After the financial and sovereign crisis, a number of Member States which previously disciplined bank failures through normal insol- vency proceedings, followed, among others, the Italian example, adopting measures at a national level to ensure the stability of their financial markets and establishing specific rules for banks and invest- ment companies. 102
In this context, the previous EU’s intervention on crises manage- ment was aimed at granting mutual recognition, without harmo- nizing the different national provisions.
However, the crisis proved that significant difficulties raised in dealing effectively with failing banks that operated in more than one Member State, due to the differences among those various instruments.103 As fragmentation and inefficiency in EU banking and financial services could harm the single market and impair its advantages for consumers, investors and businesses, EU financial integration and interconnections between institutions needed to be covered by a common framework of intervention powers and rules.104
Much of the EU’s first intervention focused on crisis prevention, with a view to preventing serious problems from emerging in the financial sector. This includes, inter alia, regulatory steps to improve prudential supervision and to strengthen the overall resilience of banks, provided for by a major package of reforms to the capital requirements regime for credit institutions and investment firms, well known as “CRD IV”105; for the Eurozone countries, the Single Supervisory Mechanism was established. 106
Immediately after, the step forward of the ongoing reforms was, necessarily, the enhancement of mechanisms of crisis management at EU level in order to reduce the potential impact of failures, should they occur, minimizing different national approaches and fragmenta- tion of the single market and abandoning the “mutual recognition”
approach in favour of legislative harmonization. 107
To this end, the EU legislator adopted two complementary pieces of legislation: (1) Directive 2014/59/EU on Bank Recovery and Resolution (BRRD) 108 and (2) Regulation no. 806/2014 “establishing uniform
rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism (SRM) and a Single Resolution Fund (SRF)” 109 ; both the instruments are based on the three-phased approach to bank crisis management, which, as described in the previous paragraphs, has been adopted in Italy since a significant time110 (i.e., (i) preparation and prevention; (ii) early intervention; and (iii) resolution). 111 1) The BRRD is aimed at obtaining efficiency and cohesion, in
ensuring that failing banks in the EU Single Market can be resolved in a way which preserves financial stability and minimizes costs for taxpayers across the EU. 112
In all Member States, banks and other financial institutions,113 includ- ing groups with cross-border operations,114 will be then subject to harmonized provisions governing how resolution is carried out and how the costs are shared115; a range of instruments is established to tackle potential bank crises at the mentioned three stages: prepara- tory and preventive, early intervention, resolution. Expanded powers are assigned to national and EU resolution authorities116 whose func- tion may also be exercised by the same authorities responsible for the prudential supervision of institutions. 117
However, the BRRD is a “minimum harmonization” directive, meaning that a Member State may adopt recovery and resolution measures that are stricter or more onerous than those in the BRRD, so long as the national measures do not conflict with the BRRD.
