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)
Date: 2016-08-31
Institutions: European Central Bank
Subjects: Italy, banking supervision, central bank, cooperative bank, financial stability, national law, parent company

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  14  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  Union,  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 applicable 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. 

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3 

See Opinion CON/2016/17. All ECB opinions are available on the ECB’s website at www.ecb.europa.eu. 
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). 

See paragraph 2 of Section II, Chapter 2 and Section II, Chapter 3 of the draft circular. 

 
 
 
 
                                                 
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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  to  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  corrective  actions  if  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 controls and interventions over the affiliated banks, which is proportionate to their individual risk 
profiles 5. 

1.5  The parent bank’s powers include: (a) corporate governance of the cooperative banking group and 

its members, including the procedures for appointing, removing and replacing the members of the 

management  and  control  bodies  of  the  affiliated  banks;  (b)  internal  control  and  IT  systems; 

(c) control  and  intervention  over  the  affiliated  banks;  (d)  prudential  requirements  and  reporting; 
(e) decisions of strategic relevance and (f) sanctions 6. 

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 defaults on its 

creditors (external guarantee). Secondly, there is a mechanism of intra-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 avoiding resolution proceedings 7. 

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 

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Section II, Chapter 4 of the draft circular. 
Paragraphs 1, 3, 5 and 6 of Section III, Chapter 1 of the draft circular. 

Section III, Chapters 1.1 to 1.8 of the draft circular. 
Paragraphs 1 and 4 of Section III, Chapter 2 of the draft circular. 
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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empowers  the  parent  bank  to  instruct  the  affiliated  banks  to  implement  the  competent  authority’s 
instructions 9.  

2.   General observations 

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  systems  are  uniform,  as  well  as  ensuring  that  the  cooperative  banking  group 

complies 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  that  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  management,  compliance,  internal  audit  and  planning,  and  reporting  exclusively  to 

the parent company.  

3.  

Specific observations 

3.1  Under  the  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  possible 11.  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  clarification  to  this  provision.  Such  clarification  should  indicate  that  the  operational 

support  units  shall  nevertheless  be  functionally  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 framework on banking 

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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. 
See paragraphs 3.1.5 and 3.1.6 of Opinion CON/2016/17. 

First indent of paragraph 3 of Section III, Chapter 1.3 of the draft circular. 

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groups 12, the draft circular should  also provide for establishing 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, the parent bank should be empowered to approve transactions where the total exposure 

towards the same client or a group of connected clients is above predefined thresholds.  

3.3  Under  the  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  based  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  key 
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  loans  (NPLs) 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 an 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 developing 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 separating the bad loan unit from the lending unit.  

3.5  Under  the  draft  circular,  the  parent  bank  and  the  affiliated  banks  must  equip  themselves  with 

mechanisms  to  integrate  IT  systems  and  data  management  processes  to  ensure  reliable  and 
accurate risk measurement on an individual and consolidated basis 15. In this respect, a deadline for 

the  implementation  of  a  unified  IT  system  should  be  introduced.  In  particular,  the  draft  circular 

should  be  amended  to  ensure  that  cohesion  contracts  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 

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15 

See Articles 53(4) and 67(1)(b) and (d) of the Consolidated Law on banking, 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. 
Second indent of paragraph 1 of Section III, Chapter 1.1 of the draft circular. 
Second indent of the last paragraph of Section III, Chapter 1.3 of the draft circular. 

Last paragraph of Section III, Chapter 1.4 of the draft circular. 

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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 

classifying  risks  to  which  the  participating  banks  and  the  system  as  a  whole  are  exposed; 

(b) powers  of  intervention;  (c)  conducting  risk  assessment  and  communicating  the  findings  to  the 
participating  banks16.  The  draft  circular  should  specify  that  these  powers  and  tasks  are  to  be 

conducted by the parent bank annually, at a minimum, and more frequently, if required, due to an 

affiliated bank’s risk profile. 

3.7  Under  the  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 the internal capital adequacy assessment process 

(ICAAP)  that  need  to  be  applied  by  the  affiliated  banks  at  individual  level;  (d)  implement 
instructions  from  the  competent  authority17.  In  this  respect,  it  is  important  that  the  draft  circular 

requires  the  parent  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 parent 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  intervention  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  circular  outlines  the  administrative  process  that  a  bank  intending  to  become  a  parent 

bank must follow in order to establish a cooperative banking group. If 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 

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First indent of the paragraph 5 of Section III, Chapter 2 of the draft circular. 

Paragraph 3 of Section III Chapter 1.5 of the draft circular. 
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. 

Paragraphs 2 and 3 of Section III Chapter 1.4 of the draft circular. 

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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  authorising  and  withdrawing 

authorisations  of  credit  institutions,  taking  up  the  business  of  a  credit  institution  and  ensuring 
compliance  with  Directive  2013/36/EU  of  the  European  Parliament  and  of  the  Council 21,  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  to  ensure  legal  certainty,  the 

draft circular should contain more clearly specified requirements for such an exclusion. Moreover, 

there should be more specification as regards the requirement for the cohesion contract to refer to 
‘serious violations 23’.  

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 

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22  
23  

Paragraph 3 of Section V Chapter 1 of the draft circular. 
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). 
Section III, Chapter 1.7 of the draft circular. 

Section III, Chapter 3.1 of the draft circular.  

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