Under a bail-in, no shareholder and creditor shall incur greater losses than they would have incurred as a result of compulsory administrative liquidation proceedings.
Certain liabilities of the unsound bank or intermediary (such as deposits up to €100,000, secured liabilities, and interbank liabilities with an original maturity of less than 7 days) are excluded from the bail-in. Under particular circumstances, such as when applying this tool poses a risk to financial stability or could compromise the continuity of critical functions, the Bank of Italy may also exclude other liabilities, as long as an amount equal to at least 8% of total liabilities is bailed in. The National Resolution Fund, financed by contributions from banks, may meet the relevant capital requirements up to 5% of total liabilities.
The main instruments involved in, and excluded from, the bail-in are detailed below:
- Instruments Involved
- Bank shares and capital holdings;
- Bank bonds;
- Subordinated instruments;
- Repurchase agreements;
- Bearer certificates of deposit;
- Deposits not protected by the deposit guarantee scheme (i.e. deposits over €100,000);
- Derivative contracts.
- Excluded instruments
- Deposits protected by the deposit guarantee scheme (i.e. deposits up to €100,000);
- Secured liabilities, including covered bonds and other secured instruments;
- Liabilities deriving from holdings of client assets or acquired under a fiduciary relationship;
- Interbank liabilities (excluding intragroup transactions) with an original maturity of less than 7 days;
- Liabilities arising from participation in payment systems with a residual maturity of less than 7 days;
- Payables due to employees, trade and tax payables, as long as they are given preference under bankruptcy law.
- Exceptional Exclusions
- Assets that, if bailed in, would undermine the stability of the financial/economic system (assets of large authorities/companies with national influence);
- Complex assets that, if bailed in, would lengthen the time scale;
- Assets that, if bailed in, would destroy value, resulting in harmful consequences also for the other creditors.
The bail-in is applied according to a hierarchy whose rationale is that investors in riskier financial instruments should incur any potential losses or see their claims converted into equity before others. The next category shall be bailed in only once the resources of the riskier category are exhausted.
The order of priority in a bail-in is as follows:
- holders of other equity instruments;
- other subordinated creditors;
- unsecured creditors;
- individuals and small and medium businesses with deposits over €100,000;
- the Italian deposit guarantee fund, which contributes to the bail-in in place of the protected depositors.
To implement resolution measures, the Bank of Italy has the power to take control of a bank under resolution and exercise all the rights and powers conferred upon the shareholders, other owners and the management body of the bank under resolution; In addition, the Bank of Italy may exercise among other the following powers:
- transfer shares or other instruments of ownership issued by the entity under resolution to third parties;
- arrange the sale of assets and legal relationships of the entity under resolution to third parties;
- reduce, including to zero, the nominal amount of shares or other instruments of ownership issued by the entity under resolution, and cancel such shares or instruments;
- reduce, including to zero, the principal amount of eligible liabilities of the entity under resolution or the outstanding debt due in respect of said liabilities;
- cancel, if necessary, the debt instruments issued by the entity under resolution, except for secured liabilities;
- convert eligible liabilities into shares or other instruments of ownership of the entity under resolution, a relevant parent institution, or a bridge institution;
- require the entity under resolution or the relevant parent institution to issue new shares or other instruments of ownership or other capital instruments, including convertible capital instruments.
Before making an investment, please consult with your private banker, who will provide you with a professional assessment of any potential risks associated with the instrument in which you intend to invest—including for the purposes of the regulations on the write down or conversion of capital instruments and the bail-in.
In addition, please note that asset management portfolios may include, now or in the future, instruments that may be subject to the write down or conversion of capital instruments and/or, effective 1 January 2016, bail-in. Cassa Lombarda will carefully assess the potential risks associated with the instruments in which its managers invest so as to always provide you with a level of protection that is appropriate to, and consistent with, your risk profile—including in light of the new regulations on the management of potential crises at financial intermediaries.
Don’t hesitate to contact us for any clarification on the numbers you find in the contact page