In a number of areas, the directive provides for regulatory and implementing technical standards (RTS and ITS) to be drafted by the European Banking Authority (EBA). These standards are subject to adoption by the European Commission before entering into legal force as directly applicable EU regulations (in the same way as what happens under the CRD IV provisions). The EBA is also mandated to issue guidelines (GL) in specified areas. The BRRD provides varying deadlines for delivery by the EBA of draft Regulatory Technical Standards and Guidelines on a timetable that extends into 2015. 118
According to the new rules, the preparation and prevention phase is focused on collaboration between the undertaking and the public authority: all banks (and the other mentioned institutions) will have to arrange recovery plans for times of distress and authorities will
have to ensure that all preventive steps are taken to deal with bank failure. 119 Resolution authorities, on the other side, shall draw up a resolution plan for each bank/institution, providing for the resolu- tion actions which the authority itself may take, where the institu- tion meets the conditions for resolution. 120
As for the second phase, early intervention tools adopted by the EU legislator are not very different from some pre-crisis Italian measures, provided by Art. 53 of the CLB 121 and Arts 51–55 of the CLF122: each competent national authority will now be empowered to require the bank/institution to adopt measures outlined in the recovery plan,123 to draw up an action programme and timetable for its implementation,124 to convene a shareholders’ meeting, proposing the agenda or the adoption of certain measures,125 to prepare a plan for debt restructuring,126 to require changes to the institution’s business strategy and the legal or operational structures of the institution,127 to acquire, including through on-site inspections, all the information necessary. 128
In case of “a significant deterioration in the financial situation of an institution or where there are serious infringements of law, of regu- lations or of the statutes of the institution, or serious administrative irregularities, and other measures taken [...] are not sufficient to reverse that deterioration”, the BRRD provides for the more invasive tool of the removal of the senior management or the management body, and their substitution with other managers, chosen by the author- ity. 129 The measure can even result with the appointment of a special manager for a limited period of time, with the objective of restoring the viability of the institution (Temporary Administration) 130; this instrument is basically the same as the TM provided for by Art. 76 of the Italian CLB 131 and as the CLF’s Provisional Administration.132
Another measure adopted by the EU legislator which is particu- larly similar to the CLB’s SA 133 is the Special Management, 134 which is placed in the title dedicated to resolution135 but still can be consid- ered as a “going concern” remedy. In fact, the provided continuation of the institution’s regular activities, even if in the hands of a special manager, suggests that this tool should be used when the crisis is ongoing but (considered as) reversible. This is also confirmed by the fact that the BRRD legislator placed this procedure in a separate part of title IV (Chapter 2) and not among the proper “resolution tools”
(Chapter 4). Another aspect in common with the SA is the role of
the special manager, who, like the SA commissioner, is appointed for no more than one year (renewable) and has the statutory duty to take all the measures necessary to promote the resolution objec- tives (including to ensure the continuity of critical functions) and implement resolution actions (including an increase of capital, reor- ganization of the ownership structure of the institution or takeovers by institutions that are financially and organizationally sound)136 ; besides, the special manager may only exercise such powers under the control of the resolution authority.
Also, the triggers for the Special Management procedure are similar to the Italian ones: infringement of the requirements for continuing authorization; losses that will deplete all or a significant amount of the institution’s funds, less assets than liabilities; inability to pay debts or other liabilities; necessity of extraordinary public financial support. 137
Resolution tools provided for by the BRRD are, instead, new alterna- tives to the current gone concern instruments available in Italy, at least in part.
Arts from 37 to 43 of the directive, in fact, describe four measures which will require the Italian legislator to adopt an enlarged vision of bank liquidation: (a) the sale of business, enabling authorities to sell an institution or part thereof without shareholders’ approval; (b) the setting up of a bridge institution, allowing authorities to transfer an institution or part thereof to a publicly controlled entity, with the view to sell it to the private sector when market conditions are appro- priate; (c) the asset separation, to be applied in combination with the other tools and entailing the transfer of impaired assets to an asset management vehicle, which will then sell them to the market; (d) the bail-in, which enables the resolution authorities to write down equity and to write down or convert debt or other capital instruments into equity.
A resolution by way of bail-in, in particular, may be of either of two types: “Open Bank Resolution” and “Closed Bank Resolution”. Under the first, the bank and its critical and systemic operations would be maintained, the bank being recapitalized by way of a write down of liabilities or the conversion of debt into equity (or both). Parts of the bank might be run down over time, and it would be likely that management would be replaced and shareholders would be diluted, perhaps fully. According to the second, the bank is split into a “good
bank” (or bridge bank) and a “bad bank”, the “bad bank” being liqui- dated. Non-systemic creditors would either be left with the “bad bank”, suffering losses as part of the liquidation, or transferred to the
“good bank”, the creditor’s claim either being reduced or converted into equity, in whole or in part. 138 Through the bail-in tool in partic- ular, losses are put onto shareholders, bondholders and, possibly, other creditors (i.e., other unsecured and uninsured creditor claims) according to a bail-in hierarchy.139 By redistributing the risk between taxpayers, depositors and debt holders,140 the bail-in rules have been introduced to reduce the overall risk in the system. 141
As described above,142 the Italian system knows a comprehensive liquidation procedure (CAL), within which the liquidators may also opt for the sale “as a whole” of the business or part of it to another intermediary continuing the business of the undertaking (under the direction and the control of the Bank of Italy), when this is useful to liquidate the bank/institution without disruptive effects (Art. 90 of the CLB).
