Italian Banking System Research Articles

Bank Size, Functional Distance and Loss Given Default Rate of Bank Loans

Most of the studies available on relationship lending focuses on the benefits for borrowers and neglects those achievable for banks. In particular, empirical studies on the benefits achieved for banks in terms of loans recovery rate, in connection with loss given default rate, are very few. In contrast, choosing the best approach to managing loans is crucial in the current credit market considering the high deterioration in quality of bank loans. This paper empirically tests whether the banks more oriented towards a relationship lending approach report a lower level of loss given default. Bank size and functional distance are used to measure the relationship lending approach in banks. This paper takes into account the Italian banking system and the effectiveness of their debt recovery processes during the 2005-2008 period. The data has been collected by ABI Banking Data and Bank of Italy. The empirical analysis highlights that banks more oriented in the relationship lending model have a greater capacity to recover bad loans. These findings have some managerial implications.

Measuring Sectoral/Geographic Concentration Risk

This article focuses on the application of the Pykhtin model to the Italian banking system to measure concentration risk by industry sector and geographic region. The proposed approach generalizes the portfolio model used in Pillar 1 for the calculation of the capital requirement, removing the assumptions of the existence of one systematic risk factor and of an infinitely granular portfolio. The difference between the unexpected loss stemming from the Pykhtin model and that calculated using the supervisory formula can be interpreted as a measure of concentration risk. The Pykhtin model is consistent with the Basel II framework. It accordingly generates an unexpected loss measure that is in line with the IRB capital requirements. The proposed model therefore has the advantage of “speaking the language of supervisors”. This approach makes it possible to interpret the difference between regulatory and economic capital. It also enables concentration risk to be broken down into its two components: single-name and sectoral/geographic concentration risk. The empirical results show the model’s ability to generate internally coherent rankings that are close to the economic intuition: exposure to sectoral/geographic concentration risk is negatively correlated to banks’ size.

Modelling Deposit Insurance Scheme Losses in a Basel 2 Framework

This paper extends the existing literature on deposit insurance by proposing a new approach for the estimation of the loss distribution of a Deposit Insurance Scheme (DIS) that is based on the Basel 2 regulatory framework. In particular, we generate the distribution of banks’ losses following the Basel 2 theoretical approach and focus on the part of this distribution that is not covered by capital (tail risk). We also refine our approach by considering two major sources of systemic risks: the correlation between banks’ assets and interbank lending contagion. The application of our model to 2007 data for a sample of Italian banks shows that the target size of the Italian deposit insurance system covers up to 98.96% of its potential losses. Furthermore, it emerges that the introduction of bank contagion via the interbank lending market could lead to the collapse of the entire Italian banking system. Our analysis points out that the existing Italian deposit insurance system can be assessed as adequate only in normal times and not in bad market conditions with substantial contagion between banks. Overall, we argue that policy makers should explicitly consider the following when estimating DIS loss distributions: first, the regulatory framework within which banks operate such as (Basel 2) capital requirements; and, second, potential sources of systemic risk such as the correlation between banks’ assets and the risk of interbank contagion.

Governance and strategy within the financial system: tradition and innovation

Italian banks have undergone an evolutionary process and development of corporate, retail and private banking within the Italian banking system as a response to market pressures exerted by business and private customers for a broadening and qualitative expansion of offerings and organization of available competencies. This not only refers to large enterprises, whose relations with the financial system are autonomous, on equal terms and for some time now have opened up internationally, but above all the large number of SMEs found in Italy’s economic system. Interpreting governance and strategy takes place in a broad perspective in which banks and the financial system have to deal with five significant factors today: regulations, customers, knowledge, capital and synergies. Interaction with these five factors is undoubtedly not only guided by a choice made by shareholders and managers but represents the set of decisions that mitigate ideological factors, choices concerning sustainability and social acceptance of these choices. This paper intends to explore this interaction, drawing on and utilizing the most significant studies in the Italian Banking & Finance sector, with a specific focus on relations between the financial system and businesses, that is to say, the corporate banking area.

