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Italy – Capital Injections (2008) Italy – Capital Injections (2008)
Manuel Leon Hoyos
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PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
Italy – Capital Injections (2008)
Manuel León Hoyos
1
February 5, 2020
Abstract
In response to the 2007-2009 global financial crisis, in October 2008, the Italian government
announced urgent measures to guarantee financial stability and the flow of credit. The Italian
government targeted three areas of support: a) bank recapitalizations, b) liquidity access,
and c) expansion of guarantees on bank deposits. This case exclusively examines the Italian
bank recapitalization scheme introduced in December 2009 in line with EU State aid rules.
The four Italian banks recapitalized in 2009 under the scheme were Banco Popolare (€1.45
billion), Banca Popolare di Milano (€500 million), Credito Valtellinese (€200 million), and
Banca Montepaschi di Siena (€1.9 billion), for an overall amount of €4.05 billion. The
government purchased special bonds issued by banks. These bonds became known as
“Tremonti bonds” and Italian regulators agreed to treat them as core Tier 1 regulatory
capital.
Keywords: Italy, banks, recapitalization, capital injections, financial crisis, Tremonti bonds
1
Research Associate, Yale Program on Financial Stability. manuel.leonhoyos@yale.edu
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
At a Glance
The 2007-2009 global financial crisis
prompted governments around the world to
take unprecedented actions. On October 9,
2008, the Italian government issued Decree-
Law 155, on urgent measures to guarantee
the stability of the financial system and the
continued flow of credit. It targeted three
areas of support: bank recapitalizations,
greater access to liquidity, and expanded
guarantees on bank deposits. Decree-Law
185/2008 became the legal basis of the
Italian bank recapitalization scheme.
The Italian Ministry of Economy and Finance
recapitalized four banks in 2009 by the
purchase of special bonds, known as
“Tremonti bonds,” to strengthen the banks’
balance sheets. Despite speculations, the two
largest Italian banks Intesa San Paolo and
Unicredit did not participate in the scheme.
Italian regulators deemed the Tremonti
bonds as core Tier 1 regulatory capital
because they were perpetual, non-
cumulative, and convertible into common
shares after three years. Participating banks
had to adhere to a “code of ethics” regarding
policies on executive compensation. They
had to commit to increase lending to small and medium-sized enterprises (SMEs), contribute to
the guarantee fund for loans granted to SMEs, suspend up to 12 months of mortgage payments
for homeowners, and ensure appropriate liquidity levels to creditors of public administrations.
Summary Evaluation
Italian authorities expressed that the Italian recapitalization scheme “exhibited satisfactory
performance in its implementation, providing a safety net that corresponds well to market
needs and ensuring the provision of lending to the real economy.” In February 2010, Bank of
Italy’s governor Mario Draghi expressed that Italian banks were “well placed to cope with
the international environment.” Draghi noted that their capital bases were strengthened by
the issue of shares, disposal of non-core assets, the ploughing back of profits and, in some
cases, government interventions.
Summary of Key Terms
Purpose: “to restore stability of the financial system and
to remedy a serious disturbance in the economy of Italy”
Announcement Date
October 9, 2008
Legal Authority
Italian Decree-Law
185/2008;
EC Treaty Article 87 (3)(b)
Date of first capital
injection
July 31, 2009
Last Date to inject capital
December 31, 2009
Program Size
Initially, available funds
were up to €15-€20
billion. In February 2009,
up to €12 billion.
Participants
Banco Popolare (€1.45
B), Banca Popolare di
Milano (€0.5 B), Credito
Valtellinese (€0.2 B),
Banca Montepaschi di
Siena (€1.9 B)
Usage
€4.05 billion
Administrators
Italian Ministry of
Economy and Finance
Outcomes
Notable features
“Tremonti bonds,” code
of ethics, commitments
to lend to SMEs.
Capital Injections – Italy (2008)
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
Contents
I. Overview ................................................................................................................................................... 1
Background ............................................................................................................................................................. 1
Program Description ........................................................................................................................................... 2
Outcomes ................................................................................................................................................................. 4
II. Key Design Decisions ............................................................................................................................ 6
1. The Italian recapitalization scheme was part of a package in response to the global
financial crisis (2007-2009).................................................................................................................................. 6
2. The Italian Decree-Law N. 185/2008, later converted into Law N. 2/2009 was the legal
basis for the Italian recapitalization scheme. ................................................................................................. 7
3. The European Commission approved the Italian recapitalization scheme under EU State
aid rules compatible with the EC Treaty. ......................................................................................................... 7
4. Italy and other countries communicated government interventions to contain the
financial crisis. ............................................................................................................................................................ 7
5. The Italian Ministry of Economy and Finance managed the recapitalization scheme with
support from the Bank of Italy. ............................................................................................................................ 8
6. Initially, the size of the recapitalization scheme was between €15 and €20 billion. In
February 2009, with the introduction of the Tremonti bonds the size was reported to be up
to €12 billion. .............................................................................................................................................................. 8
7. Eligible institutions included fundamentally sound Italian banks (including subsidiaries
of foreign banks) with shares listed in the regulatory market. .............................................................. 8
8. Recapitalizations consisted of “Tremonti bonds,” which were perpetual and convertible
into common shares after three years. ............................................................................................................. 9
9. Remuneration and redemption conditions on Tremonti bonds were revised to
encourage participation in the recapitalization scheme. .......................................................................... 9
10. Banks recapitalized had to sign a Memorandum of Understanding committing to a
code of ethics and lending to SMEs and households. ............................................................................... 12
III. Evaluation ............................................................................................................................................... 13
IV. References .............................................................................................................................................. 14
V. Key Program Documents ................................................................................................................... 17
Summary of Program ....................................................................................................................................... 17
Legal/Regulatory Guidance ........................................................................................................................... 17
Press Releases/Announcements ................................................................................................................. 17
Media Stories ....................................................................................................................................................... 17
Reports/Assessments ...................................................................................................................................... 17
VI. Appendices ............................................................................................................................................. 18
Appendix A: Timeline ...................................................................................................................................... 18
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
1
I. Overview
Background
The collapse of Lehman Brothers in mid-September 2008, and the ensuing global financial
crisis, triggered unprecedented responses from governments around the world. In October
2008, in a period of ten days, multiple high-level government meetings took place in efforts
to coordinate an international response and common measures to combat the crisis. The
meetings included the European Council on Economic and Financial Affairs (ECOFIN) on
October 7, 2008; the G7 summit in Washington D.C. on October 10; an emergency Euro
summit of heads of state on October 12; and the European Council meeting on October 15-
16.