Such a measure partially matches with the sale of business and sale of assets tools, while the bridge bank and the bail-in tools will need to be introduced and regulated after the implementation of the directive. 143
In fact, even if the sale of assets and liabilities provided for Art. 90 of the CLB is already a way to realize a bridge bank or a bad bank/good bank scheme (in the sense that good assets are transferred to another entity while the bad assets remain in the hands of the liquidators, who realize them for the allotment to creditors), the bridge banks and bad banks intended by the BRRD have never been part of the Italian tradition.144 In Italy, so far, this mechanism has actually been activated only when a good (in bonis) and private transferee (or more than one) is found and is available for the final acquisition of the business or assets; but the Italian framework does not provide for a specific instrument of public financial intervention which could feed a public bank (in the 1990s, in order to comply with the EU competi- tion framework, public banks were converted to private banks, and the Bank of Italy’s advances, previously employed to cover losses following banking liquidations, were abolished). Thus, the “new”
instrument, now introduced by the BRRD, will be challenging; when a good private transferee is not available, the public bridge bank could help to preserve the assets’ value until an intervener is found
while the bad bank may grant an efficient recovery of the impaired assets or of the assets which are difficult to evaluate. Those vehicles shall be wholly or partially owned by public authorities and shall be controlled by the resolution authority, so that the Bank of Italy will be probably entitled to set up such an entity, to find its funding and to manage it. Certainly, specific rules, whose natural placement should be the CLB’s section on crisis management procedures, will need to be created on this purpose. 145
Also the bail-in tool will have to be transposed, almost ex novo, – in the Italian system, and in this case, some questions of constitu- tional compatibility could arise, with reference to the compression of some shareholders’ and creditors’ rights that the tool implies.146 There might be circumstances, indeed, when the resolution authori- ties could interfere on creditors’ rights without having exhausted shareholders’ claims.147 The principle of equal treatment of creditors, governing crisis procedures in Italy, could then be affected by the application of such provisions. 148
Under the BRR Directive, it falls to national resolution authorities to initiate the resolution phase (i.e., to decide when and whether a bank is failing or likely to fail – without any possibility of restoring its viability with a private sector or supervisory action – and when a resolution action is necessary in the public interest, to preserve finan- cial stability and vital systemic functions) and to manage the proce- dure. The flexible and discretional approach to regulation, which is already in use in Italy, has therefore been applied149 always within the limits shaped by the principle of proportionality.150
The directive has also the scope to facilitate cooperation and coor- dination among authorities for banks operating cross border and, as a consequence, to provide for a framework to come to joint decisions throughout, from a group perspective (Title V of the BRRD). For this reason, resolution colleges are established, composed of the relevant national authorities involved in each case. The resolution college, however, is not a decision-making body, but a platform facilitating decision-making by national authorities, whereas the joint decision is taken by the national authorities concerned.151 The EBA is entitled to mediate, should authorities not come to a joint decision, and this mediation, in certain cases, is binding. 152
As evident, the described resolution measures imply the recourse to a resolution fund; as a consequence, Member States will also be
required, as a general rule, to set up ex ante resolution funds to ensure that the resolution tools can be applied effectively. 153 This is one of the most challenging issues, as each Member State will have to inter- nally regulate the question of financing the mandatory fund; the CLB already provides for the Deposit Insurance Systems154 , even if for different functions, but Italy’s membership of the Banking Union and of the new SRM will give entitlement to also rely on the subsequent Single Bank Resolution Fund.
