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Fitch: Italian Bank Retail Bail-in Highlights Credit Loss Risk
Fitch Ratings-Milan/London-28 July 2015: The bail-in of retail junior bondholders in the liquidation of Banca Romagna Cooperativa (BRC) highlights the increased likelihood that losses will be sustained by bank creditors now that effective resolution tools are available in the EU, Fitch Ratings says. It also highlights poor conduct by Italian banks in raising subordinated and hybrid debt through their retail branches.
When the Italian authorities began BRC's liquidation on 17 July, they decided to bail in its equity and junior debt, all of which was held by retail depositors. This first-time bail-in of retail creditors in Italy shows how bank resolution procedures have changed under the EU's Bank Resolution and Recovery Directive (BRRD).
The initial plan was to use funds from Italy's Deposit Guarantee Insurance Fund to make up the shortfall between BRC's assets and liabilities. But the European Commission ruled that this would constitute state aid. Bail-in followed, while retail insured depositors, protected under BRRD, suffered no losses and were transferred. Together with BRC's assets they were transferred to ICCREA Banca Sviluppo, the entity that manages distressed banks and identifies solutions for failed banks within the network of Italy's mutual banks, the Banche di Credito Cooperativo.
Despite the bail-in of junior debt, no loss was ultimately suffered by the retail bondholders as the Italian mutual sector's Institutional Guarantee Fund decided to reimburse them in full to preserve the reputation of the sector.
But junior creditor losses are far more likely under BRRD and we believe this will reduce retail investors' appetite for this type of bank debt instrument. Equally, bailing in subordinated debt can be done outside (ie before) formal resolution action on a bank. If this measure is insufficient to recapitalise a bank and no other private sector solution is available, resolution actions can be taken. This could cause a problem for smaller Italian banks, which have traditionally relied heavily on retail customers to invest in a broad range of funding instruments.
The Bank of Italy recently warned banks and their customers of the risks of institutions placing their own debt to retail buyers under the changed resolution landscape, which will be fully effective from January 2016. It also published on its website an explanation of the changes under the new framework for resolving a bank.
Italy, along with 10 other EU countries, failed to comply with the January 2015 deadline for implementing the BRRD into national law. But the implementation process has started in Italy, with Parliament approving the relevant law on 2 July. This needs to be complemented by decrees from the Ministry of Finance. The Bank of Italy has been designated the Italian resolution authority. But irrespective of this, under BRRD losses can be imposed on bank creditors. The handling of BRC indicates that Italian national authorities and supranational authorities within the EU are fully adhering to the spirit of the resolution regime.
Fitch Ratings-Milan/London-28 July 2015: The bail-in of retail junior bondholders in the liquidation of Banca Romagna Cooperativa (BRC) highlights the increased likelihood that losses will be sustained by bank creditors now that effective resolution tools are available in the EU, Fitch Ratings says. It also highlights poor conduct by Italian banks in raising subordinated and hybrid debt through their retail branches.
When the Italian authorities began BRC's liquidation on 17 July, they decided to bail in its equity and junior debt, all of which was held by retail depositors. This first-time bail-in of retail creditors in Italy shows how bank resolution procedures have changed under the EU's Bank Resolution and Recovery Directive (BRRD).
The initial plan was to use funds from Italy's Deposit Guarantee Insurance Fund to make up the shortfall between BRC's assets and liabilities. But the European Commission ruled that this would constitute state aid. Bail-in followed, while retail insured depositors, protected under BRRD, suffered no losses and were transferred. Together with BRC's assets they were transferred to ICCREA Banca Sviluppo, the entity that manages distressed banks and identifies solutions for failed banks within the network of Italy's mutual banks, the Banche di Credito Cooperativo.
Despite the bail-in of junior debt, no loss was ultimately suffered by the retail bondholders as the Italian mutual sector's Institutional Guarantee Fund decided to reimburse them in full to preserve the reputation of the sector.
But junior creditor losses are far more likely under BRRD and we believe this will reduce retail investors' appetite for this type of bank debt instrument. Equally, bailing in subordinated debt can be done outside (ie before) formal resolution action on a bank. If this measure is insufficient to recapitalise a bank and no other private sector solution is available, resolution actions can be taken. This could cause a problem for smaller Italian banks, which have traditionally relied heavily on retail customers to invest in a broad range of funding instruments.
The Bank of Italy recently warned banks and their customers of the risks of institutions placing their own debt to retail buyers under the changed resolution landscape, which will be fully effective from January 2016. It also published on its website an explanation of the changes under the new framework for resolving a bank.
Italy, along with 10 other EU countries, failed to comply with the January 2015 deadline for implementing the BRRD into national law. But the implementation process has started in Italy, with Parliament approving the relevant law on 2 July. This needs to be complemented by decrees from the Ministry of Finance. The Bank of Italy has been designated the Italian resolution authority. But irrespective of this, under BRRD losses can be imposed on bank creditors. The handling of BRC indicates that Italian national authorities and supranational authorities within the EU are fully adhering to the spirit of the resolution regime.
