Measures to support financial stability introduced by Law Decree 237 of 23 December 2016

Financial Industry Alert


On 23 December 2016 law decree 237 (the "Decree") was published in the Official Gazette no. 299 and entered into force on the same day.

The Decree was adopted in light of events that have affected Banca Monte dei Paschi di Siena to enact, with urgency, certain provisions aimed at guaranteeing the economic and financial stability of Italy, ensuring public support for capital strengthening measures and the protection of savings deposits. The Decree included the following:

(i)     provisions entitled (a) "State Guarantees on newly-issued liabilities" and (b) "Emergency Liquidity Provision".
(ii)    provisions relating to "Capital Strengthening Measures";
(iii)    amendments to Law Decree 170 of 21 May 2004 on financial collateral arrangements.
This Alert is a summary of the main provisions of the Decree described above.


1.  State guarantees on newly-issued liabilities: general features

Pursuant to Article 1 of the Decree, the Ministry of Economy and Finance (the "MEF") can, until 30 June 2017, provide a State guarantees for debt securities issued by Italian banks to preserve financial stability (each a "Guarantee"). The Guarantees will be unconditional, irrevocable and payable on first demand.  

1.1 Object of the Guarantee

Guarantees may only be given for debt instruments with the following characteristics:
(i)     they are issued after 23 December 2016;
(ii)    maturity is between three months and five years (or seven years in the case of covered bonds);
(iii)   they provide for bullet repayment of principal in a single instalment at maturity;
(iv)   Euro denominated and fixed interest rate;
(v)    no subordination clauses as to repayment of principal and payment of interest; and
(vi)   not structured debt or complex products and without component of a derivative nature.
The Guarantee will cover both principal and interest payments.

1.2 Condition for the granting of the Guarantee

The Guarantee can be granted only after the positive decision of the European Commission on the regime for granting the Guarantee or, as appropriate, following an individual notification. In other words, the granting of the Guarantee is subject to the scheme complying with EU rules on State aid.
Furthermore, the granting of each Guarantee will be made on a case-by-case basis following the assessment by the competent supervisory authority (Bank of Italy or the European Central Bank, as applicable) of the following:
(i)    compliance with own funds requirements pursuant to EU regulation 575/2013;
(ii)   no capital shortfalls highlighted under stress tests.

1.3  Duration and limits

The MEF is entitled to grant the Guarantee until 30 June 2017, which may be extended by the MEF for an additional six months.
With regard to the quantitative limits, under Article 3 of the Decree the amount of Guarantees granted is limited to the amount strictly necessary to restore the medium to long-term refinancing capacity of the beneficiary banks.
In addition, for each bank, the nominal value of debt instruments with a maturity longer than three years for which the Guarantee may be granted cannot exceed one-third of the total nominal value of the securities issued.

1.4  Application procedure

The application for admission to the Guarantee shall be submitted to the Bank of Italy and the Treasury Department indicating, inter alia, the liquidity needs, including future liquidity needs, of the bank, the liabilities for which a Guarantee is sought and any liabilities for which a Guarantee has already been granted.
Within three days of receiving the request, the Bank of Italy must provide its assessment to the Treasury Department, which shall decide on the application within the following five days.

1.5  Enforcement of the Guarantee

If a bank believes it will be unable to fulfill its payment obligations related to the issuance of debt securities covered by the Guarantee, it shall apply for the activation of the Guarantee indicating, inter alia, the amounts owed by the bank under the guaranteed financial instruments as issued.
The application for activation shall be submitted at least 30 days before the maturity of the guaranteed securities.
The Treasury Department shall promptly pay the amount due by the bank, in any case no later than the day before the guaranteed bond matures, subject an assessment of the foundation of the application for activation.
Following payment by the Treasury Department pursuant to the Guarantee, the bank is required to repay to the Treasury Department the amount paid plus interest at the legal rate up to the date of repayment to the Treasury Department (there seems to be no specific deadline for repayment).

1.6   Beneficiaries of the Guarantee

Those eligible for the Guarantee are, in addition to the Italian banks which meet the requirements referred to in paragraph 1.2 above, also banks with registered offices in Italy which do not meet only one of the requirements indicated in paragraph 1.2. but that have positive net assets, provided that the relevant bank is in urgent need of liquidity support.
Finally, the Guarantee can be granted, subject to certain conditions, in favor of a bank under resolution procedures or a bridge institution under Law Decree 180/2015.

2.  Emergency liquidity provisions

In addition to Guarantees, the Decree also introduces provisions related to the emergency liquidity assistance, "ELA", i.e. loans provided by the Bank of Italy to banks facing serious liquidity crises.
In particular, Article 10 of the Decree sets forth that within six months from the entry into force of the Decree, the MEF may grant the State guarantee to supplement the security granted by the Italian banks  in order to guarantee such loans.
Such state guarantee is irrevocable. The Bank of Italy will be required to first enforce the security allocated by the bank and then the state guarantee.

2.1 Beneficiaries

Those eligible for the state guarantee in the context of emergency liquidity provision operations are the same as those in paragraph 1.6 above.

