Italian Guarantee Scheme

On October 9, 2008, the Ministry of Economy and Finance adopted Decree-Law No. 155 on “Urgent measures to guarantee the stability of the credit system and the continued availability of credit to enterprises and consumers in the current crisis on international financial markets.” This legislation provided for a number of interventions intended to stabilize and protect the domestic economy, including a bank recapitalization program, a deposit guarantee program, and an emergency liquidity facility. The Decree-Law also allowed for the possibility that a bank could be taken under “extraordinary administration” by government-appointed officials if it were to face “a crisis situation (including liquidity crisis) that could jeopardize the stability of the financial system” (European Commission 2008).

On October 13, 2008, the Ministry of Economy and Finance adopted an addendum to Decree-Law No. 155 entitled Decree-Law No. 157 on “Additional urgent measures to guarantee the stability of the credit system.” In addition to supplying the legal basis for the Guarantee Scheme, the amendment provided the necessary legislation for a temporary bond swap program and a separate guarantee program for banks looking to refinance with the European Central Bank.^FSee footnote 4 for a description of this separate guarantee program.

The adoption of Decree-Law No. 157 on October 13, 2008 supplied the legal basis for the Guarantee Scheme, but the program was not implemented until the signing of Law 190/2008 into force by Italian Parliament on December 4, 2008. It was then published as part of the public record in the December 6, 2008, edition of the Gazzetta Ufficiale della Repubblica Italiana.

The Italian government notified the European Commission of Decree-Law No. 157 on October 17, 2008, and received approval on November 13, 2008.  As discussed in more detail in the Evaluations section, the need to structure the Guarantee Scheme in such a way as to ensure EC approval significantly influenced the design of certain program features.

Though there was no overall limit specified at the time of the Guarantee Scheme’s inception, all debt guaranteed under the program would be issued at “market conditions” and prioritized according to banks’ individual liquidity levels and capital ratios (Shearman & Sterling 2008). The Banca d’Italia assumed responsibility for monitoring banks’ capitalization and assessing their needs under the Guarantee Scheme. 

An individual bank’s solvency was determined by the Banca d’Italia according to the following criteria:

1. Neither core capital nor total capital ratios could be lower than the regulatory ratios “at the time of the last available supervision report” (European Commission 2008) and
2. The bank must not have experienced any accounting losses in more than one of the last three consecutive accounting years.

Branches of foreign banks were excluded from the Guarantee Scheme, since they owned only about 8% of the total assets owned by banks in Italy, and all except one—which had a market share of 2%—possessed market shares below 1% (European Commission 2008).

Explicit exclusions included subordinated debt, guaranteed bank bonds, structured instruments and complex products, products with a derivative component, or regulatory capital.

Additionally, no more than 25% of guaranteed liabilities could have maturities longer than three years.

Program documents did not provide a specific rationale for limiting the Guarantee Scheme to euro-denominated debt.

Banks’ individual utilization of any combination of the three interventions outlined in Decree-Law No. 157—the Guarantee Scheme, the temporary swaps, or the guarantee program for ECB refinancing transactions—could not surpass their “capital for supervisory purposes, including Tier 3 capital” (European Commission 2008 ).

Italian authorities relied on the guidelines set forth in the European Central Bank’s “Recommendations on Government Guarantees on Bank Debt” of 20 October 2008 (European Central Bank 2008) in determining the approach to Guarantee Scheme fees.

For short-term debt with maturities of between three months and 12 months, the fee equaled 50 bps on an annual basis.

For medium-term debt with maturities greater than 12 months, the fee equaled 50 bps on an annual basis, plus the lesser of the following:

1. The median of the five-year CDS spreads of the bank during the period January 1, 2007, to August 31, 2008, or
2. The median of the five-year CDS spreads in the same period for the rating category to which the bank belonged.

For banks issuing medium-term debt with maturities greater than 12 months that did not have CDS data or representative CDS data, the fee was calculated as follows:

1. For banks with an official credit rating, the fee equaled the median of the five-year CDS spreads recorded during the period January 1, 2007, to August 31, 2008, from major banks which have both registered offices in Eurozone countries and whose senior unsecured debt is rated in the same category as the bank in question.
2. In the case of banks without any ratings, the fee would equal the median of the five-year CDS spreads recorded in the same period from major banks which have registered offices in Eurozone countries but are of the lowest available rating category, plus 50 bps on an annual basis.

Additionally, guaranteed issuances for debt with maturities longer than two years incurred a supplementary top-off fee of 50 bps on an annual basis, beginning 24 months from the original granting of the guarantee.

Guidance issued by the European Commission in October 2008 on the creation of credit guarantee programs called for the inclusion in programs of a set of safeguards “to minimize . . . distortions and the potential abuse of the preferential situations of beneficiaries brought about by a State guarantee” and “to avoid moral hazard.” Although the guidance did not specify exactly what safeguards a program should include, it did require “an adequate combination” of elements including restrictions on advertising based on the guarantee, balance sheet growth, share buybacks and executive compensation (European Commission 2008).

Growth in balance sheet volume during participation in the Guarantee Scheme could not exceed the higher of:

1. “The annual rate of growth of Italian nominal GDP in the preceding year;
2. “The average historical growth of the balance sheets in the Italian banking sector during the period 1987–2007; or
3. “The average growth rate of the balance sheet volume in the banking sector in the EU in the preceding six months” (European Commission 2008).

No banks had applied to issue debt under the Guarantee Scheme as of May 2009. However, due to the perceived weakness of the domestic economy following the height of the global financial crisis (GFC), the Italian authorities opted to extend the original issuance window by six months (European Commission 2009).

On December 15, 2011, the European Commission approved a request by the Italian government to reintroduce the Guarantee Scheme under modified terms. This second iteration was then prolonged on February 2, 2012, to expire on June 30, 2012 (see Appendix A: The 2011 Reintroduction of the Italian Guarantee Scheme).