EN ECB -PUBLIC  
 
OPINION OF THE EUROPEAN CENTRAL BANK  
of 31 August 2016  
on the Banca d’Italia's circular implementing  the reform of Italian cooperative banks  
(CON/2016/ 41) 
 
Introduction and legal basis  
On 21 July 2016, the European Central Bank (ECB) received a request from the Banca d’Italia for an 
opinion on draft circular  No 285 implementing the reform of banche di credito cooperativo (BCCs, ‘Italian 
cooperative banks’)  (hereinafter the ‘ draft circular ’). The draft circular  follows the conversion of Decree-
Law No 18 of 1 4 February 2016 into law , which amended Legislative Decree No 385/1993 ( hereinafter 
the ‘Consolidated Law on banking’ )1.  
The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 
Functioning of the European Uni on, and the third and sixth indents of Article  2(1) of Council Decision  
98/415/EC2, as the draft circular  relates  to the specific tasks conferred upon the ECB concerning the 
prudential supervision of credit institutions, the Banca d’Italia and rules applic able to financial institutions 
insofar as they materially influence the stability of financial institutions and markets. In accordance with 
the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing 
Council has  adopted this opinion.  
 
1. Purpose of the draft circular  
1.1 The purpose of the draft circular  is to implement Articles 37-bis and 37- ter of the Consolidated Law 
on banking concerning cooperative banking groups . 
1.2 The draft circular  defines the structure of a cooperative banking group and lays down conditions 
that must be fulfilled by  the cooperative banking group members . Under  the draft circular , a 
cooperative banking group is composed of : (a) a parent bank; ( b) BCCs that have entered into a 
cohesion contract ; and (c) other banks that are not BCCs,  and financial and ancillary services 
undertakings3 controlled by the parent bank.  Under the draft circular , the parent bank is the sole 
entity that may exercise the powers of direction and coordination over the affiliated banks and is responsible for ensuring stability and sound and prudent management of the cooperative banking 
group. The activities falling within the sole responsibility of the parent bank shall not be outsourced 
or delegated.  
                                                 
1 See Opinion CON/2016/17. All ECB opinions are available on the ECB’s website at www.ecb.europa.eu.  
2  Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by national 
authorities regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42).  
3 See paragraph 2 of Section II, Chapter 2 and Section II, Chapter 3 of the draft circular.  
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2 1.3 In addition, a cooperative banking group may also include a local sub- group that includes a sub-
holding bank based in a specific geographical area. This sub- holding bank  supports the parent 
bank in the task of directing and monitoring the BCCs by giving the parent bank’s instructions  to the 
BCCs . All entities of the sub- group, including the sub- holding bank , are subject to the parent bank’s 
powers of direction and coordination4. 
1.4 By entering into a cohesion contract , the BCCs join the cooperative banking group and agree to be 
subject t o the parent company’s  direction and coordination, powers and control. The parent 
company ’s powers include: ( a) issuing binding instructions to the affiliated banks and to the other 
companies of the cooperative banking group;  (b) taking appropriate correct ive actions i f affiliated 
BCCs do not comply with the parent company’s instructions ; and (c) issuing sanctions 
proportionate to the seriousness  of the breach of contractual obligations in question . Compliance 
with the parent bank ’s instructions  in accordance with  the cohesion contract is ensured by a system 
of control s and interventions over the affiliated banks , which is proportionate to their individual risk  
profile s5. 
1.5 The parent bank ’s powers  include:  (a) corporate governance of the cooperative banking g roup and 
its members , including the procedures for appoint ing, remov ing and replac ing the members of the 
management and control bodies of the affiliated banks ; (b) internal control and IT system s; 
(c) control and intervention over the affiliated banks ; (d) prudential requirements and reporting;  
(e) decisions of strategic relevance and (f) sanctions6. 
1.6 The draft circular  requires  the parent bank and the affiliated banks to enter into a cross -guarantee 
scheme, whereby  the parent bank guarantees the liabilities  of all affiliated banks and each affiliated 
bank guarantees the parent bank and the other affiliated banks for their own liabilities. The cross -
guarantee scheme has two dimensions . Firstly, the participating  banks  are jointly liable , within the 
limits of their individual obligations,  for the liabilities of each participating bank that  default s on its 
creditors (external guarantee) . Secondly, there is a mechanism of int ra-group financial support by 
which the participating banks offer each other the financial support needed to ensure their solvency 
and liquidity, and,  in particular , to comply with prudential requirements and satisfy requests by the 
competent authority . This mechanism also helps in avoid ing resolution proceedings7. 
1.7 The draft circular also confers powers on the competent authority, i.e.  the ECB or the Banca 
d’Italia , as the case may be,  in line with Council Regulation (EU) No 1024/20138. In particular , the 
following decisions will not be effective or implemented until authorisation is granted by  the 
competent authority:  (a) withdrawal ; (b) exclusion from the cooperative banking group;  
(c) admission or denial of admission to the cooperative banking group. The draft circular also 
                                                 
