FINANCIAL SYSTEM

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Bank of Italy

The Bank of Italy is the central bank of Italy and part of the European central banking system since 1998. It is a public institution, as established by the banking law of 1936 and by the ruling of the Supreme Court of Cassation which states that the Bank of Italy “is not an institution for the private sector, but a public entity indicated by Article 20 of the Royal Decree of March, 12th 1936, number 375”.

The property can be divided among private subjects, while the management, along with its duties and powers must be publicly oriented and organized.

The Bank of Italy follows different regulations, bestowing votes to the members, which are not proportional to the owned shares. A detailed list of the members can be found on the Bank of Italy website. As the vote is free from any link with the held capital, the casting is fair and equal among the members, thus the decisions are not concentrated nor fragmented. The Bank pursues activities and projects of public welfare and determines the binding measures to which all the banks in the Italian system must obey. Furthermore, it controls and monitors the regulations about money demand to preserve the national economic interest, which can be different from one member to the other.

This juridical status of the Bank of Italy excludes the possibility of bankruptcy, a condition that was shared by the rest of Italian banks until 2015. In order to guarantee the independence of the Bank from the political sphere, bonds are held only by banks, insurance companies and public economic institutions. Nevertheless, it is easy to notice how conflicts of interest may rise between the “controller” and the “controlled” as some of the banks supervised by the Bank of Italy coincide with its own members.

The headquarters are in Rome, while branches are present nationwide.

CONSOB

The National Commission for Listed Companies and Stock Exchange (Commissione Nazionale per le Società e la Borsa “CONSOB”) is an independent and administrative authority, with juridical powers and autonomy, created with the law number 216/74. Its activity is dedicated to the protection of investors, to efficiency, transparency and development of the Italian real estate market.

Before its establishment, these duties were pursued by the Treasury, a Ministry belonging to the executive power of the State. CONSOB headquarters are in Rome, with a secondary branch in Milan.

Its duties focus on preserving and guaranteeing savings, through a strict control of financial products, mediators and markets, in accordance with the legislative decree number 58/98 that assigns several powers to CONSOB in the matters of regulations, authorization, vigilance and sanctions.

The Commission is composed by the president (currently Giuseppe Vegas), and four commissioners, nominated by the President of the Republic, on suggestion of the President of the Council, after the approval of the Council of Ministers.

European Central Bank

The European Central Bank (ECB) is an EU institution, crucial for the Eurosystem and the single supervisory mechanism. Its primary function is guaranteeing price stability, therefore protecting the value of euro as the single currency. In the single supervisory mechanism, the ECB also focuses on the prudential supervision for all credit institutions that belong to the Eurozone, therefore contributing to the security and solidity of the EU and every member’s banking and financial system.

Established on June 1st, 1998 with the Treaty of the European Union and the “Statute of the European Central Banks System and the European Central Bank”, it has become operational from January 1st, 1999 in order to gather the functions of monetary policy and foreign exchange rates from the eleven members’ national central banks. In this occasion, the exchange rates towards the single currency were firmly established and the ECB finally had full responsibility of the monetary policy for the Eurozone, which is the second largest economy after US.

Gradually, other members have joined: Greece in 2001, Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015. The creation of the Eurozone and the ECB has contributed to start and implement the complex path towards European integration.

In order to join the single market, all these Countries had to satisfy specific criteria for communitarian ideals which must be uphold by those who want to use the single currency.

EBA

The European Banking Authority (EBA) monitors the banking sector at the European and international level from its headquarters in London, UK. The EBA has replaced the Committee of European Banking Supervisors, established in 2001, aiming to match the financial supervision with the future parameters following the creation of the euro.

Established in 2011 after the financial crisis of 2007, the European Banking Authority, along with the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), has contributed to implement a new European financial monitoring system, the European System of Financial Supervisors (ESFS), in Frankfurt, Germany.

The EBA consists in different powers:

  • The Board of Supervisors is the main decision-making body;
  • The Management Board ensures support, work programme and annual budget;
  • The Chairperson prepares the necessary work and leads Board’s meetings;
  • The Executive Director is responsible for the management of the annual work programme.

Basel Committee on Banking Supervision

The Basel Committee on Banking Supervision provides a consulting body at the international level, established in 1974 by G10 members’ central banks. Its mission is to define guidelines for the Community in order to preserve a consistent banking monitor and guarantee better stability for the financial system through an agreement for an adequate capital of the banks, signed at Basel in 2004.

According to this agreement, all the banks within the Members’ borders must hold a certain amount of capital against financial troubles and risks, established by the rating system. The Basel Committee does not have legislative power, but it can present suggestions that must be readily implemented by the single national institutions.

The communitarian spirit aims to reach several Central Banks, to homogenise its norms within the European economic and financial system. Since the first agreement about minimum capital requirements for banks in 1988, made to limit their “aggressive” policies and freedom in various unregulated sectors, the supervision process has gradually developed into the creation of a first consultation document.