The ECOFIN approved a set of principles and extraordinary measures for European
governments to combat the crisis (ECOFIN 2008). The G7 finance ministers and central bank
governors pledged to take aggressive actions that included: support for systemically
important financial institutions, all necessary efforts to ensure credit access to banks,
temporary guarantees on short and medium-term liabilities, expansion of guarantees on
bank deposits, bank recapitalization through the use of public funds, and acquisition of
illiquid assets (G7 2008).
The Euro heads of state released the “Declaration on a concerted European action plan of the
Euro area countries” which committed efforts to reestablish confidence and the well-
functioning of the financial system. In agreement with the European Commission (EC) and
the European Central Bank (ECB), the plan outlined support to financial institutions by
facilitating: a) appropriate liquidity conditions, b) funding of banks, c) additional capital
resources, d) recapitalizations of distressed banks, e) flexibility in the implementation of
accounting rules, and f) cooperation among European countries (Euro Summit 2008). A few
days later, the European Council endorsed the plan of action and extended it to all countries
part of the European Union (Euro Council 2008).
Italy, on October 9, 2008, issued Decree Law N. 155, “Urgent measures to guarantee the
stability of the credit system and the continued flow of credit to firms and consumers in the
current state of crisis in world financial markets.” The decree envisaged a government
package focused on three areas of support to the Italian banking sector: a) bank
recapitalizations, b) access to liquidity, and c) expanded guarantees on bank deposits (Bank
of Italy 2008, 21). This case exclusively examines the Italian bank recapitalization scheme.
At the time, Italy held a large and increasing public debt (estimated at 105% of GDP in 2008).
Italian banks’ interest rate spreads over Italian government bonds had widened significantly
in the past year. The head of the Italian Ministry of Economy and Finance (MEF) Giulio
Tremonti expressed that Italy, unlike other European countries, could not pursue a major
fiscal stimulus through deficits or debt increases. However, Tremonti remained confident
that the Italian financial system was in better condition than other European countries, as
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
2
Italian banks relied on more traditional credit activities such as retail deposits and bonds,
and less on complex securities such as in the US or the UK (The Economist 2009).
The reported aggregate Tier 1 capital ratio of the Italian banking system was 7.7% in 2007
and 7.6% in 2008. For the five largest Italian banks, it was 6.4% in 2007 and 6.7% in 2008
(see Table 1).
Program Description
The legal bases for the Italian government support package were passed through fast-track
procedure as Decree-Law N. 155/2008 on October 9, Decree-Law N. 157/2008 on October
13, and Decree-Law N. 185/2008 on November 29. These were converted into Law N.
190/2008 on December 4, and Law N. 2/2009 on January 28 (Bank of Italy 2009c, 170).
On November 20, 2008, the ECB published a recommendation on the pricing of bank
recapitalizations by national governments. The EC released guidance on December 5 to
ensure that recapitalizations through EU State aid did not grant banks undue competitive
advantages and financial stability was preserved in line with the rules of the single market.
The EC guidance envisioned two types of recapitalizations: for “distressed” banks and for
“fundamentally sound” banks. In principle, recapitalizations for distressed banks required
stricter requirements (Bank of Italy 2009a, 9; EC 2008a; ECB 2008). For sound banks,
recapitalization allowed governments to acquire securities issued by the banks with an
“appropriate” yield of between 7% and 9%. Higher yields could be considered in order to
encourage banks to buy back the securities as market conditions improved (Bank of Italy
2009a, 9).
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
3
The legal basis for the Italian recapitalization scheme for sound banks was Article 12 of
Decree-Law 185/2008, converted into Law N. 2/2009 (Bank of Italy 2009c, 170–71; EC
2009c). The total available funds for the Italian recapitalization scheme was unspecified but
expected to be between €15 and €20 billion (EC 2008b). Italian authorities made clear that
support would be available “as needed”(Bank of Italy 2009d, 25). In February 2009, when
the scheme was amended, the size of the scheme was reported to be up to €12 billion
(Reuters 2009a). The €80 billion Italian economic stimulus plan announced on November
15, 2008, was considered low at an estimated 0.6% of GDP (Financial Times 2008; Bank of
Italy 2009d, 5).
Italy notified the EC of its recapitalization scheme on December 18, 2008, which the EC
approved on December 23, 2008, after intensive exchanges with Italian officials. The scheme
was in line with EU State aid rules, as a temporary measure and compatible with Article 87
(3)(b) intended to “restore stability of the financial system and to remedy a serious
disturbance in the economy of Italy” (EC 2008b; 2008c).
The MEF was empowered to recapitalize banks until December 31, 2009, conditional on a
notification to the EC after six months on the need to prolong the scheme. Eligible institutions
included fundamentally sound Italian banks (including subsidiaries of foreign banks) with
shares listed on regulated markets. The criteria of fundamentally sound was based on a
bank’s credit default swaps spread, ratings, and a complementary assessment by the Bank of
Italy. The Bank of Italy assessed the bank’s solvency, capital adequacy, and risk profile (EC
2008c; 2009c; Bank of Italy 2009c, 170–71).