4 Section II, Chapter 4 of the draft circular.  
5 Paragraphs 1, 3, 5 and 6 of Section III, Chapter 1 of the draft circular.  
6 Section III, Chapters 1.1 to 1.8 of the draft circular.  
7 Paragraphs 1 and 4 of Section III, Chapter 2 of the draft circular.  
8  Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank 
concerning policies relating to the prudential supervision of credit institutions (OJ L 287, 29.10.2013, p. 63).  
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3 empower s the parent bank to instruct  the affiliated banks to implement the  competent authority’s  
instructions9.  
 
2.  General o bservations  
2.1 The ECB welcomes the fact that the draft circular  provides for the parent bank to create the 
cooperative banking group under its  powers of direction and coordination, which are specified in 
the cohesion contract between the parent bank and the affiliated cooperative banks . These 
specifications are aimed at ensuring that  the cooperative banking group’s strategic direction and 
internal control system s are uniform , as well as ensuring that t he cooperative banking group 
complie s with prudential requirements applicable to it .  
2.2 The ECB takes note of the powers conferred on the ECB as the competent authority by virtue of 
the draft circular, in line with Regulation (EU) No 1024/2013.  
2.3 As noted by  the ECB in a previous opinion10, the establishment of a cooperative banking group 
involves significant challenges for the parent company in terms of risk governance and control 
systems . In particular, the ECB has emphasised that the parent company should be able to direct 
and coordinate the cooperative banking group, including by giving direct instructions to the affiliated 
banks under any circumstances to ensure compliance with applicable prudential rules and 
supervisory requirements as well as to ensure t hat the cooperative banking group entities’ 
operations and strategies are in line with the cooperative banking group’s policies and objectives . It 
is of great importance that cooperative banking groups have well -designed control functions, 
including risk m anagement, compliance, internal audit and planning, and reporting exclusively to 
the parent company .  
 
3.  Specific observations  
3.1 Under t he draft circular , the parent bank performs the internal control functions on behalf of the 
affiliated banks  by way of outsourcing arrangements , although maintaining adequately organised 
operational support units located at the biggest affiliated banks  should be possible11. However, 
since one of the main objectives of the reform  is to more specifically set out the parent  bank’s 
exclusive powers of direction and coordination over the affiliated banks,  it would be useful to add 
an explicit clarif ication  to this provision. Such clarification should indicate that the operational 
support units shall nevertheless  be functionall y dependent on,  and subordinated to,  the parent 
bank’s control functions.  
3.2 The draft circular does not fully clarify the parent bank’s decision making powers with regard to 
granting loans over a certain amount. Consistently with the Italian regulatory f ramework on banking 
                                                 
