OREANDA-NEWS. August 10, 2015. No straightforward restructuring patterns have emerged from Italian authorities' efforts to rescue failed banks before the introduction of EU bail-in rules in January 2016, and some actions taken to restore viability appear controversial, says Fitch Ratings. There are uncertainties regarding potential misuse of deposit guarantee funding and breach of state-aid rules.

Italy is one of 11 countries that failed to implement the EU's Bank Recovery and Resolution Directive (BRRD) into national legislation by the end of last year. But its ministerial consultation period debating this closes in mid-August and we expect legislation will be in place by year-end. In the meantime, various options to resolve failed banks and avoid mandatory creditor bail-ins as required under BRRD are being pursued by the authorities including the Bank of Italy.

The recapitalisation of Cassa di Risparmio di Ferrara (Carife), a small savings bank based in the north-east of Italy, at end-July is a case in point. Poor lending at Carife resulted in high losses at the bank, which was placed in special administration in 2013. Administrators identified unreserved losses at the bank totalling EUR376m. Carife had total assets of EUR6bn, equity of EUR380m, subordinated debt of EUR150m and deposits of EUR2.9bn at end-2012.

A EUR300m capital injection from the Fondo Interbancario di Tutela dei Depositi (FITD), the mandatory deposit guarantee fund covering all banks except the mutuals, was approved by Carife on 30 July. FITD is now the bank's largest shareholder, at 94%, wiping out its previous owners, a local foundation plus local entrepreneurs and retail investors.

The recapitalisation of Carife is large in FITD's terms. The FITD can provide support to banks under administration as long as this is less costly than liquidating the bank and returning all insured deposits to their owners. It can only recapitalise a bank if recovery prospects appear reasonable. We do not know if this is the case for Carife but recapitalisation through FITD may also open the door to state-aid questions, especially as subordinated debtholders were not bailed in.

In February 2015, the European Commission ruled that FITD's EUR265m loan to Cassa di Risparmio della Provincia di Teramo (Tercas), another small Italian savings bank, constituted state aid. The Commission also said that FITD support could have been lessened if EUR169m of subordinated debt had been written off. Under state-aid rules, equity and junior debt bail-in must take place, implying Tercas' subordinated debt should have been used to absorb losses at the bank.

The Tercas case, still being discussed with the European Commission, may set a precedent for Carife and we believe that bail-in of Carife's subordinated debt cannot be ruled out. The resolution of additional banks under special administration, including Banca delle Marche (EUR680m equity at end-June 2013) and Banca Popolare dell'Etruria e del Lazio (EUR530m equity at end-September 2014), before end-2015 is also allegedly being considered. The authorities might decide to use FITD funding in both cases.