Change and Motivation: How Changes in Organizational Contexts Alter the Behavioral and Motivational Profiles of Individuals: The Case of the Italian Banking System

Il saggio analizza i diversi profili di motivazione nel personale bancario basandosi sui risultati di un'indagine che ha coinvolto oltre 600 persone in quattro banche. Il principale modello analitico di riferimento e quello sviluppato da Nohria e Lawrence

The value of standardisation in public administration services: The Italian corporate banking experience

The Public Administration (PA) plays a key role in fostering the competitiveness of the European economy and financial market. Consequently, different stakeholder categories have recently registered new interest in cooperating to support the PA’s modernisation. In Italy, the Government has launched an institutional programme, the ‘e2012-innovation strategies’, marking some fundamental steps in the PA innovation process, as demonstrated by the introduction of the e-invoicing obligation for suppliers of PA. The banking system plays a core role in the concrete implementation of the mentioned objectives, thanks to a widespread presence over the territory, the availability of multiple channels and great knowledge of innovation and technology. The Italian banking system holds a further relevant asset, based on cooperation logics: the CBI Service, managed by the CBI Consortium, demonstrates best practice in the field of the innovation and standardisation of corporate banking services. In line with trends and the institutional commitment towards PA efficiency, the CBI Consortium is currently supporting the development of new models of interaction between the banking system and the Central Public Administration, and the implementation of innovative electronic services (documents, payments, reporting), interoperable with international standards, for the public sector.

The Tax Burden on the Banking Sector: Some Methodological Issues and Assessments

The paper considers several approaches to the measurement of firms’ tax burden in order to identify significant indicators for the banking sector. It also analyses features of tax provisions which are peculiar to the Italian system. On these bases, it looks at measures affecting the tax burden on the Italian banking system over the period 2000-09. Inter alia, the analysis shows the role played by the rules for a firm’s tax base and for tax relief and considers the increasing importance of deferred tax assets. The comparison between the Italian banking sector and those of other countries, in relation to commercial banks, shows that over the period 1998-2008 all jurisdictions experienced a reduction in both effective and statutory tax rates. Even if the tax burden on Italian banks has seen one of the largest reductions, this tax indicator is still the highest among the countries considered.

La crisi finanziaria č un test per Basilea II?

- In the last few months the debate about the Basel II framework has been intensified by the extent of the current financial crisis. The main discussion focused also on the impact of the new capital regulation over the business cycle fluctuations. Some market players fear that the new framework may be pro-cyclical as it is based on risk sensitive principles. Indeed the Basel II Committee is working on reforming part of the existent regulation. But, at the same time, the soundness of the main body of the framework has been confirmed by the supervisors. Anyway it is unreasonable to think that an extensive regulation concerning capital requirements is enough to prevent any excess of the financial market. In fact, the best lesson we may learn from the present crisis is that only a sound and cautious corporate governance leads to a responsible balance between financial profits and underlying risks. A brief description of the crises on the Italian market is also presented. The traditionally conservative lending practice of the Italian banking system seems to have shielded, in part, this economy from the crisis.

Liberalizzazione, concentrazione e diversificazione del sistema bancario italiano

- Starting from the early nineties, the Italian banking system has undergone a deep process of deregulation, consolidation and diversification. The deregulation process has enabled Italian banks to enter new - geographical and product - markets. The single European market has introduced a competitive challenge from abroad. The concentration process may be explained on several grounds. Smaller banks have aimed at reaching a more efficient scale of production. Deals involving banks located in Northern and Southern Italy had a prudential rationale, given the weakness of Southern banks. Large banks have presumably pursued a defensive strategy, due to the threat of take-overs from abroad. An important role has been played by the moral suasion exerted by the Bank of Italy. Deregulation and consolidation have come along together with an increase of the competitive pressure, as shown by the decline of interest rate margins. Banks have reacted by diversifying their business, in order to expand their sources of revenue and to create switching costs for their customers (by selling bundles of services). Keywords: banks, deregulation, consolidation, competition Parole chiave: banche, liberalizzazione, concentrazione, concorrenza Jel Classification: G21 - L89

Modelling Deposit Insurance Scheme Losses in a Basel 2 Framework

This paper extends the existing literature on deposit insurance by proposing a new approach for the estimation of the loss distribution of a Deposit Insurance Scheme (DIS) that is based on the Basel 2 regulatory framework. In particular, we generate the distribution of banks’ losses following the Basel 2 theoretical approach and focus on the part of this distribution that is not covered by capital (tail risk). We also refine our approach by considering two major sources of systemic risks: the correlation between banks’ assets and interbank lending contagion. The application of our model to 2007 data for a sample of Italian banks shows that the target size of the Italian deposit insurance system covers up to 98.96% of its potential losses. Furthermore, it emerges that the introduction of bank contagion via the interbank lending market could lead to the collapse of the entire Italian banking system. Our analysis points out that the existing Italian deposit insurance system can be assessed as adequate only in normal times and not in bad market conditions with substantial contagion between banks. Overall, we argue that policy makers should explicitly consider the following when estimating DIS loss distributions: first, the regulatory framework within which banks operate such as (Basel 2) capital requirements; and, second, potential sources of systemic risk such as the correlation between banks’ assets and the risk of interbank contagion.

