3.III.B.4 The creative solution of Veneto Banca and Banca Popolare di Vicenza

Veneto Banca (VB) and Banca Popolare di Vicenza (BPVi) were two cooperative banks based in the Veneto Region (together “Venetian banks”). They were winded-up in 2017.2 This is the most intriguing case of the whole Italian Crisis. The adopted solution was highly creative and quite complex considering the multiple procedural and substantial variables to be taken into account simultaneously.

Veneto Banca was founded in 1877 in Montebelluna (its original name was Banca Popolare of Montebelluna). In 1997, VB started a period of rapid expansion, becoming a relevant actor on the national scene in just a few years’ time.3 In 2012, VB was in the number of 10 largest banking groups in Italy. It had total assets of 33.5 billion Euro and 586 branches. It employed 6,241 people.4

Founded in 1866, Banca Popolare di Vicenza was the first cooperative bank in Veneto. The recent history of BPVi is similar to that of VB. In’90s and, in particular, with the start of the new millennium, BPVi experienced an intense growth.5 In 2014, also BPVi was in the number of top banking groups in Italy, with its 46.5 billion Euro of total assets, 5,295 employees and 654 branches.6

In 2013, the Bank of Italy discovered a number of anomalies and irregularities inside Veneto Banca. Among other things, VB had not deducted from its own funds the capital raised through the issuance of new shares, which had been financed by granting loans (so called “kissed loans”) to the client/investors. Hence, supervisors required severe corrections with a negative impact on the balance sheet of VB. At the same time, it required strengthening the asset base.7. In the following months, VB was subjected to further inspections (not only by the Bank of Italy but also by the ECB and the CONSOB), which evidenced, in particular, several violations of corporate governance rules and misconducts concerning the relationship with clients.8 In April 2015, VB share price went from 39.5 to 30.5 Euro.9

In December 2015, the shareholders approved the “Serenissima project”, which was considered by the ECB as necessary to raise the declining fortunes of VB. 10 The project included: (i) the transformation of VB into a joint stock company; (ii) a capital increase up to 1 billion Euro; and (iii) the listing of the Bank’s shares. Six month later, the listing attempt resulted in a fiasco. In June 2016, the Global Offering remained almost entirely unsubscribed and VB’s shares were not admitted to trading.11 As a result, a first rescue plan was put in place through a coordinated action of the Italian banking sector. The new-born Atlante Fund immediately injected circa 988.6 million Euro in VB, becoming the Bank’s major shareholder with a stake of 97.64% of its capital.12 In December, Atlante invested in VB a further 628 million Euro.13

The situation did not improve much and, with the beginning of 2017, efforts to rescue VB continued. In January, VB launched a settlement initiative with small shareholders who had lost a great part of their investments, to reduce legal incertitude.14 In February and June, it was the State’s turn. VB received an Extraordinary public financial support in form of “debt guarantees” on bonds, for a total nominal amount of 4.9 billion Euro.15In addition, the Bank applied for a “precautionary recapitalization”.16 In the meanwhile, VB studied the hypothesis of a merger with BPVi. In the end, VB was not admitted to precautionary recapitalization, on the grounds of EU authorities’ evaluation with respect to losses that the Bank had incurred or was likely to incur in the near future.17

BPVi followed a parallel path. In 2014, the Bank of Italy evidenced cases of non-authorized trading in own shares.18 Here again, further investigations revealed the “kissed loans” scheme together with other irregularities, (e.g. Mifid violations and deficiencies in internal procedures)19. In June 2015, main capital indicators were below regulatory levels.20 Just one month before, the share price had declined from 62.5 to 48 Euro.21 BPVi was therefore forced to arrange an incisive action plan. As for the “Serenissima Project”, the plan involved: (i) the transformation of BPVi into a joint-stock company, (ii) a share capital increase up to 1.5 billion Euro and (iii) the listing of BPVi’s shares.22 Through the auspices of ECB,23 shareholders approved the plan in March 2016.24

After that, the history of BPVi went on hand in hand with that of VB. In June 2016, the global offering was rejected by the market and25 Atlante became shareholder of the bank with a stake of 99,33% of its capital investing 1.5 billion Euro.26 In December, Atlante accepted to provide additional 310 million Euro.27 In January 2017, the Bank launched its settlement initiative with small investors.28 In February and June the State guaranteed BPVi bonds for 5.2 billion Euro.29 In March, BPVi required a “precautionary recapitalization”.30 Moreover, as I have said above, BPVi and VB were working in parallel on an merger solution. In conclusion, BPVi was not admitted to precautionary recapitalization for the same reasons as VB31.

On 23 June 2017, the ECB stated that VB and BPVI “were failing or likely to fail”; according to Article 18 of SRMR. ECB motivated as follows:

The SRB, which was immediately notified, decided not to open resolution, as it would be “not necessary in the public interest”, under Article 18 of the SRMR. The determination was grounded on the following reasons referred to both banks:32

With reference to the unmentioned objective “to protect public funds”, the SRB only affirmed:

As for the Resolution of Banco Popular, here again resolution plans were completely disregarded, once more confirming perplexities about their concrete efficacy in the part where the plans try to predict the future. In detail:

However, in the resolution decision of June 2017:

Therefore, VB and BPVi were wound-up under the Italian CAL according to Law Decree 99/2017. The whole businesses of the two banks, their branches and the major part of assets and liabilities passed to Intesa Sanpaolo (Intesa), for 1 Euro.35 Intesa was chosen as a result of an “open, fair and transparent” process.36 Intesa acquired assets37 and liabilities38 for total amounts of 45.9 billion and 51.3 billion Euro respectively, keeping a claim for the ensuing imbalance against the two banks.39 The Italian Government undertook to guarantee the risks deriving from VB and BPVi’s warranties in the share-purchase agreement and other legal risks up to a maximum of 1.991 billion Euro. It also provided 3.5 billion Euro to Intesa to cover its capital needs and an additional 1.285 billion Euro for the corporate restructuring40, as required under state aid legislation.41 NPLs that were not transferred to Intesa were transferred to S.G.A. S.p.A. and the two banks got credit for their value42. Non-transferred equity participations for 1.7 billion Euro and non-transferred liabilities remained in the two Banks under liquidation. Moreover, small retail investors were restored, under certain conditions, by the Fondo di Solidarietà for 80% of the value of their claims and by Intesa itself.

