Retail Investor Protection and Banking Crisis Management: Lessons from Italy

Professor Claudia Sandei will come to present around retail investor protection and banking crisis management in Italy.

This is a free event but registration is required in advance.

This event has been organised by the Centre for Business Law and Practice and will be delivered by Professor Claudia Sandei, Associate Professor of Law at the University of Padua (Italy)

A central theme of the recently implemented European bank resolution legislation is that private sector creditors (principally, shareholders, senior and junior bondholders and depositors with deposits not protected by deposit guarantee schemes) must potentially contribute to the recapitalization of a failing bank before State support can be granted. This means that there must be a 'bail-in' of creditors before a 'bail-out' by the taxpayer.

This fundamental concept is a major cause for concern in Italy as a large part of shares and bonds issued by banks were held by retail investors who were not aware of the risks they would incur when they bought a bank bond or when they chose to deposit money in a current account. Having escaped the first wave of the financial crisis in 2008 relatively unscathed, problems in the Italian banking sector then began to grow due to bad loans, high structural costs, and sectoral inefficiencies.

At the end of November 2015 four small Italian banks (Banca Marche, Cassa di risparmio di Ferrara, Popolare Etruria e CariChieti) which were under special administration, were resolved under the new legal framework transposing the BRRD into national law. The losses imposed on shareholders and subordinate debtholders amounted to about €870 million but the social cost was much higher. In order to protect senior bondholders and depositors, further losses of about €1.7 billion were absorbed by the newly established Resolution Fund. 

Last spring it was the turn of two mutual banks (Banca Popolare di Vicenza and Veneto Banca), again retail investors suffered high losses.

Then the 2016 Stress Tests conducted by the EBA on the EU banks EU-wide stress tests found weakness in Italy’s Banca Monte dei Paschi di Siena (MPS). Monte dei Paschi di Siena passed the test in the baseline scenario but obtained a negative result in the adverse scenario. The result was due basically to the great amount of non performing loans hold by Mps. Thus in Autumn, the Board of Directors of Monte dei Paschi di Siena approved a plan to sell its entire portfolio of bad loans and carried out a capital increase of up to €5 billion. But the plan failed and things got out oh hand. In December, MPS announced that liquidity may run out in four months, asking Italy fot help.

In the late hours of December 22nd the Italian government approved a decree law providing up to €20 billion in liquidity guarantees and precautionary recapitalisation funds for MPS (which has €160.1 billion in total assets) and, if needed, for several other struggling banks as well. Subordinated and senior bondholders would be saved while shareholders would be diluted.

The Italian situation offers several important lessons. Mainly that bail-in can have disastrous consequences for investors, particularly for the retail ones, and for the economic and regional development. Moreover, from a more general point of view, we observe that the distinction between investors and depositors is currently disappearing: both are exposed to the risk of default but only shareholders can take part in the decision making process and this is not acceptable.

It is common knowledge that banks are different from other firms but to what extent can savers and depositors can be sacrificed?

Professor Claudia Sandei is an Associate Professor of Law in the University of Padua (Italy) where her teaching and research focuses mainly on insolvency law as well as comparative corporate and commercial law. She collaborates closely with many academics in Spain, Germany, Austria, and the United Kingdom, and is also a member of the editorial boards of some of the most important law reviews in Italy. Besides an important number of articles in the company field (some of which have also been published in foreign law journals), she is the author of the first comprehensive monograph published in Europe on the implementation of the Shareholder Rights Directive and the use of technology in company annual general meetings.