The issuance by Italian banks of dual recourse instruments backed by loans to small and medium sized enterprises moved a step closer at the end of last week with an amendment to the relevant law, which an Italian ECBC representative said meets the needs of Italy’s banks.

The law amendment was included in the Italian government official gazette published on Friday after being approved in parliament on 6 April.

An Italian bank official involved in the European Covered Bond Council’s work on SME-backed instruments said that the new amendment has been achieved following a long and constructive dialogue between the authorities and the banking industry, notably the Italian banking association (ABI). He said that the legislators recognised the needs of the banks, while the move also fits in with the European Commission Capital Markets Union (CMU) initiative.

Italy’s securitisation law was initially amended in 2014 with the creation of a separate article to introduce the new class of instrument. According to the Italian official, the main purpose of the latest amendment is to introduce public supervision for the instrument.

Speaking at an ECBC plenary in Copenhagen on Thursday, he said that the law amendment now needs to be followed by secondary legislation, which will take the form of a ministerial decree and regulations issued by the Bank of Italy, with the former setting out which types of SME loans will be eligible as collateral alongside leasing, factoring, ship loans and other commercial loans.

“It is a simple structure, and similar to the existing OBG structure,” said the official.

However, he said that the previous name of obbligazioni bancarie collateralizzate (OBC) will no longer be used as it is too similar to the name of Italy’s covered bonds, obbligazioni bancarie garantite (OBG). He said that it is considered important that the new SME instrument is not confused with traditional covered bonds, and that a different name and distinct article for the instrument in legislation should help protect the OBG.

The instrument will otherwise reflect typical covered bond characteristics and matches the on-balance sheet model proposed by the ECBC in its European Secured Notes (ESN) initiative.

The Italian official said that the new instrument is well suited to SME loans since these are typically of short duration and, for example, may be restructured, and being able to include them in a dynamic cover pool is more efficient than setting up standalone securitisations for such assets. However, he noted that the costs of establishing a programme could limit use of the instrument to larger Italian banks, as has been the case for OBGs.

He said that the attractiveness of the instrument would also depend on whether they are ECB-eligible and benefit from other preferential regulatory treatment, as traditional covered bonds do. He expects them to be more costly to issue than OBGs, but hopes that the pricing will be “not too far” away from them.

According to ABI figures cited by the Italian official, there are some Eu190bn of unsecured SME loans in the Italian banking system

“But we have to see how many will be eligible,” he added.