The Italian banking system has a long history, dating back to the founding of the Medici bank in the 15th century. Over the years, the country’s financial sector has faced numerous challenges, including economic downturns and political uncertainty. Despite these difficulties, the Italian banking system has been able to adapt and continue to function. The Italian government, along with international organizations, has implemented various policy responses to bolster the sector and protect account holders and creditors.

The Italian banking sector operates on the principles of fractional reserve banking and risk management. Italian banks are responsible for managing the deposits and loans of their customers, as well as complying with various regulatory requirements. While this system has its benefits, it also exposes banks and their customers to certain risks, such as credit risk, liquidity risk, and operational risk. These risks can negatively impact the banking sector, leading to financial instability and, in extreme cases, bank failures.

Banking regulation in Italy is essential to ensure the stability and resilience of the banking sector. It aims to minimize systemic risks and protect depositors and creditors from potential bank failures. Regulatory authorities in Italy, such as the Bank of Italy and the Italian Securities and Exchange Commission, work together to create and enforce regulations that promote transparency, accountability, and stability within the financial sector.

The Italian banking sector faces several challenges, including high levels of non-performing loans (NPLs), weak profitability, and vulnerability to external shocks. These weaknesses could have significant implications for account holders and creditors, as they increase the likelihood of bank failures and financial crises. In the event of a bank failure, creditors may experience losses, and the confidence in the Italian banking system could be severely undermined.

Italian Banking Law

Legislative Decree No. 385/1993 (Consolidated Law on Banking – TUB): The TUB is the primary regulatory framework governing the Italian banking sector. It sets out the rules for the establishment, operation, and supervision of banks and financial intermediaries in Italy.

Legislative Decree No. 58/1998 (Consolidated Law on Financial Intermediation – TUF): The TUF governs the provision of investment services, securities markets, and the management of collective investment undertakings.

Bank of Italy Circular No. 285/2013: This circular details the prudential supervisory rules for banks, including capital adequacy requirements, risk management, and governance.

Bank Recovery and Resolution Directive (BRRD): The BRRD is a European Union directive that establishes a framework for the recovery and resolution of banks and investment firms in EU member states, including Italy.

Legislative Decree No. 180/2015 (Banking Recovery and Resolution Law): This law implements the BRRD in Italy and sets out the rules for the recovery and resolution of Italian banks, aiming to minimize the impact of bank failures on the financial system and taxpayers.

Domestic enforcement of banking regulations in Italy is primarily carried out by the Bank of Italy and the Italian Securities and Exchange Commission. These institutions have the authority to impose administrative sanctions, such as fines and disciplinary measures, on banks and financial institutions that fail to comply with regulatory requirements. Internationally, Italian banks are subject to the oversight and enforcement actions of EU authorities, such as the European Central Bank and the European Banking Authority. These institutions can impose additional sanctions and enforce compliance with EU-wide regulations, ensuring a consistent approach to banking supervision across member states.

Bank Resolution and Insolvency Procedures in Italy

Bank resolution procedures in Italy are governed by the Banking Recovery and Resolution Law, which implements the EU’s BRRD. The resolution process aims to minimize the impact of a failing bank on the financial system and prevent taxpayer bailouts. Resolution tools include the sale of the failing bank’s assets, the establishment of a bridge bank, and the bail-in of creditors, where eligible liabilities are written down or converted into equity to absorb losses.

Italian bank insolvency procedures are governed by the TUB and the Bankruptcy Law. When a bank is declared insolvent, the Bank of Italy may revoke its license and initiate liquidation proceedings. The liquidation process involves the appointment of a liquidator, the sale of the bank’s assets, and the distribution of proceeds to creditors according to the priority of claims.

Creditor Hierarchy and Priority of Claims

In Italian bank insolvency proceedings, the creditor hierarchy determines the order in which claims are settled. The priority of claims is as follows: Claims secured by collateral or guarantees; Preferential claims, including employee wages and social security contributions; Unsecured claims, including deposits and unsecured bonds; Subordinated debt; and Shareholders’ equity.

In the event of a bank failure in Italy, international creditors can utilize the Italian legal framework to recover their funds. The first step is to ensure that their claims are registered in the insolvency proceedings. Creditors can also engage legal representation to navigate the complex insolvency process and protect their interests. Depending on the circumstances, creditors may be able to recover their funds through the resolution process, liquidation proceedings, or by participating in a bail-in, where eligible liabilities are converted into equity.