FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Italy

Italy has three regulatory bodies for the financial industry :

• Banca d’Italia (Bank of Italy)
• Commissione Nazionale per le Societa’ a La Borsa (Italian Securities and Exchange Commission - CONSOB)
• Istituto per la Vigilanza sulle Assicurazioni Private e di Interesse Collettivo (ISVAP)

FRSGlobal in Italy

The Italian economy, like other European economies, has not escaped the effects of the global downturn. Banks now face tougher regulatory scrutiny as a result of the concerns enveloping the global financial sector, even though Italian banks generally managed to weather the financial crisis better than a number of other countries’ financial institutions.

Regulators are now demanding more accurate, timely and transparent measures to determine a bank’s state of health particularly in light of recent concerns over European sovereign debt levels and the stability of the banking system.

In Italy, general global economic conditions have contributed to a weakening of the banks’ asset quality and profitability, driving a renewed emphasis on regulatory oversight, better quality risk management – including the incorporation of improved liquidity and profitability measures and reporting – and a demand for improved visibility of the banks’ balance sheets by the banks’ management.

Contraction in the local Italian economy has sharply slowed lending growth to the private sector, banks’ profitability has declined, and asset quality deteriorated. Despite increasing capitalisation in 2008–09, banks’ capital ratios still range from weak to average compared with other European countries.

To redress the weaknesses in their balance sheets banks will need to carefully manage their capital while at the same time adjusting to the demands of heavier regulations.

Italian financial institutions face greater regulatory surveillance, triggered by the huge shifts in the way the entire industry is regulated and monitored, with the most recent example being the CEBS stress tests conducted on 91 European banks in July 2010 including major institutions in Italy.

The major Italian financial institutions that have a strong international presence are also faced with the same demands from multiple regulators and also have to consider the impact of their foreign activities on their overall capital strength and the impact of local conditions on their overall profitability and longer term financial well-being.

Big changes including an increasing focus on risk management to support the banks’ daily operations and to provide more accurate and comprehensive updates for both the banks’ management teams and for the regulators are fundamental considerations for the banks’ daily management.

The focus on capital adequacy, liquidity, banks’ resilience to downturns, and the quality of risk management frameworks and processes, are now primary considerations not only of management, but are also now essential in ensuring long-term growth and survival and in retaining the confidence of investors and regulators alike.

Regulatory Environment — Italy

Statutory

Financial reporting (FINREP)
FINREP regulatory reporting is based on IFRS/IAS accounting framework and is mainly concerned with information on balance sheet as well as Profit & Loss. In addition there are a number of breakdown reports which zoom in on details of provisions, revaluation reserves and other valuation differences, interest on income and expenses and derivatives. All the financial data reports are required to be submitted on a biannual basis to the Central Bank of Italy.

Prudential

Common Reporting (COREP)
COREP is generally centered around risk reporting mainly credit risk, market risk, operational risk as well as concentration risk. These reports also provide details on calculation of capital charge, group solvency ratio and capital adequacy requirements. All credit institutions are required to submit COREP reports on a consolidated basis biannually to the national financial regulator, Central Bank of Italy. COREP is also reported quarterly on a solo basis.

• Supervisory capital and prudential ratios on a single bank basis
  This type of reporting collects a pool of information on regulatory capital, solvency ratio, market risk and potential. It also covers reports on credit risk, operational risk and counterparty risk. This report is required to be submitted on a biannual basis. The Basel II framework is being implemented in Italy for calculation of capital adequacy requirements and assessments of solvency ratios.
• Large exposures reporting
  This reporting concerns exposures related to large transactions or large credit transfers and is required to be reported on a biannual basis along with COREP.

Statistical

Balance sheet statistics
These reports are required to be submitted monthly and are collected by the Central Bank of Italy for statistical purposes. Reports include balance sheet information broken down into reports such as statement of assets and liabilities, interest rates statistics etc.

Other statistical reports
This includes reports on assets and liabilities with detailed information on derivatives, territorial and sectorial data required to be submitted monthly. In addition it also includes quarterly reports which provide statistical data on investment and payment services, income statement, transit and outstanding items, assets and liabilities in foreign branches etc.

Transactional

Suspicious Transaction Reporting
As an international measure to prevent money laundering activities all the financial intermediaries are required to send reports without any delay to the Financial Intelligence Unit of Central bank of Italy in case any suspicious transactions or any terrorist financing activities are observed. In addition financial institutions also provide anti-money laundering aggregated data to the Central Bank of Italy on a monthly basis which the Central Bank can use for statistical purposes to tackle terrorist financing.

What’s coming up: Italy

Securities

Banks need to report exposures from resecuritization in trading book for supervision and also need to disclose it to the public.

This kind of reporting leads to discipline of internal models to manage risk of default and risk of migration. Banks also need to calculate the Value at Risk (VaR) stress using data of at least 12 months. Banks need to start reporting from December, 2011.