2.2 Enforcement of the Guarantee

If the bank to which emergency liquidity has been provided does not meet its payment obligations under its loan agreement with the Bank of Italy, the latter, depending on the outcome of the enforcement of security granted by the bank, submits the activation application for the state guarantee to the Treasury Department which, after confirming the validity of the request, shall pay the amount due by the bank promptly and, in any case, within 30 days.As regards this measure, unlike the provisions concerning the Guarantee described above, the legislator seems not to have regulated the restitution obligations of the defaulting bank towards the State, or the subrogation of the same in the credit position of the Bank of Italy.       

3.  Implementing provisions

Article 12 of the Decree sets forth that the implementation of both the provisions on the Guarantee on liabilities and the provisions on state guarantees within ELA operations is mandated to the adoption of a special decree by the MEF.


1. Subscription for or acquisition of shares by the State

Pursuant to Article 13 of the Decree, the MEF may subscribe for or acquire, by 31 December 2017, in derogation of public finance accounting rules, shares issued by Italian banks, whether or not they belong to a banking group, or Italian parent companies of banking groups (the "Issuer"). Issuers eligible to apply for this type of intervention by the State are Issuers that, based on stress tests, need to strengthen their regulatory capital.        

2.   Conditions for State interventions

In order to request the intervention of the State, the Issuer is required to first submit to the competent authority (Bank of Italy or the European Central Bank, as applicable) a capital strengthening plan indicating (a) capital needs; (b) the measures that the Issuer intends to adopt to achieve the capital strengthening and (c) the deadline for completion of the capital strengthening plan.
Only if implementation of the capital strengthening plan - the results of which should be given to the competent authorities and the MEF - proves insufficient to achieve the capital strengthening required, may the Issuer request state intervention.

3.  State intervention implementation

The intervention by the State, in the subscription for or acquisition of shares, based on the provisions of the Decree, seems to be conditional upon pre-emptive "burden sharing measures among creditors", as stated in Article 22.
In particular, Article 22 provided that -  in order to limit the use of public funds - subscription for the Issuer's shares by the MEF is made after application of the "burden sharing measures among creditors". Such measures, to be provided by decree of the MEF and subject to the positive decision of the European Commission on the compliance of the intervention with the EU regulatory framework on State aid applicable to bank recapitalisation measures in the context of the financial crisis, are:

(i)     conversion of the Additional Tier 1 instruments into newly-issued ordinary shares that can be calculated in the Issuer's primary equity Tier 1;
(ii)     if the measure referred to in point (i) above is not sufficient, conversion of instruments and loans calculated as elements of Tier 2 into newly-issued ordinary shares that can be calculated in the Issuer's primary equity Tier 1; (iii) if the measure referred to in subparagraph (ii) above is not sufficient, conversion of instruments and loans, other than those referred to in (ii) above, whose right to repayment of principal is contractually conditional upon fulfillment of the rights of all non-subordinated creditors of the Issuer, into newly-issued ordinary shares that can be calculated in the Issuer's primary equity Tier 1.    

4.   Implementing measures

The provisions relating to the subscription for or acquisition of shares by the State may be subject to implementing decrees of the MEF, to be adopted after consulting with the Bank of Italy.


The Decree has introduced the following amendments to Article 26, Law Decree 170 of 24 May 2004 regarding financial collateral arrangements and, in particular, varying provisions regarding perfection of security transfers for transactions involving the Bank of Italy:

(a)  Under Article 3, subsection 1-bis, the following wording was inserted in bold:
"In case of a pledge or assignment of claims, the guarantee that meets the requirements set out in Article 2 shall be effective between the parties of a financial guarantee contract. Except as provided for by the following subparagraph, for the purposes of the enforceability against third parties and the assigned debtor or borrower of claim that has been pledged, the notice requirements to the debtor or acceptance by the debtor set forth by the Civil Code remain unchanged";

(b) in Article 3, after subsection 1-bis, the following provisions were inserted:

  • subsection 1-ter: "If, in order to satisfy, including indirectly, liquidity requirements, the Bank of Italy carries out financing transactions or other transactions that are guaranteed by a pledge or assignment of claims, the guarantee is effective against third parties from the moment it is granted, in accordance with Articles 1, paragraph 1, letter q), and 2, paragraph 1, letter b), and in derogation of the provisions of Articles 1265, 2800 and 2914 no. 2), of the Civil Code.
    In derogation of Articles 1248 and 2805 of the Civil Code, the assigned debtor or the debtor of the pledged claim cannot set-off against the Bank of Italy any claims against the transferor or pledgor, respectively, regardless of whether such claims have arisen, have been acquired or become due before or after the granting of the security in favor of the Bank of Italy. For other purposes, regarding the enforceability of the guarantee towards the assigned debtor or the debtor of the pledged claim, the notice requirements or acceptance provisions set forth by the Civil Code remain unchanged";

  • subsection 1-quater. "If the guarantees referred to in subsection 1-ter consist of mortgages, registration provided for in Article 2843 of the Civil Code is not required. Article 67, paragraph 4, of Royal Decree 267 of 16 March 1942 applies to the transactions of the Bank of Italy referred to in subsection 1-ter".