Italy: Banco Ambrosiano Emergency Liquidity Program, 1982

Banco Ambrosiano’s significance to the credit system arose from its size: direct deposits of almost ITL 3.7 trillion (USD 2.7 billion) and about 80 subsidiaries, many of which were located in tax havens that did not cooperate with the national supervisory authorities (Galanti, D’Ambrosio, and V. Guccione 2012). According to the Treasury minister at the time, Beniamino Andreatta, these subsidiaries were responsible for losses of ITL 900 billion that ultimately destabilized the bank (Andreatta 1982).

Beyond BA’s size and the need to protect depositors and creditors, Andreatta as well as the then-president of the reconstituted bank, Giovanni Bazoli, cited the following as other justifications for BA’s rescue: (a) protecting the jobs of more than 4,000 employees of Banco Ambrosiano; and (b) maintaining Italy’s solvency image abroad, which the banks in the rescue operation also cited as one of the forces behind their participation (Andreatta 1982; Bazoli 1982; Lepri 1982b).

The Court of Appeals of Milan found the outflow of deposits from Banco Ambrosiano in 1982 to be ITL 320 billion between June 17 and June 24 and ITL 357 billion between June 24 and August 6 (Court of Cassation 1989).

The fixed-term advance provided by the Bank of Italy was one instrument for replacing the funding lost by the outflow of deposits. However, the minister of Treasury at the time, Andreatta, stated the central bank in Italy was not able to intervene for significant amounts, in the case of large banks, to support the institution’s liquidity (Andreatta 1982). One researcher suggests the Bank of Italy’s inability to intervene in larger amounts arose from the optics of a bailout: “a bailout would have had adverse effects both on the savings of BA’s customers and on investors, with terrible consequences in regard to public opinion, considering that the BA was close both to the Catholic Church and to the majority party which therefore expected a backlash in future political polls” (Pellegrini, Lionzo, and Lai 2021).

To prevent the collapse of BA, the Bank of Italy approached other large Italian banks to pledge financial support to BA in the interim. According to Andreatta’s testimony before the Chamber of Deputies, this system of engaging third-party banks to provide liquidity made it possible to maintain the operations of the Banco Ambrosiano branches while regulators investigated the extent of the bank’s losses (Andreatta 1982).

Andreatta’s statements suggest the provision of liquidity by the Bank of Italy in the form of a fixed-term advance and by the rescue consortium of national banks were temporary measures to stopgap the liquidity drain at Banco Ambrosiano until a longer-term solution could be devised.

This case study focuses on the fixed-term advance from the Bank of Italy, a form of official emergency liquidity assistance. In addition to the advance, granted on July 7, Banco Ambrosiano received liquidity support in the following forms:

• June 21–July 6: Banco Ambrosiano obtained USD 120 million in repurchase agreements to exchange lire for US dollars through the foreign exchange arm of the Bank of Italy, in order to service foreign currency obligations (Court of Cassation 1989);
• June 23: the Bank of Italy authorized an exceptional release of ITL 140 billion from Banco Ambrosiano’s restricted deposit account to the mandatory reserve account, in other words, lowering the bank’s reserve requirement;
• July 14: the Ministry of Foreign Trade authorized Banco Ambrosiano to release ITL 42.5 billion in non-interest-bearing deposits;
• July 9–August 6: Banco Ambrosiano received ITL 530 billion in liquidity support (in ITL and foreign currency) from a public-private consortium of banks (Court of Cassation 1989).

An option for liquidity support that was considered and ruled out before the provision of a fixed-term advance was appealing to the Vatican Bank, Istituto per le Opere di Religione (IOR), to honor its letters of comfort for the foreign subsidiaries of Banco Ambrosiano (Andreatta 1982). “The Italian central bank discovered that the international loans made by Banco Ambrosiano’s overseas affiliates were covered by letters of comfort (‘lettere di patronage’) signed by the head of the Vatican Bank, Archbishop Paul Marcinkus” (Hess 1989). The Treasury minister believed these letters were tantamount to guarantees against the questionable loans made by BA to foreign companies; therefore, the IOR had an obligation to cover the losses on these loans (Andreatta 1982). The IOR (and its sponsored entities) had the equivalent of about ITL 1.7 trillion in obligations to BA through these letters (Andreatta 1982).

