Presentazione di PowerPoint

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IFRS and Basel 2 the Italian experience
Luca Giannini, ABI - Italian Banking Association
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Agenda

• IAS/IFRS and Basel 2 general context
• 2. ABI IAS Project and Basel Project
• 3. The adoption of IAS/IFRS and Basel 2 in
  Italy
• IAS/IFRS impacts
• 5. Conclusions

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1. IAS/IFRS and Basel 2 general context

• different objective
• - Basel Stability of the banking sector
• - IAS/IFRS Performance report to shareholders
  on current period through to reporting
  date
• different effective date
• - Basel from 2007
• - IAS/IFRS from 2005

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1. IAS/IFRS and Basel 2 general context
IAS/IFRS
European Commission (EC) Communication entitled
"The EU's Financial Reporting Strategy The way
forward
European quoted enterprises apply IAS/IFRS in
their Consolidated Financial Statements
EC adopts IAS/IFRS exiting (endorsement
mechanism)
IAS Regulation (EC)1606/2002
Lisbon European Council March 2000
2000
2003
2002
2004
2005
2006
March
June
July
August
June
November
June
January
The Accord Implementation Group (AIG) developed
a set of principles for enhancing the efficiency
of the approval process for international banking
groups
The Basel Committee issued an updated version
of the framework

• The Basel Committee issued a comprehensive
  version of the Basel II Framework, solely as a
  matter of convenience to readers
• The European Commission published the Capital
  Requirements Directives (Directive 2006/48/EC and
  Directive 2006/49/EC)

The Basel Committee published the International
Convergence of Capital Measurements and Capital
Standards A Revised Framework Basel II
Basel 2
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2. ABI IAS Project and Basel Project
ABI Basel 2 activities
In order to deal with the transposition of the
Basel 2 framework, from 2001 ABI set out 5
working groups and 5 sub-working groups,
involving more than 250 banking experts in more
than 60 meetings.
The work done enabled ABI to

• join more than 30 meeting at EBF level
• send 16 Position Papers to the European
  Commission, the Basel Committee and the Bank of
  Italy
• propose 34 amendments to the CRD (7 by the means
  of Italian parliamentary)
• organize training courses with almost 500
  participants from 140 companies
• organize more than 100 seminars with more than
  3500 participants
• issue a guideline on the PD and LGD estimation
• create a national database for the operational
  losses (DIPO)

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2. ABI IAS Project and Basel Project
IAS ABI Project
In the 2002, ABI started a Project in order to
Influence and manage the introduction of the
IAS/IFRS in the Italian legislation Influence
and manage the interpretation of the IAS/IFRS in
the Italian context Promote the adoption of the
IAS/IFRS Support the Italian Banking Sector in
the implementation of the IAS/IFRS
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2. ABI IAS Project and Basel Project
IAS ABI Project
The Structure of IAS Project a) Steering
Committee b) Project Manager c) Planning
Manager d) Working Groups
Steering Committee is composed of
representatives of ABI, banks and Universities.
Its committed to govern the Project and is
supported to achieve his aims by working groups.

• On January 2004, working groups were composed of
  
• 148 banking experts, from 42 banks of 26 banking
  groups
• 21 auditing experts from the big auditing firms.
  
• There were 8 working groups and 23 operating
  units.

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2. ABI IAS Project and Basel Project
IAS Project ABI activities

• In order to deal with the application of
  IAS/IFRS, from 2002 the work done enabled ABI to
• send 33 Position Papers to the European
  Commission, IASB, EFRAG, Basel Committee on
  Banking Supervision, Bank of Italy, National
  Standard Setter
• join more than 45 meetings at European and
  International level (EBF Accounting Working Group
  and IBFED Accounting Working Group)
• join more than 180 meetings at National level.

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2. ABI IAS Project and Basel Project
IAS ABI Project
IAS Projects outputs for ABI associates

• Conventions (7)
• Seminar and Training courses(45)
• IAS ABI BlueBook (39)
• Soluzioni IAS ABI (36).

Other subjects interested to IAS Projects
outputs

• Ministry of Finance
• Universities
• National Standard Setter
• Other Lobbying Associations.

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3. The adoption of IAS/IFRS and Basel 2 in Italy
IAS/IFRS

• Adjustment of the accounting directives to the
  IAS/ IFRS
• - Directive 2001/65/EC of 27.9.2001 amending
  Directives 78/660/EEC, 83/349/EEC and 86/635/EEC
  partially adopted with Legislative Decree 30th
  December 2003, n.394

• IAS Regulation (EC)1606/2002 Legislative Decree
  28th February 2005, n.38 (IAS Decree)

• Adjustment of the accounting directives to the
  IAS/ IFRS
• - Directive 2003/51/EC (amending Directives
  78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC
  on the annual and consolidated accounts)
  Enforced only for obligatory parts (Legislative
  Decree 2nd February 2007, n.32)

Basel 2

• New regulations for the prudential supervision of
  banks Bank of Italy Circular n. 263 of 27
  December 2006