9 Section I Chapter 3; paragraph 5 of Section III Chapter 1; paragraph 5 of Section III Chapter 1.5; Section III Chapter 
3.2; and paragraph 2 of Section IV Chapter 2 of the draft circular.  
10 See paragraphs 3.1.5 and 3.1.6 of Opinion CON/2016/17.  
11 First indent of paragraph 3 of Section III, Chapter 1.3 of the draft circular.  
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4 groups12, the draft  circular  should also provide for establish ing a cooperative banking group- wide 
control system in respect of large transactions. In particular , the parent bank should be given 
specific powers to confirm loan transactions , whether  in the form of a loan, guarantee or any other 
credit -granting instrument , that exceed a specific percentage of the affiliated bank ’s own funds . 
Similarly, t he parent bank should be empowered to approve transactions where  the total exposure 
towa rds the same client or a group of connected clients is above predefined thresholds.  
3.3 Under t he draft circular  the parent bank may stipulate in its by -laws for up to 50 per cent  of the 
positions in its corporate bodies to be allocated to the directors and auditors of affiliated banks  with 
a lower risk profile . The selection procedure for these positions  is bas ed on merit and takes into 
account the candidates’ previously demonstrated skills  and the results achieved in managing the 
banks of the cooperative  banking  group. However, the draft circular does not mention k ey 
managers13. The Banca d’Italia may wish to consider extending the merit -based part of the  
selection process to key function holders  in the parent bank as well as  the local sub- groups . Key 
function holders  may be subject to additional rotation requirements  in order  to ensure their 
independence.  
3.4 Under the draft circular , the parent bank has the power to provide instructions regarding 
management and evaluation of non- performing loan s (NPL s)14. The parent bank should manage 
directly  the most important class of NPLs , i.e. the bad loans  portfolio ( sofferenze) , which would 
provide several advantages.  
(a) It would enable the parent bank to develop a n effective strategy for negotiating and carrying 
out bad loan disposals, including managing such bad loans after  disposals  take place,  where 
relevant .  
(b) It would assist in  develop ing a comprehensive, consistent  and robust medium - and long-term 
management strategy for bad loans at the parent company level across the cooperative 
banking group.  
(c) It would provide guidance as regards  separatin g the bad loan unit from the l ending unit .  
3.5 Under t he draft circular , the parent bank and the affiliated banks must equip themselves with 
mechanisms to integrat e IT systems and data management processes to ensure reliab le and 
accurate  risk measurement  on an individual and consolidated basis15. In this respect, a deadline for 
the implementation of a unified IT system  should be introduced . In particular , the draft ci rcular 
should be amended to ensure that  cohesion contract s provide for a single IT system and data 
management process to be adopted within a reasonable period of time, but  no later than three 
years from the date of entry  into the cohesion contract . An adequate integration mechanism would 
                                                 