On July 2, the representatives of the IOR refused to honor its obligations with respect to the nonperforming foreign loans (Andreatta 1982).

The IOR’s refusal to accept responsibility for these foreign loans forced the Bank of Italy and Treasury to consider a different intervention scheme. The authorities then decided to investigate recapitalization of the bank and to offer temporary liquidity in the form of a fixed-term advance in the interim (Andreatta 1982). Liquidity support was followed by reconstitution of the bank as Nuovo Banco Ambrosiano on August 8, 1982 (Andreatta 1982).

The new bank was capitalized with ITL 600 billion from the public-private consortium that had earlier provided ITL 530 billion in liquidity support (Bazoli 1982; Italian Parliament 1987). Nuovo Banco Ambrosiano paid ITL 350 billion to the old bank for substantial stakes in two Italian subsidiaries, La Centrale and Interbanca (Italian Parliament 1987), and received special 1% advances from the Bank of Italy under the Ministerial Decree of September 27, 1974, to comprise the remaining ITL 1 trillion necessary to fulfill its obligations (Andreatta 1982; Bazoli 1982).

The Bank of Italy provided the fixed-term advance to Banco Ambrosiano through a standing facility, which has existed since July 1967, establishing a precedent for this type of support (Bank of Italy 2013; Bartolini 2002).

On June 17, 1982, Banco Ambrosiano’s board of directors, following the disappearance of Roberto Calvi, sent a request to the Bank of Italy for administrative dissolution. The Ministry of Treasury issued a decree ordering the dissolution of Ambrosiano’s administration and appointment of an extraordinary administration (Court of Cassation 1989). The same day, Calvi’s secretary was found dead in front of her office at Banco Ambrosiano’s headquarters in Milan. In response to these developments, the Bank of Italy sent a supervisory inspector, Vincenzo Desario, to Ambrosiano to serve as interim commissioner (Draghi 2007; Masera 2021). On June 18, Calvi was found dead in London. On June 19, following a proposal by then–Bank of Italy Governor Carlo Ciampi, the Treasury minister issued an order for the Bank of Italy to appoint three commissioners as the bank’s provisional administration: Antonino Occhiuto (former member of the Bank of Italy’s Governing Board), Giovanni Battista Arduino (retired banker), and Alberto Bertoni (business economics professor at Bocconi University) (Draghi 2007; Masera 2021). The provisional administration remained in place until August 6, when the Bank of Italy, with approval from the Treasury, put Banco Ambrosiano under compulsory liquidation (Draghi 2007; Masera 2021).

No governance considerations for the fixed-term advance were reported. Between June 19 and August 6, when Banco Ambrosiano was put under compulsory liquidation, the bank was placed in provisional administration and led by commissioners appointed by the Bank of Italy. Both the commissioners and Banco Ambrosiano’s supervisory committee performed separate audits of the bank’s financials (Court of Cassation 1989). See Key Design Decision No. 4, Administration, for additional information.

In the historical archives of the Italian newspaper La Stampa, the first mention of the Bank of Italy’s support is implied in a June 17, 1982, article, “Now the Deposits of Ambrosiano Are Protected by the Bank of Italy,” which reported, “the Bank of Italy calls for calm . . . the situation can be brought under control, and in any case, there is no fear for those who have deposited their savings at the Ambrosiano,” [author’s translation from Italian] suggesting the Bank of Italy hoped to preempt depositor runs through the announcement effect (Lepri 1982a).