CRD III amendments

The Bank of Italy started its consultation on implementation of CRD III from July 2011 to October 2011. Prudential reports will be amended as per the COREP guidelines for CRD III. The amendments will come into effect from December, 2011.

Basel III

The Basel Committee on Banking Supervision (BCBS) developed a comprehensive set of reform measures to strengthen the regulation, supervision and risk management of the banking sector. The major aims of the regulations are to:

• Improve the ability of banks to absorb shocks arising from financial and economic stress
• Improve risk management and governance
• Strengthen transparency and disclosures of banks

The Basel III framework will be implemented from January 1, 2013.

CEBS change over to EBA

The European Banking Authority (EBA) came into effect from 1 January 2011 and took over the responsibilities of Committee of European Banking Supervisors (CEBS). EBA is responsible for safeguarding public values such as stability of the financial system, transparency of markets and financial products, protection of depositors and investors wealth.

Financial Reporting (FINREP)

The aim of FINREP has always been to harmonise the financial reporting within the member states to improve comparability. However after implementation it has become apparent that the large number of national discretions has prevented to reach this goal. With the announced adjusted guidelines, the member states are obliged to apply at least the balance sheet and P&L statement and can choose out of 23 additional templates to apply. However CEBS insists that on all templates that the national regulator adopts, no changes should be made to its meaning or appearance.

Further it asks the member states for a firm commitment that the FINREP reporting will be the only consolidated financial reporting that an individual banking group has to provide to the regulator. Also the scope of consolidation will need to be aligned with the CRD.

Common Reporting (COREP)

In general the adoption of the COREP templates has been more straightforward between the member states than FINREP. However there have been still numerous differences. Here CEBS intends to align this further medium term with clearer definitions and tuning of the COREP templates.

Large Exposures is included in the COREP framework with the revised guidelines. It will be applicable as of 1st of January 2011, but only move into a binding core reporting framework as of 31st December 2012.

Read our data sheet for more information on the Large Exposure Reporting requirements

Concentration risk

Draft guidelines have been published on a revision of the concentration risk reporting. The most notable change is that reporting on concentration risk within an individual risk type (intra-risk) is considered to be insufficient. It pleas for reporting based on risk interaction (inter-risk) and would be related to credit, market, operational and liquidity risks.

Read the comment piece “CEBS pushes forward with reporting harmonisation agenda” for more information on the new requirements and their impact on financial institutions »

CEBS stress testing

Read the comment piece "CEBS stress testing" which looks at the results of the CEBS EU-wide stress testing exercise of July 2010, compares them with the previous US and UK FSA stress testing results, and looks at what the market can glean from them »

Solvency II

Solvency II is a fundamental and wide-ranging review of the capital adequacy regime for the European insurance industry. It represents both a challenge and an opportunity for European insurers. Globally it is scheduled to come into effect by 31 Dec 2012..

The project initiated by European Commission as an advancement to Solvency I is expected to enhance a revised set of EU-wide capital requirements and risk management standards..

The objective of new system is to introduce more sophisticated solvency requirements for insurers, in order to guarantee that they have sufficient capital to withstand adverse events, such as floods, storms or big car accidents..

Currently, EU solvency requirements covers insurance risks, whereas in future insurers would be required to hold capital also against market risk (e.g. a fall in the value of an insurer's investments), credit risk (e.g. when debt obligations are not met) and operational risk (e.g. malpractice or system failure). This will help to increase their financial soundness with implementation of sound economic risk management practices in insurance industry.

With a demand of more streamlined approach towards supervision, the new system would enable insurance groups to be supervised more efficiently, through a 'group supervisor' in the home country that would have specific responsibilities to be exercised in close cooperation with the relevant national supervisors.

The introduction of group supervisors would ensure that group-wide risks are not overlooked and would enable groups to operate more efficiently, while providing policyholders with a high level of protection. Groups that are sufficiently diversified may also be allowed to lower their capital requirements under certain conditions.

The Directive often referred as Basel II for insurers is based on a three pillar approach which is similar to the banking sector (Basle II) but adapted for insurance.

The new provisions of Solvency II will be adopted under the Lamfalussy process:

Level 1 – Solvency II directive includes overall framework principles developed by European Commission approved by European Parliament and European Council.

Level 2 –Includes introduction to implementation measures developed by European Commission and approved by European Insurance and Occupational Pensions Committee (EIOPC)

Level 3 –Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) will guide European Commission to enhance supervisory standards.

Level 4 –European Commission will finally monitor, Compile and enforce the regulation regime.

Maximum harmonization is assumed with the new Solvency II framework Directive. This means the European rules will be implemented all countries of the European Economic Area (i.e. the EU plus Iceland, Liechtenstein and Norway). The European Union’s Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has recommended to the European Commission that Bermuda, Switzerland and Japan will be the first countries assessed for equivalence with EU insurance regulations under Solvency II.

Thus the new solvency II requirements with challenges and opportunities ahead will be more risk-sensitive and more sophisticated than in the past, thus enabling a better coverage of the real risks run by any particular insurer.