06 December 2013

IMF: Italy - Detailed assessment of observance of Basel Core Principles for Effective Banking Supervision

Italy is the first country to be assessed under the revised Basel Core Principles approved by the Basel Committee in September 2012. This report reflects the regulatory and supervisory framework in place as of the date of the completion of the assessment.

Summary [abridged]

1. The core supervisory process at the Banca d’Italia (BI) is strong, and it has a well-defined and integrated supervisory approach. 

2. The authorities have made progress in addressing the recommendations of the 2006 FSAP, although some issues remain. 

3. Italy is the first country to be assessed under the revised Basel Core Principles approved by the Basel Committee in September 2012. It is also the first country to be assessed and rated not only on the essential criteria but also on the additional criteria. It is important to note that since last assessment conducted in 2005/2006, the bar of the standards has been raised twice by the BCBS (the BCP methodology was revised in 2006 and again in 2012). This assessment, consequently, is not directly comparable with the previous assessment or across countries. More is expected of supervision and regulation, and much that before the revision was considered “desirable” is now considered essential, with the lessons of crisis and evolution of financial markets and international standards. The assessment also brings a new relevance to observed implementation and practices.

4. Therefore, even in the presence of strong regulatory framework and robust supervisory practices, there are areas requiring attention so that Italy can meet the highest standards of supervisory effectiveness. 

5. The Bank of Italy collects and analyses a wide range of banking information... Key risk areas (credit, financial, operational, profitability, capital, strategic and governance) are risk-graded and an overall risk grade is assigned to the bank. The risk ratings are the foundation for determining the scope of the supervisory plan for each bank.

6. The supervisory coverage of the bank is comprehensive and the follow-up process is intensive. 

7. Deficiencies in the legal and regulatory framework are largely mitigated by intensive and intrusive supervisory action on and off site, on a bank-by-bank basis. Nevertheless, in such cases it is recommended that the regulatory framework is completed so it is clear to the market what the supervisory expectations are. A good example is the framework for management and control of country and transfer risk. 

8. The regulatory framework for concentration risk is mostly focused on large exposures and management of name risk, while the revised CP has been considerably expanded from the previous methodology, and the focus has shifted from “large exposures” to “risk concentration”—which includes not only name risk but by industry, economic sector, geographic region, and by market (for instance, when banks are exposed to particular asset classes, products, collateral, or currencies). Supervisory practice, however, does consider such concentrations on a case by case review. 

9. The new framework for related party lending has come into force in January 2013, and therefore assessors could not observe implementation. A review of the regulation, however, showed that some deficiencies may reduce its effectiveness. 

10. Loan loss provisioning, practices are heavily influenced by fiscal and judicial requirements over prudential considerations.

11. The NPLs may remain on the books for years and include interest, according to IAS 39, based on bank management’s estimation of collectability and collateral support. 

Full report

Further publications:

1. Technical Note on Insurance Sector
2. Technical Note on the Financial Situation of Italian Households and Non-Financial Corporations and Risks to the Banking System
3. Technical Note on Interconnectedness and Spillover Analysis
4. Technical Note on Safety Nets, Bank Resolution, and Crisis Management Framework
5. Technical Note on Stress Testing The Banking Sector
6. Detailed Assessment of Observance of IOSCO-Objectives and Principles of Securities Regulation
7. Detailed Assessment of IAIS-Insurance core Principles

© International Monetary Fund