The scheme was expected to have its first operations by January 2009. However, in the first
two months of the scheme, no bank participated. Then, in February 2009, the scheme was
amended to offer a second option of remuneration. This was intended to make it more
attractive to banks who expected to use the government capital for a short period of time. It
consisted of higher annual coupons in exchange of lower redemption prices for the first four
years, which were set at nominal value. (EC 2009a). On February 16, 2009, Italy notified the
EC of the amendment, which as approved on February 22, 2009. Three days later, Tremonti
signed a ministerial decree to allow the government to recapitalize banks by buying “special
bonds” from banks, considered as core Tier 1 regulatory capital (EC 2009b). These bonds
became known as “Tremonti bonds.”
Italian regulators treated the Tremonti bonds core Tier 1 capital because they were
perpetual and convertible into common shares after three years. The interest paid was non-
cumulative—only paid when a bank had distributable earnings, provided that the bank’s
capital ratio was at least 8%. Remuneration included an initial coupon with fixed step-up
clauses, increases in remuneration associated with dividend payments and financing costs
of the government, and a redemption price premium that increased over time. Individual
recapitalizations were limited to 2% of a bank’s risk weighted assets, without surpassing 8%
of Tier 1 capital ratio (Bank of Italy 2009b, 40–42; EC 2008c; 2009a).
Banks participating in the scheme had to adhere to a “code of ethics” for policies on executive
compensation. Additionally, banks had to sign a Memorandum of Understanding (MoU) in
which they committed to: a) increase lending for the next three years to small and medium-
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
4
sized enterprises (SMEs); b) contribute to the guarantee fund for loans granted to SMEs; c)
suspend up to 12 months of mortgage payments for borrowers that lost their jobs or
benefited from public-income support; and d) ensure appropriate liquidity levels to
creditors of public administrations. Banks were required to provide aggregated data on a
quarterly basis to monitor the application of the MoU (Bank of Italy 2009b, 40–42; 2009c,
170–71). On July 31, 2009, Italy requested the EC to prolong its recapitalization scheme until
December 31, 2009, which the EC approved (EC 2009c). The scheme was reintroduced ten
months later on October 23, 2010, and ended December 31, 2010 (EC 2010b).
Outcomes
By the end of 2009, when the Italian recapitalization scheme first expired, capital injections
totaled €4.05 billion. The four participating banks included: Banco Popolare for €1.45
billion, Banca Popolare di Milano for €500 million, Credito Valtellinese for €200 million, and
Banca Montepaschi di Siena for €1.9 billion (see Table 2).
Table 2: Government Recapitalizations in Italy
Bank
Recapitalization
(euros)
Date issued
Redeemed
Banco Popolare (BP)
1,450,000,000
Jul 31, 2009
Mar 14, 2011
Banca Popolare di Milano (BPM)
500,000,000
Dec 4, 2009
Jun 30, 2013
Credito Valtellinese (Creval)
200,000,000
Dec 30, 2009
Jun 13, 2013
Montepaschi di Siena (MPS)
1,900,000,000
Dec 30, 2009
Total:
4,050,000,000
Source: (EC 2010b, 2)
The announcement of the Tremonti bond decree in late February 2009 was accompanied
with the speculation that the two largest Italian banks Unicredit and Intesa San Paolo would
participate in government recapitalizations, each one for an amount of €3 billion (Reuters
2009a).
However, by May 2009, no recapitalization had taken place under the scheme. Tremonti
expressed that banks had been too "relaxed" about using the recapitalization scheme. In May,
four institutions reportedly requested around €6 billion from the Italian scheme: Unicredit,
Banco Popolare, Banca Popolare di Milano and Banca Montepaschi di Siena. Unicredit’s chief
executive said that the bank planned to seek up to €4 billion in capital support from
government programs in Austria and Italy (Mayer Brown 2009; Reuters 2009b).
Despite continuous speculation, Unicredit and Intesa San Paolo did not participate in the
scheme and instead sought to raise capital through private investors. Seemingly to avoid
government demands on lending. By the end of September 2009, UniCredit had a core Tier
1 ratio of 7.5% while Intesa Sanpaolo 7.2% (Reuters 2009c).
All four banks that the Italian government recapitalized agreed to a “code of ethics” for
policies on executive compensation and signed an MoU committing to support SMEs and
homeowners. Banco Popolare, the first bank recapitalized, announced in early March 2009,
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
5
that it had formally requested the MEF and the Bank of Italy for approval to issue €1.45
billion in Tremonti bonds (BP 2009a; 2009b). The request was approved in mid-June 2009,
and the bonds were issued at the end of July 2009. The bank committed to an increase of 6%
on loans to SMEs over the next three years, and a €21.75 million contribution to the
guarantee fund for loans granted to SMEs (BP 2009c; 2009d). In March 2011, Banco Popolare
completed redemption of the Tremonti bonds, and paid €86.4 million on accrued interest
payments between July 2010 and March 2011. The bank reported that Tremonti bonds
contributed to an increase in lending to households by 9% in 2009 and 7.2% by September
2010. While for SMEs, the increase was 5% in 2009, and 7.1% by September 2010 (BP 2011).
Banca Popolare di Milano announced in late March 2009 its intention to issue €500 million
in Tremonti bonds after reporting a 77% slide in annual profits (Mayer Brown 2009). In
September 2009, the bank reached an agreement with the MEF and expected the injection to
raise its core Tier 1 ratio from 6.2% to 7.6% (Financial Times 2009). The bonds were issued
in early December 2009 and the bank completed the redemption of the Tremonti bonds in
June 2013 (BPM 2009; 2013). Credito Valtellinese issued €200 million in Tremonti bonds on
December 30, 2009. The bank committed to increase loans to SMEs by 4% (Creval 2009). In
June 2013, the bank completed redemption of the Tremonti bonds (Creval 2013).
Banca Montepaschi di Schiena announced in March 2009 that it would issue €1.9 billion in
Tremonti bonds. In August 2009, the Bank of Italy gave the bank the green light to negotiate
the terms of the bond issuance with the MEF. By the end of June 2009, its tier 1 capital ratio
stood at 5.8% but was expected to increase to 7.3% after the recapitalization (Italian News
2009). The MEF approved the issue of Tremonti bonds in mid-December 2009 and injected
the capital on December 30, 2009. The MoU included an estimated 4.5% increase in loans to
SMEs. This was an additional €10 billion a year for SMEs for the next two years, on top of the
€70.2 billion disbursed on average in the past two years. Additionally, the bank committed
to contribute €28.5 million guarantee fund for loans to SMEs (MPS 2009).