12 See Articles 53(4) and 67(1) (b) and  (d) of the Consolidated Law on b anking, as implemented in Section V (internal 
controls) of Part I, Title IV, Chapter 3 and Section IV (large exposures) of Part II, Chapter 10 of  the Banca d’Italia’s 
Circular No 285/2013; Chapter 5 (risk activities towards  related entities) of Title V of the Banca d’Italia’s Circular No 
263/2006.  
13 Second indent of paragraph 1 of Section III, Chapter 1.1 of the draft circular.  
14 Second indent of the last paragraph of Section III, Chapter 1.3 of the draft circular.  
15 Last paragraph of Section III, Chapter 1.4 of the draft circular.  
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5 need to be adopted during the intermediate period  to ensure reliability and accuracy of risk 
measurement on an individual and consolidated basis . 
3.6 The draft circular  confers on the parent bank the following powers and tasks: ( a) monitoring and 
classif ying risks to which the participating  banks and the system as a whole  are exposed;  
(b) powers of intervention; (c) conducting risk assessment and communicat ing the findings  to the 
participating  banks16. The draft circular shou ld specify that these powers and tasks are to be 
conducted by the parent bank annual ly, at a minimum,  and more frequently , if required, due to an 
affiliated bank’s  risk profile . 
3.7 Under t he draft circular , the cohesion contract gives  the parent bank  the power  to: (a) issue 
instructions to the affiliated banks to ensure compliance with prudential requirements on a 
consolidated and individual basis ; (b) define and adopt risk measurement methodologies for 
regulatory purposes ; (c) set rules and criteria for t he internal capital adequacy assessment process  
(ICAAP)  that need to be applied by the affiliated banks at individual level;  (d) implement 
instructions from the competent authorit y17. In this respect, it is important that the draft circular 
requires  the par ent bank to establish uniform criteria for the stressed scenario to be applied by 
each BCC as part of  the ICAAP18. 
3.8 The draft circular restricts the scope of the par ent bank’s control over the affiliated banks , including  
its intervention and sanctioning powers . The oversight activity  must  be strictly linked to a set of 
predefined indicators , the results of the overall oversight activity , and the outcome of the previous 
intervention. These early warning indicators  must  refer to the following matters , at a minimum : own 
funds, credit risk, profitability, liquidity and fund raising19. These provisions should further specify  
that this oversight function is built on a framework of progressive metrics under a ‘traffic  light’ 
approach. The oversight function should be designed in a way that will prevent , to the greatest 
extent possible,  the imposition of measures by the competent authority on an individual or 
consolidated basis. In particular , the oversight function should be based on a system of early 
warning and i ntervention or recovery indicators that would allow the parent bank to:  (a) verify 
affiliated banks’  compliance with the instructions issued by the parent bank ; (b) classify the level of 
risk to which the affiliated banks  are exposed;  (c) provide the grounds to uphold  its corrective 
actions and sanctions imposed on the affiliated banks in accordance with the cohesion contract ; 
(d) promptly provide appropriate measures of intra- group support as referred to in the cross -
guarantee scheme.  
3.9 The draft circula r outlines the administrative process that a bank intending to become a parent 
bank must follow in order to establish a cooperative banking group. I f the new cooperative banking 
group qualifies as a significant supervised entity for the purposes of the Single Supervisory 
Mechanism , the Banca d’Italia only takes  a decision regarding the application after having first 
                                                 
16 First indent of the paragraph 5 of Section III, Chapter 2 of the draft circular.  
17 Paragraph 3 of Section III Chapter 1.5 of the draft circular.  
18 In accordance with Section II (internal capital adequacy assessment process) of Part I, Title III, Chapter 1 of the 
Banca d’Italia’s Circular No 285/2013.  
19  Paragraphs 2 and 3 of Section III Chapter 1.4 of the draft circular.  
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6 consulted the ECB20. This should ensure that the ECB is able to fulfil its tasks specified in Article 
4(1) of Regulation (EU) No 1024/2013. It is understood that this administrative process is  without 
prejudice to the powers conferred on the ECB  by Council Regulation (EU) No 1024/2013.  Under 
that Regulation,  the ECB is  the competent authority responsible for  authoris ing and withdraw ing 
authorisati ons of credit institutions,  taking up the business of a credit institution and ensur ing 
compliance with Directive 2013/36/EU of the European Parliament and of the Council21, which 
requires credit institutions  to have in place robust governance arrangements.  
3.10 In order to exclude  an affiliated bank from the cooperative banking group, the draft circular requires 
‘the most severe circumstances ’ to be  present22. However, in order t o ensure legal certainty, the 
draft circular should contain more clearly specifi ed requirements for such an exclusion. Moreover , 
there should be more specification as regards the requirement for the cohesion contract to refer to 
‘serious violations23’.  
 
 
This opinion will be published on the ECB’s website.  
 
 
Done at Frankfurt am Main,  31 August 2016.  
 
[signed]  
 
The President of the ECB  
Mario DRAGHI  
                                                 
 
20 Paragraph 3 of Section V Chapter 1 of the draft circular.  
21  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of 
credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 
2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).  
22  Section III, Chapter 1.7 of the draft circular.  
23  Section III, Chapter 3.1 of the draft circular.