This agreement, in effect as January 2007, consists in three “pillars”:

  1. Minimum Capital Requirements

The first pillar revises the criteria for the evaluation of minimum capital requirements: it changes the former rule, that required this capital to be a minimum of 8% of the total credits to the customers, and makes this requirement more sensible to credit risks, using the rating assigned to the Credit Departments. It later considered the operational risk in the general evaluation.

With the help and collaboration of different operators in the sector, the Basel Committee has defined seven principal reasons for operational risks:

  • Internal fraud: for example, corruption of data, disappearance of assets and valuables, operations based on inside information;
  • External fraud: for example, theft, counterfeiting, forgery, issuing empty checks, software piracy;
  • Employment practices and safety on the workplace: for example, compensation requested by employees, violations of rules for the safety of the personnel, activities of the trade union, discriminatory practices, civil responsibility, harassment;
  • Problems related to customers, financial products and activities: for example, abuse or violation of confidentiality clauses, inappropriate transactions made on behalf of the bank, money-laundering, sale of unauthorized financial products or other products that have flaws in the matters of remuneration and repayments of a loan;
  • Damage to physical assets: for example, due to acts of terrorism or vandalism, earthquake, fires, floods;
  • Technical failures or malfunctions: for example, software and infrastructure failures, telecommunication problems, interruption of utilities;
  • Executive and procedural compliance: for example, wrong data entries, inadequate management of guarantees, incomplete legal documentation, unauthorized access to customers’ accounts, non-fulfilment of extra-consumer counterparts, legal controversies with suppliers, wrong entries during conciliatory activities.
  1. Supervisory Review

With increased duties and powers, regulators must verify the compliance of credit institutions regarding internal policies and governmental procedures against risks.

  1. Market and Transparency Discipline

This pillar improves the former obligations of credit institutions by supplying information to the market, in order to allow the public to verify the condition of risks and capitalisation in a clear and transparent way. Following the financial crisis that hit important credit institutions, a new version of the agreement was issued under the name of Basel III. On September 12, 2010, governors and supervision authorities of the G20 approved the new accords, that have been submitted to the governments involved, on November 2010 in Seoul, South Korea.

Banks have carefully reviewed the new regulations: the latter will be implemented gradually to ensure a serene period of transition and productive recovery, while avoiding any slowdown of the banking activities.

The full transition will be completed before 2019.

The goal is to prevent an excessive assumption of risks by the operators, and to improve the stability and solidity of the financial system, establishing a more homogeneous framework.

The measures, solely regarding financial intermediaries, can be summarized with the following aspects:

  • Introduction of a minimum liquidity standard;
  • Definition of regulatory capital with higher capital requirements. Holding an adequate level and quality of capital allows banks to sustain possible losses and to guarantee better opportunities for growth and support families and business in difficult times;
  • Improved cover against market and counterparty risks;
  • Control of the level of leverage. A minimum required amount of capital (Tier 1), which banks must hold compared with its total assets, was established through careful consideration of bank activities (on- and off-balance sheet), neutrally to the different accounting rules;
  • Counter-cyclical measures guarantee pro-cyclicality and regulatory stability. During periods of economic growth, risk levels are quite low, facilitating aggregate credit growth. On the other hand, periods of crisis tend to increase risks of default, thus obliging banks to hold back credit emissions in order to maintain the same ratio of exposure to risk to capital, and further burdening the unfavourable economic trends.

In comparison with the former agreements in 1998 and 2008, the new accord, that rises from an unsure economic context, increases the capital that credit institutions have to hold for security. Banks have to sustain an increase in costs that inevitably rises commission costs for customers and spread on bank loans. Companies will be submitted to stricter evaluation and attention when they ask for a loan.

Rating’s company evaluation will be influenced by two decisions: the amount of a loan, its costs and conditions.

The first agreement was too focused on a simplified vision of banking activities and risks for companies, therefore the stability of the banking sector, pivot of the global economy, is now its main concern.

The logic of the new accord prevents the bank to assume excessive risks and it guarantees a better protection from the present risks with improved mitigation. The new relation is based on reciprocal trust between banks and business, with real, updated information, linked to the effective capability of producing profits for the company in the long and short-run. The Italian economic system deeply needs an improved interconnection and trasversality among banks, companies and consumers, in order to increase its potential.

On the other hand, companies should adopt similar procedures, aiming to define their own security parameters: in case of systemic crisis, the company would definitely be more solid.

The Bank of Italy has proposed a consultation document regarding the phase-in of the “Capital Conservation Buffer (CCB)”, which aligns its regulations to the parameters of the Union. Once implemented, the CCB is gradually introduced at 125bps in 2017, 187,5bps in 2018 and 250bps in 2019, thus increasing the margins to the MDA in 2017 by 125bps.

 

Excerpt from the Glossary “Parole di Economia e Finanza” © Global Thinking Foundation 2016