In late May 2009, Moody’s downgraded the Italian banking sector from stable to negative.
While it expected a deterioration in asset quality and profits, it said that Italian banks were
unlikely to require “strong government backing,” due to less exposure to toxic assets,
investment activities and capital market funding. A week later, Standard & Poor’s also
forecasted an increase in loan losses and non-performing assets in Italian banks through
2010 (Mayer Brown 2009).
As seen in Table 3, by September 2009, the core Tier 1 capital ratio of the largest Italian
banks reached 7.3% and by March 2010, 7.6% (Draghi 2010a; 2010b, 12). It was generally
lower than other major European banks. However, Bank of Italy’s governor Mario Draghi
explained that the differences laid in the substantial public recapitalizations abroad and the
more stringent criteria used in Italy to classify regulatory capital. Governor Draghi
emphasized that the largest Italian banks held high-quality capital and were less leveraged
compared to other major European banks. Nonetheless, Draghi through 2009 and 2010
continued to stress the importance on strengthening capital ratios. In a speech in July 2009,
he expressed:
“I have said, and I say again, that a strengthening is nonetheless necessary. It is not just a
question of maintaining strong safeguards for stability; we must compete on an equal
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
6
footing with the foreign banks which have had to resort to massive injections of public
money in recent months; we must be prepared, as of now, to operate with a capital
endowment that future regulations will require to be larger than at present. Above all,
capital strengthening is indispensable in order to face the deterioration in the
macroeconomic situation without neglecting to give firms, households and the economy the
support they need” (Draghi 2009).
II. Key Design Decisions
1. The Italian recapitalization scheme was part of a package in response to the
global financial crisis (2007-2009).
On October 9, 2008, Italy issued Decree Law N. 155, “Urgent measures to guarantee the
stability of the credit system and the continued flow of credit to firms and consumers in the
current state of crisis in world financial markets.” The decree envisaged a government
support package focused on three areas: i) recapitalizations, ii) access to liquidity, and iii)
expanded guarantees on bank deposits (Bank of Italy 2008, 21). The €80 billion Italian
economic stimulus plan announced on November 15, 2008, was considered low at an
estimated 0.6% of GDP (Financial Times 2008; Bank of Italy 2009d, 5).
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
7
2. The Italian Decree-Law N. 185/2008, later converted into Law N. 2/2009 was the
legal basis for the Italian recapitalization scheme.
The legal basis for the Italian recapitalization scheme for sound banks was Article 12 of
Decree-Law 185 of November 29, 2009, later converted into Law N. 2/2009 on January 28,
2009 (Bank of Italy 2009c, 170–71).
3. The European Commission approved the Italian recapitalization scheme under
EU State aid rules compatible with the EC Treaty.
On December 18, 2008, Italy notified the European Commission (EC) of its recapitalization
scheme. The EC approved it on December 23, 2008, after intensive exchanges with Italian
officials. The scheme was in line with EU State aid rules, as a temporary measure and
compatible with Article 87 (3)(b) “intended to stabilize the markets as a response to the
global financial crisis” (EC 2008b; 2008c)
The government expected the scheme to have its first operations by January 2009. However,
with no use of the scheme, on February 16, 2009, Italy notified the EC of an amendment,
which as approved on February 22, 2009. The amendment became operational on February
25, 2009, with an Italian Ministerial decree. On July 31, 2009, Italy requested the EC to
prolong its recapitalization scheme, until December 31, 2009, which was approved in
October 2009 (EC 2009c). After its expiration, the scheme was later reintroduced ten months
later on October 23, 2010, until December 31, 2010 (EC 2010b).
4. Italy and other countries communicated government interventions to contain the
financial crisis.
In October 2008, in a period of ten days, multiple high-level government meetings took place
intended to coordinate an international response and establish common measures to combat
the crisis. The meetings included the EU Economic and Financial Affairs Council (ECOFIN) on
October 7, 2008; the G7 summit in Washington D.C. on October 10; an emergency Euro
summit of heads of state on October 12; and the European Council meeting on October 15-
16.
The Euro heads of state released the “Declaration on a concerted European action plan of the
Euro area countries” which committed efforts to reestablish confidence and promote the
sound functioning of the financial system. In agreement with the EC and the European
Central Bank (ECB), the plan outlined support to financial institutions by facilitating: a)
appropriate liquidity conditions, b) funding of banks, c) additional capital resources, d)
recapitalizations of distressed banks, e) flexibility in the implementation of accounting rules,
and f) cooperation among European countries (Euro Summit 2008). A few days later, the
European Council endorsed the plan of action and extended it to all countries part of the
European Union (Euro Council 2008).
As seen in Table 3, by September 2009, the core Tier 1 capital ratio of the largest Italian
banks reached 7.3% and by March 2010, 7.6% (Draghi 2010a; 2010b, 12). It was generally
lower than other major European banks. However, Bank of Italy’s governor Mario Draghi
explained that the differences laid in the substantial public recapitalizations abroad and the
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
8
more stringent criteria used in Italy to classify regulatory capital. Governor Draghi
emphasized that the largest Italian banks held high-quality capital and were less leveraged
compared to other major European banks. Nonetheless, Draghi through 2009 and 2010
continued to stress the importance on strengthening capital rations. In a speech in July 2009,
he expressed:
“I have said, and I say again, that a strengthening is nonetheless necessary. It is not just a
question of maintaining strong safeguards for stability; we must compete on an equal
footing with the foreign banks which have had to resort to massive injections of public
money in recent months; we must be prepared, as of now, to operate with a capital
endowment that future regulations will require to be larger than at present. Above all,
capital strengthening is indispensable in order to face the deterioration in the
macroeconomic situation without neglecting to give firms, households and the economy the
support they need” (Draghi 2009).