On June 25, a La Stampa article stated that the deposits withdrawn in the week since Banco Ambrosiano was put in extraordinary administration amounted to only ITL 16 billion (La Stampa 1982a). However, while reviewing the case in 1987, the Court of Appeals of Milan reported the deposit outflow during this week was about ITL 320 billion (Court of Cassation 1989), suggesting the magnitude of the liquidity problem was either unknown to the Bank of Italy or inaccurately communicated to the press (Court of Cassation 1989). Another La Stampa article from July 10 seems to suggest the former was the case: “Days go by as the technicians and the central authorities become aware of the real proportions of the crash” [author’s translation from Italian] (Cantoni 1982). On July 3, the first mentions were made to the specific liquidity support operations implemented by the Bank of Italy—a currency transfer on June 21 as well as the exceptional allowance of an early release of BA’s mandatory reserves at the Bank of Italy on June 23—although the exact amounts of these transactions remained vague (Cantoni 1982). The journalist pointed out how communication by the authorities had been lacking, noting, “the uncertainty of the interventions of the guardianship authorities has led to a progressive enlargement of the ‘gap’ and the forced shrinking of our already scarce foreign exchange reserves” [author’s translation from Italian] (Cantoni 1982).

A July 9 article described how the Bank of Italy was fighting for Banco Ambrosiano on two fronts, “abroad (to prevent the big international bankers from withdrawing or reducing their lines of credit) [and] internally, to reassure savers and prevent panic from turning into an obsessive rush to withdraw deposits” [author’s translation from Italian] (Roccati 1982). This article posited that stemming depositor runs was not the current priority for the Bank of Italy, saying, “So far, the operation has been successful on both fronts, but the external one is undoubtedly the one that worries the Bank of Italy the most, also because the Bank’s exposure is entirely toward the abroad . . . At the moment, the Banco doesn’t seem to have big holes internally: there will be talk (but things could change) of around ITL 200 billion in nonperforming loans, but the guarantees held by the Banco are not known” [author’s translation from Italian] (Roccati 1982).

On July 10, an article in La Stampa reported on the announcement of the public-private bank rescue consortium to provide short-term liquidity to Banco Ambrosiano. According to the article, the extraordinary commissioners communicated that the most important aspect of the announcement was to ensure that depositors would not be scared, emphasizing that the bank had adequate liquidity despite the issues abroad (Lepri 1982c). The July 10 article went on to criticize the confusion created by the Bank of Italy’s communication behavior in the previous three days, stating, “Bankers who claim to have been asked for an intervention by the governor and the Bank of Italy who denies: different hypotheses of intervention that seem contradictory in some parts; meetings in Rome and meetings in Milan; high and low figures, alarms and cautions; everything intertwined from one hour to the next” [author’s translation from Italian] (Lepri 1982c).

On July 12, an article titled “The Fear Has Passed” claimed, “the ‘dripping’ of withdrawals continued until last week and only stopped with the announcement of the bailout plan prepared by the Bank of Italy” [author’s translation from Italian] (La Stampa 1982b). However, this conflicts with statements by then–Minister of Treasury Andreatta and then-president of Nuovo Banco Ambrosiano Giovanni Bazoli, who said deposit outflows did not cede until September–October 1982 (Andreatta 1982; Bazoli 1982).

After this point, the articles in La Stampa’s historical archives concern other elements of the rescue package beyond acute liquidity support operations. One of the earliest records available to the public on the specific details of the Bank of Italy’s ad hoc emergency liquidity support to Banco Ambrosiano is Andreatta’s speech to the Chamber of Deputies on October 8, 1982 (Andreatta 1982).

To summarize the communication behavior of the Bank of Italy with regard to its fixed-term advance and other forms of acute liquidity support:

• Specific details of the programs were not clearly communicated (Cantoni 1982; Lepri 1982c).
• When liquidity support measures were announced, they were described as preemptive measures against depositor runs and as tools to facilitate continued operations until a longer-term solution to Banco Ambrosiano’s nonperforming loans could be found (that is, as a stopgap, which aligns with how Italian authorities viewed these measures) (Lepri 1982c).

The magnitude of Banco Ambrosiano’s liquidity problem was understated compared to data reported ex post (Court of Cassation 1989; La Stampa 1982a; Roccati 1982).

The fixed-term advance from the Bank of Italy was for ITL 97 billion when first administered on July 7, 1982 (Court of Cassation 1989).

