Basel 3: the impact of the new rules on Italian banks and businesses

Basel 3: the impact of the new rules on Italian banks and businesses

In drawing the Basel 3 rules, two needs have been balanced: on one hand, to ensure rigorous reform, capable of promoting a more stable financial system; on the other hand, to minimise the potential negative repercussions of the reform on economic growth, especially in a still uncertain recovery stage, such as the current one.
The finalisation of the new prudential framework was therefore accompanied by in-depth analyses aimed at estimating the possible impact of the reform on both banks and on economic growth.
The effect on the intermediaries of major countries was estimated through a detailed quantitative impact study (QIS) conducted with reference to December 2009 and using data on a consolidated basis provided by a large sample of intermediaries; the Bank of Italy participated in the survey involving a large number of intermediaries, which represents approximately 75% of the total assets of the banking system.


If the reform had already been fully implemented at the end of 2009, the Italian banking groups participating in the year would have recorded primary quality capital requirements to reach the 7% level (equivalent to a CET1 minimum requirement of 4.5% and a capital conservation buffer of 2.5%) of €47BLN. Part of these potential requirements connected to the presence of tools currently computable in the assets and which will no longer be used with Basel 3: the long transition period will allow their physiological replacement.
The estimate does not take into account the asset disposal actions already carried out, nor the profits achieved in 2010; furthermore, it does not incorporate any estimates regarding the contribution that future income will be able to provide to the capital strengthening or take into account the business strategies that banks can adopt to adapt to the new regulation. In the average of the last three years (2007-2009), a not particularly favourable period from an income point of view, Italian banks which have
took part in the QIS have nevertheless produced profits equal, on average, to €14.5BLN per year. The same simulation carried out on the data referring to June 2010 - which considers the capital strengthening already achieved by some banking groups - shows a contraction of the total requirements to €40BLN. Overall, according to preliminary calculations carried out by the Bank of Italy that also consider estimates of future income capacity, Italian banks will be able to move towards higher levels of assets gradually and continuing to ensure the necessary support to businesses.
On the liquidity front, the weekly monitoring activated by the Bank of Italy before September 2008, has allowed to improve the conditions of Italian banks that, on average, will not have to put in place any significant adjustment in the composition by maturity; however, they will have to continue the process
of strengthening stocks of readily liquid assets.
The reform does not disadvantage Italian banks. Of course, they already started before the crisis with lower levels of capitalisation in an international comparison, but their assets are of an average high quality, thanks also to more restrictive criteria imposed by the Bank of Italy. The most significant impact of the reform comes from the deduction of advance tax assets, generated by the very restrictive limits imposed by our fiscal regime on write-downs and loan losses. It will be necessary to work on national regulatory solutions consistent with Basel rules, which will enable us to find a solution to this problem.
The traditional bank model is not penalised, because the tightening of the requirements is particularly severe for securities and derivatives trading. The requirement on market risks has been raised significantly; the revision of the rules on counterparty risk involves a significant increase in risk-weighted assets; the introduction of the leverage ratio, which also includes off-balance sheet assets, is particularly relevant for investment banks, which traditionally work with higher leverage.
The impact on economic growth deriving from the entry into force of the new regulation would overall be positive, taking into account both the adjustment costs and the costs and benefits fully implemented. The analyses conducted by the Basel Committee show that, in the phase of entry into the reform regime, the highest capital requirements would result in a contraction of GDP that would reach a maximum of 0.22% shortly after 2018 (the year of fully operational entry). This estimate, which takes into account both the new minimum requirements and the capital conservation buffer, corresponds to an annual GDP growth rate of 0.03 percentage points lower than what would have occurred in the absence of the reform. Eventually, however, the benefits in terms of reducing the likelihood of systemic crises would far outweigh the costs.
With specific reference to our country, it is difficult today to assess the effects on companies and if these can have diversified consequences on the different sectors of the economy. In principle, the impact of the reform could weigh more on companies that rely more on bank credit and particularly on SMEs, which have a more fragile financial structure. However, the reform confirms the Basel 2 mechanisms designed to hold the capital absorption associated with loans to SMEs. For companies with a turnover of less than €50MLN, the reduction in terms of requirements, calculated with the internal models, gets, at the same risk, up to 20%. Benefits in terms of reducing the likelihood of systemic crises would far outweigh the costs.
With specific reference to our country, it is difficult today to assess the effects on companies and if these can have diversified consequences on the different sectors of the economy. In principle, the impact of the reform could weigh more on companies that rely more on bank credit and particularly on SMEs, which have a more fragile financial structure. However, the reform confirms the Basel 2 mechanisms designed to hold the capital absorption associated with loans to SMEs. For companies with a turnover of less than €50MLN, the reduction in terms of requirements, calculated with the internal models, gets, at the same risk, up to 20%. Benefits in terms of reducing the likelihood of systemic crises would far outweigh the costs.


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