5. The Italian Ministry of Economy and Finance managed the recapitalization
scheme with support from the Bank of Italy.
The Ministry of Economy and Finance (MEF) was empowered to inject capital in eligible
institutions until December 31, 2009. The Bank of Italy assessed the bank’s solvency, capital
adequacy, and risk profile.
6. Initially, the size of the recapitalization scheme was between €15 and €20 billion.
In February 2009, with the introduction of the Tremonti bonds the size was
reported to be up to €12 billion.
The total available funds for the Italian recapitalization scheme was unspecified but expected
to be between €15 and €20 billion (EC 2008b). Italian authorities made clear that support
would be available “as needed” (Bank of Italy 2009d, 25). In February 2009, when the
scheme was amended, the size of the scheme was reported to be up to €12 billion (Reuters
2009a).
7. Eligible institutions included fundamentally sound Italian banks (including
subsidiaries of foreign banks) with shares listed in the regulatory market.
Eligible institutions included fundamentally sound Italian banks (including subsidiaries of
foreign banks) with shares listed in the regulatory market. The Bank of Italy determined if a
bank was fundamentally sound by considering available risk indicators. These included:
spreads on credit default swaps on subordinated debt (median value must had not exceeded
100 basis points in the period from January 2007 to August 2008) and credit ratings of at
least A- (Bank of Italy 2009b, 40–41; EC 2008c, 2)
In late 2009, when the scheme was prolonged, Italy made additional commitments:
(a) to inform the EC, at the moment of the recapitalization, of the bank’s risk profile to enable
the EC to evaluate its viability and assess if could be considered fundamentally sound or
required restructuring. The material would include a review from the Bank of Italy on the
soundness and viability of the bank. The EC would be provided with any additional
information for its assessment of the bank's viability. Italy committed to submit within six
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
9
months the relevant information of each bank recapitalized to enable the EC to review the
bank's risk profile and viability so that it could assess if it could still be considered
fundamentally sound.
(b) when a bank applied for a second recapitalization, Italy would submit an individual
notification. The EC would assess if the bank could still be considered fundamentally sound
or if it required restructuring (EC 2009c).
8. Recapitalizations consisted of “Tremonti bonds,” which were perpetual and
convertible into common shares after three years.
The Italian government, through the MEF, acquired “special bonds” known as “Tremonti
bonds” to support banks’ balance sheets. For some commentators, the fact that banks paid
interest on the bonds gave the scheme a more market-orientated feel compared to other
European schemes were banks had been nationalized (Markit 2009). The Tremonti bonds
were designed to have the same characteristics as common shares in order to qualify as core
Tier 1 capital. They had the same degree of subordination and same ability to absorb losses,
both in case of insolvency or when losses reduced total capital ratios below the regulatory
minimum of 8%.
Tremonti Bonds were perpetual and convertible into common shares after three years.
Interest was non-cumulative and only paid if there were distributable earnings, provided the
total capital ratio was at least 8%. Public bank recapitalizations were limited to 2% of a
bank’s risk-weighted assets, and without surpassing 8% of Tier 1 capital ratio (Bank of Italy
2009b, 40–42).
Banks could redeem the Tremonti bonds given authorization by the Bank of Italy, by paying
a premium on the face value, which could increase over time in relation to the market value
of the bank’s shares. The conversion ratio of Tremonti bonds into shares was fixed based on
the average share price of the last ten trading days before the issue (Bank of Italy 2009b, 40–
42).
9. Remuneration and redemption conditions on Tremonti bonds were revised to
encourage participation in the recapitalization scheme.
The remuneration conditions were designed in line with EU State aid rules to be temporary,
to encourage an early exit. The EC recommended an indicative range based on the type of
instrument. For subordinated debt, such as preferred shares, the EC recommended an
average required rate of return of 7%. While for common shares, the EC recommended an
average required rate of return of 9.3% (EC 2008a, 8).
The conditions aimed to ensure an adequate remuneration for the government and protect
the interests of taxpayers. Additionally, to minimize distortive effects of recapitalizations,
remuneration included an initial coupon with fixed step-up clauses, increases in
remuneration associated with dividend payments and the government’s financing costs, and
a redemption price premium that increased over the years. To encourage early redemption
by banks once the crisis was over, the redemption price was set higher than the nominal
value and increased over time (see Table 4)(Bank of Italy 2009b, 40–42; EC 2008b; 2008c).
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When the recapitalization scheme was introduced in December 2008, the Italian government
set the annual rate of return on the bonds at 7.5% for the first six months. Thereafter, it was
the highest of these three options:
a) A predetermined annual coupon, increasing over time: 7.5% in 2009, 7.75% in 2010, 8%
in 2011, 8.25% in 2012, and 8.5% in 2013 and 2014. Then, it would rise in increments of
0.5% every two years (9% in 2015 and 2016, 9.5% in 2017 and 2018, etc.), up to 15% in
2039;
b) An amount equal to the product of the dividend per share distributed to common
shareholders and the number of shares. This amount was increased by an increasing
percentage over time. 105% of dividends, in whatever capacity and in any form paid, in
relation to 2009 profits, 110% for 2010, 115% for 2011-2017, and 125% for 2018 and
following years, or
c) The average yield on 30-year Italian Treasury bonds (BTP) increased by a spread.
Starting in 2011, the yield at the issuance of the 30-year BTP, increased by 300 basis
points, then starting in 2013, the 30-year BTP yield increased by 350 basis points (EC
2008c, 3–4).
For the second option introduced in February 2009, the interest rate was higher starting at
8.5%. Thereafter, the interest rate would be the highest of the following three elements:
a) A predetermined annual coupon, increasing over time: 8.5% in 2009, 2010, 2011 and
2012, 9% in 2013, 2014, 2015 and 2016, and then in increments of 0.5% every two years
(9.5% for 2017 and 2018 and so forward, followed up to 15% for 2039) or
b) An amount equal to the product of the dividend per share distributed to common
shareholders and the number of shares. This amount was increased by an increasing
percentage over time. 105% of the dividend, in any capacity and in any form paid, in 2009
profits, 110% in 2010, 115% for 2011-2017, and 125% for 2018 and following years, with a
maximum limit of 15% of the nominal value, or
c) The average yield on 30-year BTP increased by a spread. Starting in 2011, the issuing yield
of the 30-year BTP increased by 300 basis points, then, starting in 2013 and for the following
years, the 30-year BTP yield plus 350 basis points (EC 2009b, 4–5).
