New Legislative Initiative in Italy for a National Glass-Steagall Act
May 24, 2014 • 11:03AM

Tuscany City Councilman Gabriele Chiurli has started a procedure for a national Glass-Steagall Act. Italian law allows a local legislative body to introduce national draft bills, which, however, must be first approved by the local legislature—in this case, the Regional Council of Tuscany.

The new bill marks progress in respect to all other draft bills introduced so far in Italy, both at national and local level. It does not delegate to government for legislation, but it does specify changes to be introduced to the current legislation. It consists of seven articles.

Article 1 describes the "finalities":

1. "The current law aims at introducing the principle of banking separation, between commercial and investment banks, to the purpose of protecting citizens' savings. Such a purpose can be achieved only through strictly separating financial activities of deposit and credit related to the real economy from those related to high risk investments and speculation on national and international markets."

2. "Banking separation also pursues the aim of avoiding the diversion of public funds for the purpose of preventing the failure of credit institutions at taxpayers' costs."

Article 2 changes the 1993 "Single Act on Banking and Credit Laws," which establishes a national register (charter) for banks, adding to Article 13 that "the Register is divided into two sections, denominated as follows: a) commercial banks; b) investment banks."

Article 3 defines what commercial banks are, and what they are allowed to do: "Commercial banks can offer their customers only low-risk investments, including sovereign bonds and state-participated bonds, to the condition that: a) invested capital is no larger than two-thirds of the total amount deposited in the banking institution itself; b) invested capital is no more than EU250,000.

"It is prohibited for commercial banks: a) to directly or indirectly perform any activity proper of investment banks and more generally of all financial companies which are not authorized to collect deposits among the public; b) own equity or establish agreements of commercial nature with investment banks, brokerage firms, financial companies which are not authorized to collect deposits among the public."

Commercial banks "are explicitly obliged to operate in substantial balance between deposit deadlines and use of financial resources."

Article 4 defines what investment banks are and prohibits any investment bank official to have a role in commercial banks, and forbids investment banks to have equity in, or agreements with commercial banks.

Article 5 says that within one year from the law's entering into force, currently chartered banks must communicate to the central bank in which part of the National Register they want to be chartered, "having previously resolved incompatibilities as per the current law."

Article 6 mandates Parliament to draft a "different fiscal treatment for commercial banks and investment banks, aimed at favoring the former, acknowledging their role of fundamental support to the real economy of the country."

Article 7 establishes a series of sanctions for violations of the law, and Article 8 is the formal clause that the law comes into force the day after its publication in the Gazzetta Ufficiale.

In the introduction, it says that although the discussion on separating banking activities has gone on in all countries, "rules recently introduced at European level seem to be inadequate and, according to some observers, they reflect an excessive influence from the financial industry, which maintains the possibility of supporting investment banking activities through the commercial/retail sector. In fact, by introducing a separation of activities but maintaining at the same time the universal bank model, the door is left open to entanglement between the two sectors. The evidence of this is provided by the fact that the EU law prescribes the use of so-called bail-in mechanism—the self-bail-out of the crisis-ridden institution, including expropriation of deposits—in case of failure of a universal bank which is considered as 'systemic,' putting 'stability of the system' before protection of savings. It goes so far as to establish that in the resolution, speculative debts—in the first place financial derivative contracts—enjoy protection if this is necessary for the stability of the system. In other words: the payment of derivatives, including 'toxic products,' is guaranteed, if that is determined to be necessary to maintain the stability of the system, even if depositors are damaged. All this represents exactly the opposite of the principle historically established by the Glass-Steagall Act and eventually adopted by all civilian legislations."

The draft bill will now be discussed in a committee of the Tuscany Council, and will eventually go to the floor for debate and a vote. If approved, it will automatically be forwarded to the Chamber of Deputies and the Senate, and will undergo the usual procedure to become national law.

"In case this goes wrong at any stage, we ... will not surrender: we are ready to take to the street and collect the necessary signatures to introduce the draft bill as a Law of Popular Initiative," says Councilman Chiurli on the website of his movement, Democrazia Diretta.