CICR. In the exercise of its regulatory powers, the Bank of Italy may issue general rules relating to (i) capital adequacy, (ii) limitation of risk in its various forms, (iii) permissible holdings, (iv) administrative and accounting procedures, and (v) internal control mechanisms.

Disclosure requirements

In addition to the continuous bank supervision rules, the Bank of Italy must be informed of the following:

  • changes of management – the Bank of Italy maintains an electronic archive containing details of the board of directors, the statutory auditors and the key managers of each bank; and
  • changes of shareholdings – prior authorization of the Bank of Italy must always be obtained for the acquisition of the control of a bank in a direct or indirect manner. Advance notice of the intention to acquire control of a bank or of a holding company must be given to the Bank of Italy. The acquirer must then file, with the Bank of Italy, a request for authorization to purchase the shares representing the majority of the capital of the target bank. The Bank of Italy will grant its approval provided that the conditions set out above, in the paragraph "Buying Financial Institutions", are satisfied.

Bank insolvency

Types of proceedings

The Banking Act provides for the following crisis procedures for banks: special administration; provisional management; and compulsory administrative liquidation (CAL). The Unified Law on Financial Intermediaries has extended the banking crisis laws to SIMs, SGRs and SICAVs.

Special administration and CAL are proceedings during which the administrative bodies of the bank are substituted by one or more special administrators or liquidators that, together with an oversight committee, perform the functions and exercise the powers of the dissolved bodies of the relevant bank. As a matter of urgency, the Bank of Italy may provide for one of its officers to take over the provisional management of a bank while the power of the bank's administrative bodies is suspended.

Special administration is aimed at eliminating administrative irregularities and promoting solutions where:

  1. serious administrative irregularities or serious violation of laws, regulations or by-laws of the bank are identified;
  2. serious capital losses are expected; or
  3. dissolution is requested by the administrative bodies of the bank or by an extraordinary shareholders' meeting.

Special administration lasts for one year from the date of the decree of the Ministry of Treasury dissolving the bank's bodies.

Compulsory Administrative Liquidation

CAL is the only insolvency procedure for banks; it is ordered by a decree of the Ministry of Treasury revoking the authorization for a bank to engage in banking activities when the events under (a) and (b) above are exceptionally serious. The liquidators, appointed by the Bank of Italy, undertake all activities aimed at satisfying depositors' and creditors' claims, while the oversight committee performs a consultative role and monitors the actions of the liquidators. Above all, the Bank of Italy oversees the entire procedure and has the power to issue regulations and to authorize significant actions.

The decree automatically produces some effects on the relevant bank including: suspension of payments and the incurring of liabilities of any kind; inability of creditors to take individual actions against the bank and termination of actions recently started; inclusion in the liquidation of assets obtained after the issue of the decree; invalidity, for creditors, of actions taken against the bank; and the applicability of certain provisions contained in the Bankruptcy Law.

The Bank of Italy directs the procedures and may require that the special administrator or liquidators obtain authorization before taking certain actions. In particular, the Bank of Italy has the power to: authorize sales of the business or the continuation of the business of the bank being liquidated; authorize the partial allotment to either all or certain categories of creditors; and authorize the deposit of the closing statement of account of liquidation with the competent court.

Status of creditors/depositors
All the creditors of the relevant bank are notified by the liquidators of the amounts due to them on the basis of the bank's own accounting records. Creditors to whom such notice has not been delivered may request the liquidators' admission of their credits showing evidence of their claims.

In the event that a creditor has not been admitted, they can claim their rights by filing a petition with the president of the court prior to the final distribution of the proceeds of liquidation.

Proceeding
From the date of the decree, the functions of the administrative bodies, control bodies and shareholders' meetings of the bank cease, and within three days the liquidators take over the bank from the dissolved administrative bodies, and suspend payment of liabilities of whatever kind and the restitution of third parties' assets. Within one month of their appointment, the liquidators prepare the statement of liabilities and then proceed with the liquidation of the bank's assets.

The liquidators, with the prior authorization of Bank of Italy or the shareholders' meeting of the bank, may also propose a composition with creditors to the court, before allotment. The prior consent of unsecured creditors is not required; creditors are merely entitled to object to the proposal for a composition filed with the court, which may, however, discretionally approve the proposal.

Insolvency
A competent court, after consulting the Bank of Italy and the legal representatives of the bank, can declare a bank insolvent. When such court adjudication arises before the decree, it will cause the Ministry of Treasury to grant the decree. Insolvency can also be declared by the competent court after the decree has been issued, upon petition of the liquidators or of the public prosecutor, or on the authority of the same court. The judicial declaration of insolvency has immediate effect with respect to past legal acts of the bank that are detrimental to creditors' rights.

International issues

In the case of special administration of non-EU banks, the special administrators assume the powers of the administrative and control bodies of the parent bank. The Italian branches of EU banks that have had their banking licences revoked by the home state's credit authorities may be subject to a CAL. Branches of non-EU banks may also be subject to a CAL, insofar as such a proceeding is applicable.

Deposit guarantee scheme

The Banking Act provides that Italian banks and non-EU banks must be members of a deposit guarantee scheme established by banks and recognized in Italy, and that branches of EU banks authorized in Italy may be members of an Italian scheme where such a scheme provides greater depositor protection than those in their home state.

The Banking Act provides that the minimum amount of the reimbursement for each depositor is euro103,000.

The Unified Law on Financial Intermediaries also requires that the provision of investment services be subject to a compensation system for the protection of the investors recognized by the Ministry of Treasury, after consulting with the Bank of Italy and with Consob.

Capital requirements, large exposures and bank secrecy

The Supervision Regulations set forth capital requirements for banks and limitations on banking risks such as position, settlement, counterparty, concentration, market position and exchange risk.

In particular, the Supervision Regulations contain the following three broad categories of rules with respect to the capital of banks:

  • supervisory assets providing the total net amount of assets that banks must maintain;
  • solvency ratios providing the amount of capital that a bank must generally maintain in respect of its credit activities; and
  • capital for market risks providing for the capital that banks must maintain to cover the market risks to which they are subject by virtue of their financial markets activities.

The Supervision Regulations regulate large exposures of banks – this is defined as exposures to a client that is in excess of 10% of the net assets of a bank. The Supervision Regulations further require banks to ensure that (i) the total amount of its large exposures does not exceed eight times the total of its net assets, and (ii) the large exposure to any one client or group of clients does not exceed 25% of its net assets. Reporting systems must be established by banks and details of large exposures must regularly be notified to the Bank of Italy.

Bank secrecy is not enshrined in Italian legislation, but is derived from a traditional duty of confidentiality with respect to customers' affairs and dealings. The Italian Constitutional Court has referred to banking secrecy as "a duty of confidentiality which has traditionally bound banking institutions in respect of operations, accounts, and the position of users of the services they provide". By virtue of article 1374 of the Civil Code, a term on banking secrecy will also be implied into the provisions of contracts between a bank and its clients. Other duties such as data protection and consumer protection laws are also applicable to banks and other financial service providers.


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