Additionally, provisions were placed where the government could accept a lesser
remuneration. But only in cases where at least 30% of the bank’s issuance was subscribed
by private investors (at least two thirds other than shareholders owning 2% or more of the
share capital) on equal terms with the Italian government. In any case, the yield had to be at
least 200 basis points above the average yield of 30-year BTP (Bank of Italy 2009b, 41; EC
2009a)
For the first option, the redemption price would be the highest between 110% of the nominal
value at issuance and the market value of the bank shares in circulation. The redemption
price was set within a percentage value of the nominal value equal to 120% in the event of
redemption by June 30, 2013; 130% between July 1, 2013 and June 30, 2016; 140% between
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July 1, 2016 and June 30, 2019; 150% between July 1, 2019 and June 30, 2022; and 160%, in
case of redemption from July 1, 2022 onwards (EC 2008c, 5).
For the second option, the redemption price was set within a percentage value of the nominal
value equal to 100%, in the event of redemption by June 30, 2013, and 110%, in the event of
redemption between the July 1, 2013 and June 30, 2015. For the following years, the
redemption price was set as the highest of: 110% of the nominal value of the Tremonti bonds
at issuance and the market value of the bank shares in circulation, with a maximum limited
to a percentage of the nominal value equal to 130% in the event of redemption between July
1, 2015 and June 30, 2016; 140% between July 1, 2016 and June 30, 2019; 150% between
July 1, 2019 and June 30, 2022; and 160% from July 1, 2022 onwards (EC 2009b, 5).
EC Competition Commissioner Neelie Kroes mentioned that "The Italian authorities have
asked permission to modify the design of their scheme to make it more attractive to sound
banks that are willing to use the state capital only for a very short period of time” (EC 2009a).
The first option of remuneration consisted of lower coupon payments and higher
redemption prices up to 2014. While the second option consisted of an alternative
remuneration option with a higher initial coupon and a higher annual level of the coupon
until 2014. Starting in 2015, the two schemes have identical characteristics (see Table 4).
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Table 4: Tremonti bonds – The two options of remuneration
Source: (Bank of Italy 2009b, 42)
10. Banks recapitalized had to sign a Memorandum of Understanding committing to a
code of ethics and lending to SMEs and households.
Banks participating in the government recapitalizations had to adhere to a “code of ethics”
for policies on executive compensation. Additionally, banks had to sign a Memorandum of
Understanding (MoU), that committed to: a) increase lending for the next three years to
small and medium-sized enterprises (SMEs); b) contribute to the guarantee fund for loans
granted to SMEs; c) suspend up to 12 months of mortgage payments for borrowers that lost
their jobs or benefiting from public-income support; and d) ensure appropriate liquidity
levels to creditors of public administrations.
The commitments of the MoU remained valid until the bank redeemed the Tremonti bonds
to the government. Banks were required to provide aggregated data on a quarterly basis to
monitor compliance. The Bank of Italy would assess the bank’s compliance with capital
requirements (i.e. Tier 1) and its profitability. In line with the EU State aid guidelines, limits
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were set on the expansion of a bank’s assets, and additional conditions to prevent banks from
misusing public support (Bank of Italy 2009a, 30–31; 2009b, 40–42).
III. Evaluation
In 2010, Italian authorities expressed that the Italian recapitalization scheme “exhibited
satisfactory performance in its implementation, providing a safety net that corresponds well
to market needs and ensuring the provision of lending to the real economy” (EC 2010b, 2).
The core Tier 1 capital ratio of the largest Italian banks stood at 5.8% by the end of 2008 and
increased in the first three months of 2009 (Draghi 2009; 2010a). Premiums on credit
default swaps had risen, but announcements by major Italian banks of their intention to use
the recapitalization scheme and increases in profits contributed to reduce the premiums by
more than half (Bank of Italy 2009c, 139, 212).
In February 2010, Italy’s central bank governor Mario Draghi expressed that Italian banks
were “well placed to cope with the international environment.” Draghi noted that their
capital bases were strengthened by the issue of shares, disposal of non-core assets, the
ploughing back of profits and, in some cases, government interventions (Draghi 2010a).
The scheme expired on December 31, 2009, however, it was reintroduced ten months later
on October 23, 2010, until December 31, 2010. The Italian government cited protracted
effects of the global financial crisis and recent results of stress tests performed by the
Committee of European Banking Supervisors (EC 2010a; 2010b).
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IV. References
Bank of Italy. 2008. “Economic Bulletin N. 50.” Banca d’Italia.
https://www.bancaditalia.it/pubblicazioni/bollettino-economico/2008-
0004/ecbull_50.pdf?language_id=1.
———. 2009a. “Economic Bulletin N. 51.” Banca d’Italia.
https://www.bancaditalia.it/pubblicazioni/bollettino-economico/2009-
0001/en_boleco_51.pdf?language_id=1.
———. 2009b. “Economic Bulletin N. 52.” Banca d’Italia.
https://www.bancaditalia.it/pubblicazioni/bollettino-economico/2009-
0002/en_boleco_52.pdf?language_id=1.
———. 2009c. “2008 Annual Report.” 115. Rome: Banca d’Italia.
https://www.bancaditalia.it/pubblicazioni/relazione-
annuale/2008/Text_book_internet.pdf?language_id=1.
———. 2009d. “An Assessment of Financial Sector Rescue Programmes.” Edited by
Panetta, Faeh, Grande, Ho, King, Levy, Signoretti, Taboga, and Zaghini. Banca d’Italia.