The Impacts of the Basel II Accord on the Concentration of the Entrepreneurial and Banking System

From the econometric analysis model, even though based on the US economy, one deduces the existence of an important correlation between the intervened changes in the role of banks’ prudential capital and in merger and acquisition dealings: the latter have increased, at least in number, after the reviewing of prudential capital requirements in favour of better structured banking organizations. The analysis of the Italian entrepreneurial and banking system shows a country characterised by small-scale enterprises with meagre growth capability (even though the Accord, paradoxically, is meant to facilitate the granting of loans to the development of small-scale enterprises), but also by the great expanding potential of banking enterprises that, contrarily to the other productive entities, can count of high re-investible margins and, consequently, of wide capabilities of investing in private equity.

Le système bancaire italien : restructurations et opportunités

The Italian banking system : restructuring and opportunities The Italian banking system has experienced in the last years a new large-scale restructuring, with nine of the ten largest banking groups involved. Between 2005 and 2006, three transnational acquisitions and five domestic mergers were completed. Whereas the 1998-2002 restructuring process had been driven primarily by the aim of stabilising balance sheets, the current process is intended more to enable the sector to seize the opportunities arising from the gradual creation of a single European banking market. However, the transition from an essentially national frame of reference to a market on a continental scale inevitably requires large-scale adjustments. Italian banks are then expected to concentrate their efforts on redefining their business portfolios, focusing particularly on the development of capital market activities, while improving the profitability of the retail banking activities which remain their core business. The pursuing of these targets will be a quite difficult task : in fact, as shown by the lower sensitivity of bank interest rates to the change of market rates an intense competition is deeply reshaping the domestic market. Classification JEL : G21, G34

The Italian CBI 2: New corporate banking services to optimise the financial value chain

In recent times, the payments industry has been deeply affected by technological evolution, which has affected every industrial sector: security, integrity, authenticity of transactions, end-to-end, flexibility, integration with corporate systems and automatic reconciliation are words which have been in use for years, and now is the time to shift them into concrete solutions, as expected by the market. Moreover, the need for European Union harmonisation of payment methods, prices and standards has led to the creation of the single euro payments area (SEPA), which represents a major opportunity for multinational enterprises and banks who operate at a cross-border level. The Association for Interbank Corporate Banking (ACBI), thanks to its numbers (over 620,000 corporates connected and most of the Italian banking system), has ridden the wave and is now becoming a real benchmark for the corporate banking community thanks to the launch of a new Internet-based Virtual Private Network, the use of XML syntax, the integration between the financial cycle (payments) and the supply chain (trade relationships and documents, eg e-invoice). The new services cite the maximum alignment with ISO 20022 standards (UNIversal Financial Industry message scheme) providing bank customers with a set of specific Additional Optional Services built over the core scheme of existing services (eg credit transfer), offering new end-to-end functions, such as the trade documents exchange, and financing traditional solutions which have been now converted to electronic, such as the invoice financing request. But how does it work? And what value added do the new mentioned functions generate for companies? This paper explains in detail all these topics, by describing the experience of the ACBI, the critical factor of success, lessons learned and the value that the model could have in other countries and zones, given the widespread impact on the Italian market.

Survival and Growth in Joint-Stock Banking Oligopolies. Lessons from the Crises of 1917–1923 on the Role of Competitors and Politics

The Italian joint-stock banking system has faced three main crises: in 1897, with the demise of Società Generale Italiana di Credito Mobiliare (Pantaleoni, 1936); in 1921–1923, with the crisis of two of the four main joint-stock banks, Banca Italiana di Sconto (Falchero, 1990) and Banco di Roma (De'; Stefani, 1960; De Rosa, 1982–1983); and, in 1931–1933, with the disappearance of both the renewed Banco di Roma and the remaining two joint-stock banks, Banca Commerciale Italiana and Credito Italiano (De Rosa, 1982–1983; Confalonieri, 1994). After a brief examination of the nature of the Italian banking system on the eve of the First World War and the post-war economic situation, this paper examines in detail the crisis of the ‘mixed’ banking system in Italy of 1921–1923. The problems faced by the Banca Italiana di Sconto and the Banco di Roma are interpreted from the perspectives of oligopoly theory and the influence of politics. This approach is informed by a new reading of the documentary evidence, integrated with unpublished or neglected material. The paper also considers the role of the State, in relation to special legislation, and the macroeconomic costs suffered by the Treasury, together with the problems of the equilibria of joint-stock banking, banking liquidity, inter-bank competition, and monetary politics, both during and after the crises. The paper concludes with some lessons that can be learnt from the crises in terms of economic policy, primarily in the banking and monetary fields, in the light of the interactions with the political world.