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3. The adoption of IAS/IFRS and Basel 2 in Italy
Basel 2 adoption 2007
The CRD regulations take effect as from 1 January
2007. However, the CRD allows banks and banking
groups to continue to observe the previous
supervisory rules until 1 January 2008 (CRD
Transitional provisions, Article 152). Such
Transitional provisions intend to permit each
intermediary to gradually implement the advanced
methodologies and processes. Exception CRD
Transitional provisions exclude the rules on the
calculation of the supervisory capital. As a
result, Bank of Italy stated that the new
provisions regarding supervisory capital shall be
applicable immediately.
Most of the Italians banks decided to continue to
observe the previous supervisory rules until 1
January 2008.
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3. The adoption of IAS/IFRS and Basel 2 in Italy
Basel 2 adoption 2008 onwards
Banks my choose between a number of methods to
calculate the capital requirements for the risks
ruled in the CRD
Credit risk
Banks may choose between two methodologies for
calculating their capital requirement 1. the
standardized approach, which is a development of
the system established in the 1988 Capital
Accord, and 2. the IRB approach. Under the IRB,
the sensitivity of the standardized approach is
enhanced by means of increased segmentation of
exposures and the use of ratings issued by export
credit agencies (ECAs) or specialized external
credit assessment institutions (ECAIs) recognised
for this purpose by the supervisory authorities.
It creates a more favourable regulatory treatment
of retail exposures, which captures the effective
risk of this portfolio. The new framework also
establishes comprehensive rules governing credit
risk mitigation (CRM) and securitizations.
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3. The adoption of IAS/IFRS and Basel 2 in Italy
Basel 2 adoption 2008 onwards
Market risk

• The capital requirement can be calculated using
• a standardised approach or
• an internal models approach, subject to
  compliance with organizational and quantitative
  requirements and authorization by the supervisory
  authorities.

The most significant changes regard the
establishment of specific organizational
requirements for the supervisory of the trading
book.
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3. The adoption of IAS/IFRS and Basel 2 in Italy
Basel 2 adoption 2008 onwards
Operational risk

• The CRD envisages three methods for calculating
  the requirements
• Basic Indicator Approach (BIA). The requirement
  is calculated by multiplying an indicator of a
  bank's volume of business, gross income, by a
  specified factor.
• Standardized Approach. A regulatory factor is
  applied for each of eight lines of business.
• Advanced Measurement Approach (AMA). The amount
  of the requirement is determined using models
  based on operational loss data and other
  information gathered and processed by the bank.

Banks have to fulfill determined thresholds and a
range of qualifying criteria in order to adopt
the Standardized and Advanced Measurement
Approaches.
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3. The adoption of IAS/IFRS and Basel 2 in Italy
IAS/IFRS adoption
The IAS Regulation (EC)1606/2002
The IAS Regulation require European companies
listed in an EU securities market to prepare
their consolidated financial statements in
accordance with IFRSs starting with financial
statements for financial year 2005.
Options

• Require or permit IFRSs for unlisted companies
• Require or permit IFRSs in parent company
  (unconsolidated) financial statements
• Permit companies whose only listed securities are
  debt securities to delay IFRS adoption until 2007

The European IAS regulation applies not only to
the 27 EU Member States but also to the three
members of the European Economic Area (EEA)
Iceland, Liechtenstein, and Norway
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3. The adoption of IAS/IFRS and Basel 2 in Italy
IAS/IFRS adoption
The use of options in the IAS Regulation in Italy
(Legislative Decree 28th February 2005, n.38)
Consolidated financial statements
Listed companies, issuers of financial
instruments widely distributed among the public,
banks, stock broking companies, fund management
companies, regulated financial institutions
IFRSs compulsory from 2005
Individual financial statements
IFRSs optional from 2005 IFRSs compulsory from
2006
Consolidated financial statements
IFRSs compulsory from 2005

Insurance companies
IFRSs not permitted in 2005 IFRSs compulsory
from 2006 only for listed companies that do not
prepare consolidated financial statements
Individual financial statements
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3. The adoption of IAS/IFRS and Basel 2 in Italy
IAS/IFRS adoption
The use of options in the IAS Regulation in Italy
(Legislative Decree 28th February 2005, n.38)
Consolidated financial statements
IFRSs optional from 2005
Subsidiary and associated companies of the above
companies, and other companies that prepare
consolidated financial statements
Individual financial statements
IFRSs optional from 2005

Small Companies preparing financial statements in
abbreviated form
Financial statements
IFRSs not permitted
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3. The adoption of IAS/IFRS and Basel 2 in Italy
IAS/IFRS adoption
The use of options in the IAS Regulation in Italy
(Legislative Decree 28th February 2005, n.38)
Main drivers

• Technical forms of the accounts of banks and
  companies in the financial sector
• Limits to the earnings distribution
• Income taxes are based on reported accounting
  profit also for companies applying IAS/IFRS
• Principle of neutrality

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3. The adoption of IAS/IFRS and Basel 2 in Italy
IAS/IFRS adoption 2007 onwards