Questioni di Economia e Finanza.
https://www.bancaditalia.it/pubblicazioni/qef/2009-
0047/QEF_47.pdf?language_id=1.
———. 2010. “2009 Annual Report.” 116. Rome, Italy: Banca d’Italia.
https://www.bancaditalia.it/pubblicazioni/relazione-
annuale/2009/en_rel_2009.pdf?language_id=1.
———. 2011. “2010 Annual Report.” Rome, Italy: Banca d’Italia.
https://www.bancaditalia.it/pubblicazioni/relazione-
annuale/2010/en_rel_2010.pdf?language_id=1.
BP. 2009a. “Banco Popolare: Clarification on Issue of Financial Instruments under LD
185/08,” March 10, 2009, sec. News release.
———. 2009b. “Banco Popolare News Release: Banco Popolare Files a Formal Request for
the Issuance of Financial Instruments Provided for by LD 185/08,” March 10, 2009,
sec. News release.
———. 2009c. “Banco Popolare and the Italian Treasury Signed the Memorandum on
Convertible Financial Instruments,” June 19, 2009, sec. News release.
———. 2009d. “Banco Popolare: Financial Instruments Issued in Favor of the Ministry for
Economy and Finance,” July 31, 2009, sec. News release.
———. 2011. “Banco Popolare: ‘Tremonti Bonds’ Fully Redeemed,” March 14, 2011, sec.
News release.
BPM. 2009. “Banca Popolare de Milano: BIPIEMME TREMONTI BOND ISSUE,” December 2,
2009, sec. Press Release.
———. 2013. “Banca Popolare de Milano: Bank of Italy Authorises the Full Redemption of
Tremonti Bonds and Amendment to by-Laws in Connection with Rights Issue,” June
26, 2013, sec. Press Release.
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Creval. 2009. “Credito Valtellinese. Issue of Financial Instruments, Art. 12, Italian Decree
Law 185/2008 – ‘Tremonti Bonds’ – For EUR 200 Million,” December 30, 2009, sec.
Press Release.
———. 2013. “Credito Valtellinese. The Bank of Italy Releases Authorisation for the Early
Redemption of ‘Tremonti Bond,’” June 13, 2013, sec. Press release.
Draghi, Mario. 2009. “Address by the Governor of the Bank of Italy Mario Draghi.” Rome,
Italy. https://www.bancaditalia.it/pubblicazioni/interventi-
governatore/integov2009/en_draghi_080709.pdf?language_id=1.
———. 2010a. “Speech by the Governor of the Bank of Italy Mario Draghi.” Naples, Italy.
https://www.bancaditalia.it/pubblicazioni/interventi-
governatore/integov2010/address_130210.pdf?language_id=1.
———. 2010b. “Bank of Italy Governor’s Concluding Remarks 2010.” May 31, 2010.
https://www.bancaditalia.it/pubblicazioni/interventi-
governatore/integov2010/en_cf_2009.pdf?language_id=1.
EC. 2008a. “European Commission Communication. The Recapitalisation of Financial
Institutions in the Current Financial Crisis: Limitation of Aid to the Minimum
Necessary and Safeguards against Undue Distortions of Competition.”
https://ec.europa.eu/competition/state_aid/legislation/recapitalisation_communic
ation.pdf.
———. 2008b. “European Commission. Press Release: Commission Approves Italian
Recapitalisation Scheme for Financial Institutions.”
https://ec.europa.eu/commission/presscorner/detail/en/IP_08_2059.
———. 2008c. “European Commission. State Aid N 648/2008. Italian bank recapitalisation
scheme.”
https://ec.europa.eu/competition/state_aid/cases/228921/228921_939582_36_2.
pdf.
———. 2009a. “European Commission. Press Release. State Aid: Commission Authorises
Amendment of Italian Scheme to Inject Capital in Credit Institutions.” Press Release
Database, February 20, 2009. https://ec.europa.eu/rapid/press-release_IP-09-
302_en.htm.
———. 2009b. “European Commission. State Aid N 97/2009. Amendment of Italian bank
recapitalisation scheme.”
https://ec.europa.eu/competition/state_aid/cases/229909/229909_939583_29_2.
pdf.
———. 2009c. “European Commission. State Aid N 466/2009. Prolongation of the
Recapitalization Scheme.”
https://ec.europa.eu/competition/state_aid/cases/232568/232568_1013034_29_1
.pdf.
———. 2010a. “European Commission. Joint Press Release. Publication of the Results of the
EU-Wide Stress-Testing Exercise.”
https://ec.europa.eu/commission/presscorner/detail/en/MEMO_10_356.
———. 2010b. “European Commission. State Aid N 425/2010. Re-Introduction of the
Italian Recapitalisation Scheme.”
PRELIMINARY YPFS DISCUSSION DRAFT | MARCH 2020
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https://ec.europa.eu/competition/state_aid/cases/237811/237811_1178921_51_3
.pdf.
ECB. 2008. “Recommendations of the Governing Council of the European Central Bank on
the Pricing of Recapitalisations.”
https://www.ecb.europa.eu/pub/pdf/other/recommendations_on_pricing_for_reca
pitalisationsen.pdf.
ECOFIN. 2008. “2894th Council Meeting. Economic and Financial Affairs: Press Release.”
https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/10
3250.pdf.
Euro Council. 2008. “Council of the European Union. Presidency Conclusions.” Brussels.
http://data.consilium.europa.eu/doc/document/ST-14368-2008-INIT/en/pdf.
Euro Summit. 2008. “Declaration on a Concerted European Action Plan of the Euro Area
Countries.”
https://ec.europa.eu/economy_finance/publications/pages/publication13260_en.p
df.
European Commission. 2008. “Recapitalisation Communication.”
https://ec.europa.eu/competition/state_aid/legislation/recapitalisation_communic
ation.pdf.
Financial Times. 2008. “Rome’s Fiscal Stimulus Comes under Fire.” Financial Times,
November 2008. https://www.ft.com/content/3126b6d4-b4d9-11dd-b780-
0000779fd18c.