(source EteGOV)43

The Bank of Italy described the rationale for the solution as follows:

In 25 June 2017, the Commission approved the state aids provided by the Italian Government, with an aim to mitigate serious negative effects on the real economy of regions where the banks were most active.45

The Commission found that liquidation aids were in line with EU state aid rules, considering that: (i) shareholders and subordinated debt holders were fully wiped out; (ii) BPVi and Veneto Banca exited the market, while transferred activities were restructured and downsized; (iii) the measures did not constitute an aid to Intesa, because the same had been selected after a competitive process.46

The Commission also stated:

As we have seen, the solution adopted for the Venetian Banks crisis was particularly articulated. More than ever, public authorities showed their commitment to protecting stability and seeking solutions to avoid bail-in. A first attempt was made through the intervention of Atlante Fund. A second one was through extraordinary public support in form of debt guarantees. Finally, the State decided to step in with its multifaceted initiative. At that moment, (i) the resolution of the Four banks had just ended, (ii) the crisis of the Three Banks was in full force and (iii) MPS was under special observation. A decisive step for the “bail-in free” State intervention was the application of the national insolvency proceedings instead of the EU-ruled resolution where bail-in is – at least partially – mandatory. The opening of CAL and the following request to obtain “liquidation aids” were both based on the concept of “public interest”, interpreted in opposite ways. Public interest was denied to exclude the application of resolution, but public interest was at the same time invoked to allow bailout.

Finally, on Venetian Banks, the next paragraphs critically review the misuse of the “public interest concept” and briefly attempt to explain why bail-in was so scary, and why such an apparently complex solution was adopted.

The “public interest concept” was directly or indirectly called into question three times in a short span of time, in concomitance with the VB and BPVi winding-up.48 Firstly, according to the SRB, resolution was not in public interest. Secondly, the Italian Government stated that liquidation aids were essential in order to avoid a serious disturbance to regional economies.49 Thirdly, the Commission implicitly recognized the necessity of mitigating serious economic effects in the relevant regions.50

The three authorities (SRB, Italian Government and EU Commission) were surely not bound to share a common opinion, and their decisions were taken within (at least partially) different legal frameworks.51 However, the vast distance between mentioned positions raises some concerns.52

Firstly, the SRB stated that the functions performed by the two banks were not critical, since they were provided for a “limited number of third parties” and were replaceable “in an acceptable manner and within a reasonable timeframe”.53 However, (i) according to the Bank of Italy, the “third parties” of the two banks were “approximately 100,000 SMEs and 200,000 households” (for a total amount of about 26 billion Euro of loans); (ii) according to the Italian Government, the adopted solution appeared to be “indispensable” in order to “preserve the operating continuity of the two firms”. Further concerns arise when looking at the “Four Banks” crisis. In that case, a resolution of small “less significant” banks was judged to be “in the public interest” by the Bank of Italy. The exclusion of “public interest” for the resolution of two “significant banks” in the same country, under the same rules and just one year and a half later seems, to say the least, peculiar.

Secondly, for the SRB the failure of the two banks was “not likely to result in significant adverse effects on financial stability, taking into account, in particular, the low financial and operational interconnections with other financial institutions”.54To the contrary, according to the Bank of Italy, VB and BPVi were dangerously connected55 with the other Italian banks through the FITD, which “would have had to face an immediate payout of about 10 billion Euro save for a claim against the liquidation in the following years. Considering the limited resources readily available at the FITD, the banking system would have had to bear most of the costs of reimbursement to depositors within a very short time”.

Thirdly, according to the SRB, Italian CAL would have achieved the resolution objectives to the same extent as resolution.56However, to say the least, we should bear in mind that “to protect public funds by minimizing reliance on extraordinary public financial support” is a full-fledged resolution objective. This goal would have been better achieved in resolution through the application of bail-in and the intervention of the SRF to minimize the cost of public support.

On one hand, the solution adopted in the case of Venetian banks was surely path dependent with respect to Italian traditions (to confirm this, we have already seen that major crises since 1970s were solved precisely through “sale of business” and “public support”).

On the other hand, the solution was likely influenced by a set of peculiar circumstances. Firstly, the crisis of both banks became evident at a time when the EBU and the BRRD/SRMR were still in a running-in phase. Possibly, the need to manage a difficult crisis within a new institutional and regulatory framework contributed to slow down the whole process, with clear negative consequences. Secondly, in the absence of a solid implementation of MREL requisite not yet in force, the banks and their stakeholders were not prepared for a bail-in. In this regard, the Bank of Italy stated “the risk of a banking crisis should fall on creditors who assumed the risk consciously, while the how and the when BRRD Directive has been implemented have de facto prevented this from happening”. Thirdly, the Single Resolution Fund was not yet completely (nor considerably) formed either. It may be the case that also other Eurozone States were not particularly inclined to the idea of draining the scarce resources of the SRF to resolve the Venetian banks.