Financial Stability Report - Financial Risk and Stability Network

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action undertaken by the Bank of Italy regarding the quality of bank assets with a view to checking
the adequacy of coverage ratios (see the box “e recent check on the quality of Italian banks’
assets”). A recent Bank of Italy supervisory communication on the occasion of the approval of the
nancial statements for 2012 reminded banks of the importance of having their provisions reect
the present and prospective performance of the economy. 3 To minimize possible procyclical eects,
banks were asked to increase internally generated funds by curbing costs and adopting dividend
distribution policies consistent with their own solvency condition and operating performance. e
criteria for director and executive compensation must also be compatible with the objective of
bolstering banks’ soundness.
e strengthening of the banks at which the Bank of Italy’s supervisory action aims is essential to
maintain a high level of investor condence, attract outside nancing and ensure an adequate ow of
credit to households and rms.
3 e communication of 13 March 2013 is published in Bollettino di Vigilanza, No. 3, 2013, available on the Bank of Italy’s website.
THE RECENT CHECK ON THE QUALITY OF ITALIAN BANKS’ ASSETS
e recession is imposing high credit risk on banks. The Bank of Italy is conducting an assessment
of the adequacy of provisioning by an ample set of large and medium-sized banking groups.
Where necessary, the Bank requires corrective action to be taken.
Initially, in 2012 the checks were conducted off-site, using statistical methodologies to identify
banks whose loss provisions were deemed unsatisfactory. For each banking group, homogeneous
portfolios – in terms of the type of impairment (bad debts, substandard loans, restructured
loans), collateral and the borrower’s sector of activity – were assessed. For each portfolio,
where significant divergence between the effective coverage ratio and the system-wide average
was found, additional capital buffers were required under Basel pillar 2. These requirements
helped to determine the specific target or minimum trigger capital ratio for each of the groups
considered.
Last autumn the Bank of Italy also undertook a programme of inspection of 20 large and
medium-sized banking groups, selected on the basis of coverage ratios and the results of
statistical analysis. The inspections assess the banks’ policies for coping with the increase in
non-performing loans, their internal procedures for calculating loan loss provisions, and the
adequacy of these provisions. The inspections will be completed by the middle of this year.
For each intermediary, two samples of impaired loans were inspected. A first set of nonperforming
exposures, called the targeted sample (accounting on average for 20 per cent of bad
debts, 30 per cent of substandard loans and 50 per cent of restructured loans), was examined
in detail by the Bank’s inspectors. A second sample, called statistical, representative of the bad
debt portfolio and accounting on average for 15 per cent of the total, was analysed by each
bank’s internal audit, subject to subsequent verification by the inspection team. Overall, the
checks covered about 80 per cent of the banking system’s bad debts plus a significant share of
substandard and restructured loans.
The results of the inspections were partly incorporated in the banks’ balance sheets for 2012.
Intermediaries were also asked to prepare measures for continuous checking of the adequacy of
their coverage ratios. As regards the bad debts within the targeted sample analysed directly by the
inspectors, the adjustment of loss provisions has produced a signicant increase in the coverage
ratio.
Financial Stability Report No. 5, April 2013 BANCA D’ITALIA