On July 28, 1982, the Bank of Italy provided an extension on the loan, increasing the limit to ITL 126 billion on the existing credit line. The increase was granted at the request of the extraordinary commissioners, who required the funds to sustain Banco Ambrosiano through a negative daily balance of ITL 8 billion–ITL 10 billion. On August 8, at the time of its compulsory liquidation, Banco Ambrosiano had outstanding debts to the Bank of Italy of ITL 143.5 billion (Court of Cassation 1989).

It is assumed the advance became part of Nuovo Banco Ambrosiano’s liabilities after the liquidation of Banco Ambrosiano—the transfer deed does not report otherwise when listing which assets/liabilities were excluded from the transfer to Nuovo Banco Ambrosiano (Italian Parliament 1987).

Assuming Banco Ambrosiano did not transact with the Bank of Italy through the ordinary or fixed-term advance facility between February 7, 1982, and July 7, 1982, the rate of the ITL 97 billion fixed-term advance provided on July 7, 1982, should have been the same as the rate on ordinary advances at the time, 18% (Bank of Italy 2023). However, if Banco Ambrosiano had transacted with the Bank of Italy in the 150 days before it received its ITL 97 billion fixed-term advance, there would have been a 1% surcharge on the interest rate for the fixed-term advance compared to the ordinary advance, resulting in a rate of 19% (Bank of Italy 2023).

However, it is possible the fixed-term advance rates in the Bank of Italy’s historical records do not reflect what Banco Ambrosiano was offered, because the minister of the Treasury may have authorized a different rate for this advance in consideration of Banco Ambrosiano’s circumstances. Up until January 30, 1992, the law provided for the involvement of the political authority in the determination of interest rates, dating back to Royal Decree 1.5.1866 n. 2873: a specific rate was applied to each type of transaction, established by decree of the minister of the Treasury, on the proposal of the Governor of the Bank of Italy (Ciampi 1992). Additionally, if the fixed-term advance facility was accessed after 4pm, there may have been a penalty as high as 8% above the discount rate for overnight access (Bartolini 2002).

According to the Court of Appeals of Milan, the liquidity injections had had a cost (from 20% to 28%) higher than the cost of ordinary funding (15%, on average), although it is unclear whether these rates refer to the fixed-term advance specifically or the entire liquidity support operation more broadly (Court of Cassation 1989).

This loan duration was consistent with the administrative limit for a fixed-term advance granted by the Bank of Italy at the time (Ciampi 1992).

Although the initial fixed-term advance was due to expire July 29, 1982, an increase was granted on July 28, 1982—loan duration was not specified for the increase on the advance (Court of Cassation 1989).

As described in Key Design Decision No. 1, Purpose, liquidity support such as this fixed-term advance was intended to replace the funding lost because of deposit outflows until either recapitalization or compulsory liquidation. On August 8, 1982, Banco Ambrosiano was reconstituted as Nuovo Banco Ambrosiano, and it is assumed the fixed-term advance was taken over by Nuovo Banco Ambrosiano along with other liabilities and assets of the liquidated bank.

Our research found no public information about what types of securities Banco Ambrosiano used as collateral for the fixed-term advance from the Bank of Italy, or what haircuts the Bank of Italy applied.

As a matter of policy, “the Bank [of Italy] has accepted almost exclusively public sector securities, effectively eliminating any issue of portfolio risk management” (Bartolini 2002). In its usual operations, acceptable collateral for the Bank of Italy’s fixed-term advance facility has typically included government and government-guaranteed securities, land records, securities issued by mortgage lenders and other special credit institutions, securities in lire issued by international organizations, securities issued by preapproved domestic agencies (for example, a state railway agency), and bank bonds (Bartolini 2002).

In general, the terms of the Bank of Italy were such that “the value of securities accepted as collateral was marked to market, discounted by 15 percent for Treasury securities and by 20 percent for other securities. When the gap between the value of collateral and credit fell below one-half the prescribed margin, credit was reduced to reestablish initial conditions, or the bank was required to place new securities as collateral (failing which, the Bank of Italy could proceed with the sale of collateral)” (Bartolini 2002, 36–37).

The loan provided to Banco Ambrosiano was relatively small and likely not impactful to the monetary policy transmission of the Bank of Italy.

Our research has not discovered other conditions attached to the emergency liquidity.