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2018 | OriginalPaper | Buchkapitel

3. The Different Types of Bonds Issued by Italian Banks: An Overview

verfasst von : Fabrizio Crespi, Danilo V. Mascia

Erschienen in: Bank Funding Strategies

Verlag: Springer International Publishing

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Abstract

In this Chapter we provide a description regarding the characteristics of the bonds issued by Italian banks, as well as the rules governing the issuance of debt instruments. By employing data from a comprehensive database including 9,160 outstanding bonds, we show that banks, in Italy, typically issue plain vanilla bonds. Moreover, provided that the majority of bonds are unlisted, we infer that banks in Italy have been historically used to place their debt securities to retail customers directly at their branches. Finally, using real examples of debt securities currently held by retail investors, we illustrate some innovative structures of bank bonds. The complexity behind these structures suggests that retail investors are probably unaware of the implicit risks of the bonds, because they normally tend to buy (upon trust) what the bank proposes.

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Vorheriges Kapitel The Funding Strategies of Italian Banks: The Importance of Bonds

Nächstes Kapitel The Bail-in Effect: How the Cost of Funding Through Bonds has Changed After the Introduction of the BRRD

For bonds not listed in a stock exchange or in similar trading venue (for example a multilateral trading facility), the secondary market is mainly represented by the quotes expressed by the issuing banks which act as dealers or, in the best case, as systematic internalizers.

With regards to this aspect, see also the analysis made in Chap. 4 for the period following the introduction of the BRRD.

In Italy, the main financial authorities are the Bank of Italy and Consob. While the first is mainly responsible for the capital adequacy of banks, the rules regarding the adequacy of financial instruments and investment services proposed to retail investors are set by Consob (the Italian companies and stock exchange Commission) in accordance to the European Legislation (i.e., MiFID I and II frameworks) and ESMA recommendations.

This law has been frequently amended, over the years, to incorporate EU legislation in Italy.

For example, a bank can issue a bond that is convertible in shares of a corporation not included in the banking group. In this case, either the bank has the shares of the external corporation in its investment portfolio (and wants to divest its shareholding), or the bond contains some kind of derivatives that grants the possibility to exchange it with shares.

Here again, the law was amended many times to introduce European legislation in Italy; notably, the transposition of MiFID I and MiFID II frameworks, and the implementation of the Directive 2003/71/EC regarding the prospectus to be published when securities are offered to the public or admitted to trading.

Note that this provision is stricter than that provided in the EU Legislation. Indeed, Directive 2003/71/EC totally exempts from the editing of a prospectus in case of such kinds of issuances. An important aspect of this rule (the simplified prospectus) is that it is applied only to “simple bonds”. These are defined by Consob as: bonds denominated in Euro issued by European banks not containing subordination clauses; bonds for which the reimbursement is granted at maturity and are not linked to derivatives; bonds for which coupons are fixed or linked to simple and known external interest rate such as Euribor. Moreover, the level of liquidity of the bonds should be sufficient to grant a prompt divestment.

See art. 5 of Directive 2003/71/EC and art. 6 of Consob Regulation No. 11971.

The final terms contain, for instance, information about the amount issued and the amount effectively subscribed.

The communication represents a level 3 document in the MiFID framework, that is interpretative guidelines that support the practical application of the European directive. Illiquid products are defined as those that determine (for investors) limitations in case of disinvestment, so that the disinvestment cannot be made in a reasonable time, or the price of disinvestment does not reflect a reasonable fair value achievable in a liquid market. Many banks’ bonds, especially structured ones, were indeed illiquid at that time.

The Authority also pointed out a rather widespread commercial bias in the distribution of these kinds of instruments. Indeed they were very profitable for the banks’ sale networks (upfront fees could reach 5–8% levels) and, consequently, were often proposed not properly considering the adequacy rules introduced by MiFID I.

The bond is a structured one composed by a zero coupon and a floor option on the European inflation. The unbundling of the bond is reported in the final terms of the issuance.

Complex products/financial instruments are those that do not meet the criteria of “non-complex” as set out in Article 19 (6) of MiFID and Article 38 of the MiFID Implementing Directive.

Note that Consob recognized that complexity does not always mean risk: actually, you can have complex products that are not risky or, inversely, simple products that are very risky. Notwithstanding, Consob considered fundamental that an investor could understand the structure of a product, in order to avoid unaware purchases.

This was (and is) frequently the case that occurs when a small bank issued a structured bond. The small bank acts as distributor, while the structured bond is normally manufactured by a specialized intermediary (for example an investment bank).

In particular, the platform is very popular among financial advisors in Italy, as it allows simulations, construction, and monitoring of ideal diversified portfolios that advisors may build and recommend to their customers. Moreover, one of the strengths of this platform is that it offers daily updates about a variety of newly issued instruments such as mutual funds, corporate and government debt instruments, bank bonds, stocks and currencies as well.

Fixed + floating refers to bonds in which the periodical coupon is fixed for the first years, and then it is linked to an external interest rate such as Euribor. Fixed + zero coupon refers to bonds in which the periodical coupon is fixed for the first years; then, at a certain point in time, if some external conditions occur (for example a reference rate is higher or lower than a prefixed level), the coupon could be zeroed, so that the bond becomes a zero coupon.

Note that Banca IMI (7th place) is the investment bank of Intesa Sanpaolo banking group.

The total number of counties in Italy is 110.

This case will be specifically discussed in Chap. 4.

For a comprehensive analysis see Pampurini (2010) and Grasso et al. (2010).

Consob, 2009. Il dovere dell’intermediario di comportarsi con correttezza e trasparenza in sede di distribuzione di prodotti finanziari illiquidi. Comunicazione No. 9019104, 2 Marzo.

Grasso, R., Linciano, N., Pierantoni, L., Siciliano, G., 2010. Bonds issued by Italian banks. Risk and return characteristics. Consob Working Paper No. 67.

ESMA, 2014a. MiFID practices for firms selling complex products.

ESMA, 2014b. Structured retail products—Good practices for product governance arrangements.

Pampurini, F., 2010. Le obbligazioni strutturarte. ISEDI, Novara.

Van Rixtel, A., Gonzalez, L.R., Yang, J., 2015. The determinants of long-term debt issuance by European banks: Evidence of two crises. BIS Working Papers No. 513.

Titel: The Different Types of Bonds Issued by Italian Banks: An Overview
verfasst von: Fabrizio Crespi
Danilo V. Mascia
Verlag: Springer International Publishing
Buch: Bank Funding Strategies
Print ISBN: 978-3-319-69412-2

Electronic ISBN: 978-3-319-69413-9

Copyright-Jahr: 2018
DOI: https://doi.org/10.1007/978-3-319-69413-9_3