• IAS 39 to resolve the carved-out endorsement
• Consistent application of the IAS/IFRS in Europe
• Convergence projects of the IAS/IFRS to US GAAP

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3. The adoption of IAS/IFRS and Basel 2 in Italy
The different functions of the banking financial
statement

• Tool for supervisory information
• 2 Starting point for prudential supervisory
  requirements
• 3. Tool for market disclosure (Pillar 3)

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3. The adoption of IAS/IFRS and Basel 2 in Italy
The different functions of the banking financial
statement

• The Circular n. 262 issued by the Bank of Italy
  on December 22, 2005 on the financial statements,
  emanated in line with IAS Decree, has the
  objective
• to confer to the national regulation a character
  of best practice
• to allow the connection with the activities of
  the Financial Reporting (FINREP)
• to match with the prudential supervision
• to consider the national peculiarities and a
  level playing field.

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4. IAS/IFRS impacts
Regulatory Capital

• The new rules introduced by IAS/IFRS could affect
  the amount, the quality and volatility of banks
  capital.

• Bank of Italy has established specific
  provisions ("prudential filters") to safeguard
  the quality of supervisory capital and attenuate
  the potential volatility associated with the
  adoption of the international accounting
  standards (IFRS/IAS).

These "prudential filters are in line with
guidelines of the Basel Committee and of the CEBS
(Committee of European Banking Supervisors).

• In Italy the "prudential filters are applied
• a) Banking groups, from 31st December 2005
• b) Banks, from 30th June 2006.

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4. IAS/IFRS impacts
Regulatory Capital

• GENERAL PRINCIPLES
• The general structure of the supervisory
  capital doesnt change (e.g. T2 lt 100 of the
  T1).
• Nevertheless
• some capital components come less (for example
  allowances for possible loan losses and general
  banking risk)
• other components are included (for example
  reserves of the financial assets available for
  sale).

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4. IAS/IFRS impacts
Regulatory Capital

• SPECIFIC PRINCIPLE
• financial assets held for trading (HFT)
• fair value option (FVO)
• financial assets available for sale (AFS)
  specific treatment for the loans classified in
  this category
• hedges
• property, plant and equipment and investment
  property.

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4. IAS/IFRS impacts
First Time Adoption (FTA)

• The general rule for the transition to IAS
  (IFRS1, First-time Adoption of International
  Financial Reporting Standards) requires companies
  to proceeds, at the transition date, with the
  restatement of their balance sheets - prepared
  under national accounting standards in
  accordance with IAS/IFRS rules.

• All the adjustments are recognized directly in
  the shareholders equity and not in the profits
  loss accounts.

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4. IAS/IFRS impacts
Main IAS/IFRS impacts of First Time Adoption

• Loans
• Securitisation
• General banking reserve and general provisions
• Goodwill amortisation
• Investment property

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4. IAS/IFRS impacts
Loan Loss provisioning IAS/IFRS vs. Basel 2
Basel 2 rules are finalized to calculate the
capital adequacy through the capital charges.
IAS/IFRS rules are oriented to show the financial
performance based on the economic results.
IAS/IFRS vs Basel 2 Main convergences

• i) The concept of impairment IAS 39 is
  substantially equal to the concept of default
  Basel
• Basel the obligor being 90 days past due on the
  obligation and
• IAS/IFRS objective evidence of impairment
  connected to the missed payment.

ii) For the collective measurement of performing
loans can be used the new supervisory
requirements, i.e., the probability of default
(PD) and loss given default (LGD).
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4. IAS/IFRS impacts
Loan Loss provisioning IAS/IFRS vs. Basel 2
IAS/IFRS vs Basel 2 Main differences

• Time - horizon one year for Basel and residual
  maturity for IAS/IFRS.
• ii) The different concept of loss expected loss
  for Basel and incurred loss for IAS/IFRS.
• iii) IAS/IFRS dont require a validation of the
  internal process to assess from the Bank of Italy.

Convergence of Basel II and IAS/IFRS is desirable
because would reduce costs for banks and would
improve the quality of financial statement.
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5. Conclusions
The definition of new and international rules in
the accounting and supervisory field is an
occasion for each European country to put in
place a revolution to improve the accountability,
the competition and the efficiency of the
financial intermediaries. Such a goal could be
achieved putting in place a legislative framework
that enable banks to 1. prepare financial
statement 2. calculate the capital requirements
3. calculate the taxable income 4. prepare the
internal report for management purposes using
a single set of data
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5. Conclusions

• The starting point should be the accounting data
  determined using the IAS/IFRS, on solo and
  consolidated level.
• Then, a bank should be able to fulfill all the
  obligation related to the supervisory rules
  (COREP and FINREP) using the accounting data
  corrected using the prudential filter set out by
  the supervisory authority on the basis of the
  work done at CEBS.
• Finally, the accounting data should be the basis
  for the computation of the taxable income. In
  fact, international practices have developed
  several rules that permits to derive the taxable
  income for corporate income tax purposes from the
  financial accounting.