2) The Single Resolution Mechanism (SRM) is an essential comple- ment to the Single Supervisory Mechanism for more integrated bank oversight and crisis management; it sets out the institutional and funding architecture for applying those rules only in Member States participating in the Banking Union. 155
The SRM will implement the rules on banking resolution as described in the BRRD 156 for all banks supervised by the Single Supervisory Mechanism, placed under the responsibility of the European Central Bank 157 ; in fact, although it confers regulatory and mediation tasks on the EBA, the BRRD “does not completely avoid the taking of separate and potentially inconsistent decisions by Member States regarding the resolution of cross-border groups which may affect the overall costs of resolution. Moreover, as it provides for national financing arrangements, it does not sufficiently reduce the depend- ence of banks on the support from national budgets and does not completely prevent different approaches by Member States to the use of the financing arrangements”. 158
To support the resolution process and enhance its effectiveness, the regulation thereby establishes a Single Bank Resolution Fund aimed at pooling significant resources from bank contributions and, therefore, protecting taxpayers more effectively than national funds, while at the same time providing a level playing field for banks across participating Member States. 159
The decision-making structures160 of the SRM include the Single Resolution Board161, the national resolution authorities of partici- pating Member States and the European Commission. The tasks of the SRM are shared between the Single Resolution Board and the national resolution authorities.162 The European Commission will participate the SRM only in so far as needed to perform specific tasks
provided for in the regulation and in relation to state aid scrutiny under the treaty.
The ECB, as bank supervisor, is entitled to notify the commission, the Resolution Board and to the relevant national authorities and ministries that a bank is failing; the Resolution Board will assess if there is a systemic threat and no private sector solution and, if so, the Resolution Board will recommend to the commission to initiate reso- lution; on the basis of the Resolution Board’s recommendations, or of its own initiative, the commission will have the power to initiate the resolution procedure; in this case, it would also indicate to the Resolution Board the framework of the resolution tools that will be applied in each case and on the use of the fund; the national resolu- tion authorities will execute the resolution measures decided by the board according to the national law.163
If the national resolution authorities do not comply with the deci- sions of the board, this body has the power to supersede the national resolution authorities and address certain decisions for the imple- mentation of the resolution measures directly to the banks. 164
Clearly, the board is empowered with critical function which also imply the exercise of wide discretionary powers, although delegated by the commission, including decisions impacting on economic policy (for example decisions to open resolution, in light of the public interest to preserve financial stability).165 A power of such signifi- cance is due to the need for the authority in charge to be flexible: to act quickly, decisively and independently, but it has to be balanced with the principles of legality, subsidiarity and proportionality; that is why the assessment of discretionary aspects is the commission’s responsibility.166
It is clear that the national resolution authorities of the Banking Union are now obliged to “cede their sovereignty” of regulation, with reference to resolution procedures of the most significant and cross- border banks; they will remain, however, closely involved in the reso- lution process, as they are asked to assist the board in preparing its actions and are also in charge of implementing the resolution deci- sions in line with national company and insolvency law.
In Italy, the entry into force of the SRM Regulation will imply a respectable effort of integration by the primary legislator and the supervisory and resolution authority provided with regulatory powers of second level, for example, the Bank of Italy; although the layout
and the inspiring principles of Italian crises procedure system are already in line with the regulation, the existing domestic legislation and the implementation rules will need a significant revision and updating intervention to be fully compliant with the complex and centralized configuration of the Banking Union.
The CLB seems to be the natural place to host the new rules; it shall be necessarily amended, for example with specific reference to the exclusion of significant banks from the application of national reso- lution procedures and with provisions conferring the new powers on the Bank of Italy as a resolution authority.
For its part, the Bank of Italy, who has actively participated in the elaboration of the new EU legislation, has already introduced organi- zational changes of its internal structure – in order to mirror the new tripartite architecture (regulation, assigned to the EBA; supervision, assigned to the BCE; resolution, assigned to the SRB) and is working on the implementation stage regarding its own jurisdiction.