BAIL IN
DISCLOSURE OF THE WRITE DOWN OR CONVERSION OF EQUITY INSTRUMENTS AND BAIL-IN OF FINANCIAL INTERMEDIARIES
Certain financial instruments that may be included in a securities account or potential asset management portfolios when issued by banks, companies that are part of a banking group or investment firms within the European Union, as well as cash deposits over €100,000 may be subject to the new regime introduced in Italy with the decrees transposing the BRRD Directive (Bank Recovery and Resolution Directive) into Italian law. These introduced harmonised rules in all European countries to prevent and manage crises at banks and investment firms.
Specifically, under the new regulations, when the conditions for managing the “crisis” of the intermediary are met, the Resolution Authority specifically set up for this purpose at both the national and EU level shall:
- write down or convert shares, other investments, and equity instruments issued by banks or other intermediaries concerned, should this allow to deal with an intermediary that is failing or likely to fail; The provisions on the write down and conversion are applicable to equity instruments issued by banks or other intermediaries as of 16 November 2015;
- in the event the write down or conversion of equity instruments is not sufficient, take steps to resolve the intermediary or initiate compulsory administrative liquidation proceedings. Specifically, if reducing capital to zero is not sufficient to cover the losses and liquidation is not considered to be an option, the Authority shall apply the bail-in. Applying the bail-in means writing down shares and receivables and converting them into equity in order to absorb losses and recapitalise the unsound intermediary or a new entity that shall carry on its critical functions. A public intervention shall be limited to extraordinary circumstances in order to prevent serious repercussions on the financial system. The provisions on the bail-in are applicable to financial instruments and derivative contracts issued by banks or other intermediaries as of 1 January 2016.
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;
- Warrants;
- 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:
- shareholders;
- 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.
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