The Effects of Basel 2 on Italian Banks: Results of the 5th Quantitative Simulation

In 2007 the new framework for capital adequacy of banks (Basel 2), defined in 2004 by the Basel Committee for Banking Supervision, will replace the 1988 Accord (Basel 1) in all major countries. In the last years the Committee has carried out several impact studies in order to simulate the possible quantitative effects of the new discipline. This paper describes the main results of the last survey (Fifth Quantitative Impact Study, QIS5) for the Italian banks included in the sample. The evidence suggests that the new rules should not produce significant effects - on average - on the level of capitalisation of the Italian banking system. For large internationally active intermediaries the capital requirements, calculated with the advanced methodologies, decrease with respect to the current regime; for medium-sized banks the capital requirements slightly increase when calculated with the standardised approach. These results are broadly in line with the evidence for the banks from other European and G10 countries participating in the same exercise.

Finance-led divergence in the regions of Italy

The article evaluates finance-led growth as an explanation for regional divergence in Italy over the years 1890–1910. Regional banking disparities are documented and the hypothesis developed that the financial crisis of the early 1890s struck the fledgling Southern Italian banking system at a vulnerable moment, distorting its subsequent development and handicapping the region's economy. The South is revealed to have been a chronically (over the entire period) and comprehensively (on every indicator) unhealthy environment for banks. Further evidence indicates that regional divergence in bank assets was largely due to the South's failure to develop the entire range of large banks. Size-class transition matrix analysis reveals that the typical Southern bank failed to reach a large size because it was born smaller (and less frequently) than in the North, suffered a higher mortality rate, especially in the smaller classes, and had lower growth probabilities, especially in the larger categories. The salience of deposits on the liability side and government securities on the asset side suggests that they reflected more than directly caused the development of their local economies.

Le système bancaire italien : caractéristiques et paradoxes : Interview

Italian banking system : features and paradox First, this interview presents challenges and objectives of most important Italian banks and also describes the Italian banking system’s features. During the last decade, this system has known a large wave of reorganization which has allowed to improve the profitability of the banking sector. But the system’s structure remains parcelled. In a second part, the interview deals with the likely developments like cross-border agreements particularly with French banks. JEL classification : F36, G21

Applying credit risk models to deposit insurance pricing: Empirical evidence from the Italian banking system

The Federal Deposit Insurance Corporation (FDIC) has recently tested credit risk models used by large international banks to measure the risk of their credit portfolios in order to measure the risk of default of its portfolio of insured banks. Using both balance sheet and equity market data for a sample of 15 large Italian banks, this study applies a credit value at risk model to estimate both individual and portfolio default risks for the Fondo Interbancario di Tutela dei Depositi (FITD), the Italian deposit insurance fund. The empirical analysis allows the authors to estimate the loss probability distribution of the FITD exposures which in turn can be used to evaluate the FITD fund adequacy; estimate the marginal contribution to the whole portfolio risk of an individual insured bank; and test an alternative risk-adjusted deposit insurance pricing scheme to the more traditional one based on option pricing models. Three main results emerge from the empirical analysis. First, the FITD committed capital appears significantly lower than the risk of losses from bank defaults. Secondly, the estimated total risk-based premium for the sample banks is in line with the amount of the Fund's committed capital. Finally, significant differences appear to exist in the pricing of the deposit insurance service for the different sample banks. Such differences reflect both differences in the banks' individual risk profiles and the higher impact that the exposures to larger banks present on the risk profile of the FITD portfolio.

Italy: Detailed Assessment of Compliance with the Committee for Payment and Settlement Systems (CPSS) Core Principles for Systemically Important Payment Systems

This paper presents findings of the Detailed Assessment of Italy’s Compliance with the Committee for Payment and Settlement Systems (CPSS) Core Principles for Systemically Important Payment Systems. At present, the Italian banking system is subject to significant challenges resulting from slowing economic growth, and low and declining interest rates, which have resulted in pressures on margins and a need to diversify sources of income. Banca d’Italia RTGS System for Large-Value Payments (BIREL) enables participants to make final and irrevocable transfers between the settlement accounts they hold with the Banca d’Italia.

Italy: Detailed Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision

This paper reviews findings of the Detailed Assessment of Italy’s Compliance with the Basel Core Principles for Effective Banking Supervision. The Italian banking system seems to exhibit a high degree of resilience to possible macroeconomic shocks, as supported by the evolution of some financial soundness indicators and by the results of various model simulations. Despite significant improvements over the last few years, the quality of banks’ loan portfolios remains moderate. Cost-cutting and restructuring remain key challenges for Italian banks, with several conjunctural factors putting pressures on costs and income.