MNI EXCLUSIVE: Italy Pushes For Revisions To European BRRD

--Rome Government Sees Saver Protection As Priority

--Harmonised EU Resolution Cooperation and Clearer Rules Needed 

--State-aid Interpretation On Bank Bail Rescues Should Be Reviewed

By Silvia Marchetti

     ROME (MNI) - Italian authorities are pushing for a revision to the new

Europe-wide Bank Recovery and Resolution Directive (BRRD), aiming to introduce a

"transition period" that shields certain savers, whilst improving cooperation

between European and national supervisory bodies if there are future banking

crises.

     Several top Italian officials told Market News that the main goal is to

prevent new bail-in rules being "retroactive" and thus penalize all retail

investors who subscribed to high-risk subordinate bonds prior to 2016, when the

BRRD came into force. The revision of the directive must be launched by June

2018, making it urgent that steps are soon taken in coming months.  

     "We are very concerned to protect bondholders now liable to be bailed in

under the EU's new directive, especially retail investors who bought bonds prior

to the BRRD coming into force at the beginning of the year who were not aware of

what they were buying and, above all, of how the rules were effectively going to

affect them," Giampaolo Galli, Democrat member of the Lower House Budget

committee told MNI.

     These retail investors should qualify, at least morally, for some sort of

"shield" that would make them an "exception" to the application of the BRRD, he

argued. 

     According to the new bail-in rules, since the start of 2016 not just

shareholders but also subordinate bond holders and deposit holders of over

E100,000 must contribute to the burdens-sharing cost of saving their own failing

bank. 

     For Rome, finding a solution through a slight restyle of the BRRD at EU

level would have an enormous impact on the solidity and perception of Italy's

financial sector, still viewed by Italian savers and several institutional

investors as a depositary of trust despite structural weaknesses and recent bank

crises, said Galli. 

     "We would like a softer, gradual application of the directive, with a

transitory phase that would benefit Italian savers. They have put their money

and trust in Italian banks and are among those in Europe who have purchased the

most subordinate bonds lately," he added. 

     According to latest data, high-risk bonds currently in circulation in Italy

amount to roughly E61 billion, of which E23 billion are held by households. By

2017, 10.3% of all subordinate bonds will expire and must be reimbursed to

clients. 

     "In recent years, there has been a rise in the purchase of subordinate and

bank bonds by families as, due to the crisis, many were willing to risk by

purchasing unstable securities in order to gain higher profits," said Galli. 

     Bank funding is also on the rise, despite the high level of bad loans still

sitting on lenders balance sheets. With over E200 billion placed in bank bonds

that shows how Italians still trust their banks. 

     ITALY A "TESTING" PLATFORM FOR THE NEW BRRD 

     The rescue of four Italian lenders earlier this year forced Italian

authorities to "by-pass" BRRD rules by applying national regulation, enabling

public intervention via liquidation rather than resolution. 

     Ever since, Finance Minister Pier Carlo Padoan, Bank of Italy governor

Ignazio Visco and the ABI, Italy's banking lobby, have repeatedly called for a

revision of the BRRD. 

     Visco has warned Europe not to lose a window of opportunity to boost

cooperation between national and European bodies over banking resolution and

introduce a "transitory" period in order to clarify and adjust the framework

better. 

     The four banks rescued by Rome's government a few months ago brought to

light the "critical" aspects of the BRRD, that sets out some leeway for state

aid but only in the wake of an acute, "systemic" and unexpected economic crisis

which for Brussels was not then the case.

     "The whole point is on the interpretation of what 'acute' means", explained

an Italian Treasury official. 

     "We stepped-in with E5 billion to save the four banks because their failure

would have killed jobs, destroyed family savings, hampered banking operations

and services, and put at stake our financial stability. For us it was a systemic

risk," he said. 

     In a recent speech, Visco said it was crucial to balance out the needs of

lenders in the new changing regulation scenario, and those of savers and bond

holders, which is the core focus of the current debate over the revision of the

BRRD.

     Rome might stand a chance of success, notes another Treasury source, close

to Padoan. 

     "We are not asking this for this revision simply for the good of Italy, but

for the good of all European countries who are facing, or will likely face,

similar issues like the ones we had to deal with. There are a few critical

aspects that need be fixed. Eventual changes to the BRRD, having clearer rules

more focused on savers' protection, would benefit the whole union," he said.

     Galli argued that support for Italy's crusade is mounting, especially among

southern peers more vulnerable to financial shocks and who are coping with

similar banking issues. 

     He expressed confidence that the directive would be adjusted but that

timing was crucial. Galli also suggested protecting both subordinate and

insubordinate bank bond holders, stressing that the directive should apply only

to newly-issued securities after 2016. 

     Italy's central banker Visco has warned that the risks of the BRRD

"transition" period were underestimated and that in applying the new rules

financial stability must not be jeopardized. 

     Speaking at the Bank of Italy's recent annual confernece, Visco said that

in adherence to the principles underpinning the new European rules 

"authorities' interventions must be designed to preserve the value of banking

activity, to the benefit of savers and borrower firms." 

     "We cannot run the risk of undermining confidence in the banks and in the

savings in their custody," he added. 

     Visco also criticised the lack of effective coordination in banking crises.

"Today, under the new European arrangements, crisis interventions are assigned

to multiple, mutually independent authorities and institutions, both national

and supranational, with the decision-making processes relatively incompatible

with rapid intervention". 

     A revision of the directive would need to address a lack of clarity in

applying the new rules, along with a more lenient approach, too. 

     Across Europe, resolution tools can only be used when it is in the public

interest, that is when it is necessary to safeguard financial stability or to

protect depositors and taxpayers. According to Rome, it is as yet unclear how

the European Resolution Authority will put this principle into practice. 

     In all other cases banks are put into liquidation in accordance with

national legislation, but governments cannot be forced each time into "acrobatic

performances through last-minute, controversial emergency decrees to save banks

and savers," said Galli. 

     Italy is now looking to the US model, which allows more flexible use of

resolution tools and broader access to public funds, even if on a temporary

basis, but allowing crises to be managed in such a way as to minimize the

destruction of value and limit the impact on financial stability.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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