———. 2009. “Banca Popolare Receives €500m Boost,” September 2009.
https://www.ft.com/content/8f56bffe-a6d4-11de-bd14-00144feabdc0.
G7. 2008. “G7 Finance Ministers and Central Bank Governors Plan of Action.” October 10,
2008. http://www.g8.utoronto.ca/finance/fm081010.htm.
Italian News. 2009. “Monte Paschi Receives Green Light to Issue Govt-Backed Bonds,”
August 28, 2009, sec. ADP news.
Markit. 2009. “Italian Government Approves Banking Support Measures.” IHS Markit. Gobal
Insight Daily Analysis., February 26, 2009.
Mayer Brown. 2009. “Summary of Government Interventions in Financial Markets - Italy.”
https://www.mayerbrown.com/public_docs/0356fin_Summary_of_Government_Int
erventions_Italy_2col.pdf.
MPS. 2009. “Banca Montepaschi Di Siena. 10 Billion Euros to Italian Small and Medium
Enterprises.,” December 16, 2009, sec. Press releases.
Reuters. 2009a. “Italy OKs Bonds Measure to Boost Bank Capital,” February 25, 2009.
https://www.reuters.com/article/italy-banks-bond-idUSLP58969520090225.
———. 2009b. “Italy Bank Recapitalisation Uptake Too ‘Relaxed,’” May 19, 2009.
———. 2009c. “Monte Paschi Wins Approval for $2.8 Bln State Bonds,” December 16, 2009.
The Economist. 2009. “Italy’s Debt Burden.” The Economist, February 11, 2009.
https://www.economist.com/news/2009/02/11/italys-debt-burden.
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V. Key Program Documents
Summary of Program
Legal/Regulatory Guidance
European Commission. (2008, December 5). Recapitalisation communication.
https://ec.europa.eu/competition/state_aid/legislation/recapitalisation_communic
ation.pdf
Press Releases/Announcements
European Commission. (2008, October 7). Press release of the ECOFIN Council meeting.
https://europa.eu/rapid/press-release_PRES-08-279_en.htm
Media Stories
Reports/Assessments
Petrovic, Ana, and Ralf Tutsch. 2009. “National Rescue Measures in Response to the Current
Financial Crisis,” July, 105.
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VI. Appendices
Appendix A: Timeline
Date
Event
Description
Oct/07/2008
The European Council of
Economic and Financial
Affairs (ECOFIN) met to plan
a response to the global
financial crisis.
The ECOFIN approved a set of principles and extraordinary
measures for European governments to combat the crisis
(ECOFIN 2008)
Oct/09/2008
Italy issued Decree-Law N.
155
Decree Law N. 155, “Urgent measures to guarantee the
stability of the credit system and the continued flow of
credit to firms and consumers in the current state of crisis
in world financial markets.” The decree envisaged a
government package focused on three areas of support to
the Italian banking sector: a) bank recapitalizations, b)
access to liquidity, and c) expanded guarantees on bank
deposits (Bank of Italy 2008, 21).
Oct/10/2008
G7 summit in Washington
D.C, USA.
The G7 finance ministers and central bank governors
pledged to take aggressive actions that included: support
for systemically important financial institutions, all
necessary efforts to ensure credit access to banks,
temporary guarantees on short and medium-term
liabilities, expansion of guarantees on bank deposits, bank
recapitalization through the use of public funds, and
acquisition of illiquid assets (G7 2008).
Oct/12/2008
Euro summit of heads of state
in Paris, France.
The Euro heads of state released the “Declaration on a
concerted European action plan of the Euro area countries”
which committed efforts to reestablish confidence and the
well-functioning of the financial system. In agreement with
the European Commission (EC) and the European Central
Bank (ECB), the plan outlined support to financial
institutions by facilitating: a) appropriate liquidity
conditions, b) funding of banks, c) additional capital
resources, d) recapitalizations of distressed banks, e)
flexibility in the implementation of accounting rules, and f)
cooperation among European countries (Euro Summit
2008).
Oct/13/2008
The European Commission
releases the “Banking
Communication.”
The European Commission provided guidance on the
application of State aid measures for banks in the context
of the global financial crisis.
It highlighted that recapitalization schemes were
important measures Member States could take to preserve
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financial stability and proper functioning of financial
markets. Link 1, Link 2
Oct/15/2008
European Council meeting.
The European Council endorsed the plan of action and
extended it to all countries part of the European Union
(Euro Council 2008).
Nov/20/2008
ECB released a
recommendation on the
pricing of bank
recapitalizations.
(ECB 2008)
Dec/02/2008
The ECOFIN Council
anticipates the need for
further recapitalizations.
The ECOFIN council expresses that it “recognized the need
for further guidance for precautionary recapitalizations to
sustain credit, and called for its urgent adoption by the
European Commission. Link
Dec/05/2008
The European Commission
releases a communication for
recapitalization schemes.
The Communication “The recapitalization of financial
institutions in the current financial crisis: limitation of aid
to the minimum necessary and safeguards against undue
distortions of competition” provided guidance for new
recapitalization schemes and adjustments of existing ones
(EC 2008).
Dec/23/2008
EC approval of EU State aid
case N. 648/2008
Recapitalization measures in favor of the Italian banking
sector (EC 2008c).
Feb/22/2009
EC approved amendment. EU
State aid case N. 97/2009
The European Commission approved amendments to the
Italian recapitalization scheme to offer a second offer of
remuneration, more attractive for banks that plan to use
the government capital for a short period of time (EC
2009b).
Oct/06/2009
EC approved a prolongation
of the scheme until December
31, 2009. State aid case N.
466/2009
Aug/05/2010
Italian Decree-Law N. 125, Art
2.1. Published in the Italian
Official Journal n. 182
The passage became the legal basis for the Italian
recapitalization scheme.
Oct/21/2010
EC approved the re-
introduction of the Italian
recapitalization scheme. State
Aid case N. 425/2010
The scheme expired on December 31, 2009. Italy requested
the EC to re-introduce the scheme until December 31, 2010.