CRIF among the speakers at the “Credit supervision and regulation: what's next?” event

CRIF had the pleasure of taking part in the panel of speakers, with the valuable contributions of Adam Farkas, Executive Director of the European Banking Authority (EBA), alongside Giovan Battista Sala (Head of Banking Group Division 1 of the Bank of Italy) and Francesco Masala (Head of the Research Service, ABI) as well as Marco Macellari (Senior Manager, Management Consulting & Solutions, CRIF).

It fell to Andrea Resti, professor at Bocconi University, to open the proceedings, raising two issues at the center of the current regulatory debate: the consistency of IRB models and flexibility in NPL management.

On the first point, Adam Farkas presented the results of the benchmarking exercise carried out on the LDP (Low Default Portfolio) published last month, which are in line with the previous results:

  • on average a higher level of Global Charge and RWs (36% compared to 33%)
  • a similar and significant spread between banks
  • the same factors (default definition, geographical position and portfolio type) explain the 61% variability, while the remaining 39% is due to the underlying credit risk, model assumptions and bank practices

In summary, the latest benchmarking exercise does not show any significant improvement, and the variability level of the sample remains stable. These results confirm the weakness in IRB models which has emerged over recent years, in part related to irregularities in the calculation of capital requirements due to “non-risk based” factors. Changes to the regulatory framework contained in the recently issued document “Basel III: finalising post-crisis reforms” (December 2017) go towards mitigating these anomalies.

In relation to NPLs, after presenting the main market trends on an Italian and European level, Giovan Battista Sala focused his presentation on the expectations of change for a reduction in NPLs with regard to strategies, organizational structure, processes and guarantee assessment.

According to Francesco Masala, if on the one hand a rapid reduction in NPL levels is desirable, on the other hand it is necessary to take into consideration the impacts that this reduction could have on economic growth and on the credit market. In this regard, the ABI has conducted a study on the impact of a sharp reduction in NPL stock, assuming transfer at a price of 20% of the value: the results show a contained impact in terms of credit and GDP variation compared to a significant reduction in the ROE of banks. In redesigning the regulatory framework of the banking system, it will therefore be critical to assess the trade-off between stability of the banking system, profitability of the banks, and economic growth.

To close, Marco Macellari presented the results of a case study on the economic impacts of the adjustment to Calendar Provisioning in the current prudential supervision framework combined with the adoption of the new accounting framework, IFRS9. The study, based on a sample of 100 Italian banks, analyzes the effects of regulatory interaction on regulatory capital, and estimates the impacts in terms of provisioning. The study also suggests potential mitigation strategies both in terms of the model and the credit process; strategies whose effects could be strengthened by leveraging the information assets that CRIF makes available to its partners.

Download the event proceedings:
https://www.thecreditriskclub.com/en/