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IFRS and Basel 2: the Italian experience1
1Luca Giannini ABI - Italian Banking Association
Luca Giannini,Luca Giannini,ABI - Italian Banking ABI - Italian Banking AssociationAssociation
IFRS and Basel 2: the Italian experience
IFRS and Basel 2: the Italian experience2
2Luca Giannini ABI - Italian Banking Association
Agenda
1. 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
4. IAS/IFRS impacts
5. Conclusions
IFRS and Basel 2: the Italian experience3
3Luca Giannini ABI - Italian Banking Association
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
IFRS and Basel 2: the Italian experience4
4Luca Giannini ABI - Italian Banking Association
Lisbon European Council March 2000
European Commission (EC) Communication entitled "The EU's Financial Reporting Strategy: The way forward“
IAS Regulation (EC)1606/2002
EC adopts IAS/IFRS exiting (“endorsement” mechanism”)
European quoted enterprises apply IAS/IFRS in their Consolidated Financial Statements
March June July
IAS/IFRS
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 published the “International Convergence of Capital Measurements and Capital Standards: A Revised Framework Basel II”
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)
Basel 2
2000 20032002 2004
August June
2005
November June
2006
January
1. IAS/IFRS and Basel 2: general context
IFRS and Basel 2: the Italian experience5
5Luca Giannini ABI - Italian Banking Association
ABI Basel 2 activities
2. ABI: IAS Project and Basel Project
• 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)
The work done enabled ABI to:
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.
IFRS and Basel 2: the Italian experience6
6Luca Giannini ABI - Italian Banking Association
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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22
33
44
In the 2002, ABI started a Project in order to:
2. ABI: IAS Project and Basel Project
IAS ABI Project
IFRS and Basel 2: the Italian experience7
7Luca Giannini ABI - Italian Banking Association
The Structure of IAS Projecta) Steering Committeeb) Project Managerc) Planning Managerd) Working Groups
Steering Committee is composed of representatives of ABI, banks and Universities. It’s 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.
2. ABI: IAS Project and Basel Project
IAS ABI Project
IFRS and Basel 2: the Italian experience8
8Luca Giannini ABI - Italian Banking Association
IAS Project: ABI activities
2. ABI: IAS Project and Basel Project
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.
IFRS and Basel 2: the Italian experience9
9Luca Giannini ABI - Italian Banking Association
• Conventions (7); • Seminar and Training courses(45);• IAS ABI BlueBook (39);• “Soluzioni IAS ABI” (36).
IAS Project’s outputs for ABI associates:
Other subjects interested to IAS Project’s outputs:
• Ministry of Finance; • Universities;• National Standard Setter;• Other Lobbying Associations.
IAS ABI Project
2. ABI: IAS Project and Basel Project
IFRS and Basel 2: the Italian experience10
10Luca Giannini ABI - Italian Banking Association
• IAS Regulation (EC)1606/2002: Legislative Decree 28th February 2005, n.38 (IAS Decree)
IAS/IFRSIAS/IFRS
Basel 2Basel 2
• New regulations for the prudential supervision of banks: Bank of Italy Circular n. 263 of 27 December 2006
• 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
• 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)
3. The adoption of IAS/IFRS and Basel 2 in Italy
IFRS and Basel 2: the Italian experience11
11Luca Giannini ABI - Italian Banking Association
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.
3. The adoption of IAS/IFRS and Basel 2 in Italy
IFRS and Basel 2: the Italian experience12
12Luca Giannini ABI - Italian Banking Association
Basel 2 adoption: 2008 onwards
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.
Credit riskCredit risk
Banks my choose between a number of methods to calculate the capital requirements for the risks ruled in the CRD:
3. The adoption of IAS/IFRS and Basel 2 in Italy
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.
IFRS and Basel 2: the Italian experience13
13Luca Giannini ABI - Italian Banking Association
Basel 2 adoption: 2008 onwards
The capital requirement can be calculated using:1. a standardised approach or 2. an internal models approach, subject to compliance with
organizational and quantitative requirements and authorization by the supervisory authorities.
Market riskMarket risk
The most significant changes regard the establishment of specific organizational requirements for the supervisory of the trading book.
3. The adoption of IAS/IFRS and Basel 2 in Italy
IFRS and Basel 2: the Italian experience14
14Luca Giannini ABI - Italian Banking Association
Basel 2 adoption: 2008 onwards
The CRD envisages three methods for calculating the requirements:1. 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.
2. Standardized Approach. A regulatory factor is applied for each of eight lines of business.
3. 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.
Operational riskOperational risk
Banks have to fulfill determined thresholds and a range of qualifying criteria in order to adopt the Standardized and Advanced Measurement Approaches.
3. The adoption of IAS/IFRS and Basel 2 in Italy
IFRS and Basel 2: the Italian experience15
15Luca Giannini ABI - Italian Banking Association
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.
The IAS Regulation (EC)1606/2002
• 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
OptionsOptions
3. The adoption of IAS/IFRS and Basel 2 in Italy
IAS/IFRS adoption
IFRS and Basel 2: the Italian experience16
16Luca Giannini ABI - Italian Banking Association
Listed companies, issuers of financial instruments widely distributed among the public, banks, stock broking companies, fund management companies, regulated financial institutions
Consolidated financial statements
Insurance companies
Individual financial
statements
IFRSs optional from 2005
IFRSs compulsory from 2006
IFRSs compulsory from 2005
The use of options in the IAS Regulation in Italy
(Legislative Decree 28th February 2005, n.38)
Consolidated financial statements
IFRSs not permitted in 2005
IFRSs compulsory from 2006 only for listed companies that do not prepare consolidated financial statements
IFRSs compulsory from 2005
Individual financial
statements
3. The adoption of IAS/IFRS and Basel 2 in Italy
IAS/IFRS adoption
IFRS and Basel 2: the Italian experience17
17Luca Giannini ABI - Italian Banking Association
Subsidiary and associated companies of the above companies, and other companies that prepare consolidated financial statements
Small Companies preparing financial statements in abbreviated form
IFRSs not permitted
Consolidated financial statements
IFRSs optional from 2005
IFRSs optional from 2005
Financial statements
Individual financial
statements
3. The adoption of IAS/IFRS and Basel 2 in Italy
IAS/IFRS adoptionThe use of options in the IAS Regulation in Italy
(Legislative Decree 28th February 2005, n.38)
IFRS and Basel 2: the Italian experience18
18Luca Giannini ABI - Italian Banking Association
The use of options in the IAS Regulation in Italy
(Legislative Decree 28th February 2005, n.38)
Main driversMain drivers
3. The adoption of IAS/IFRS and Basel 2 in Italy
IAS/IFRS adoption
• 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
IFRS and Basel 2: the Italian experience19
19Luca Giannini ABI - Italian Banking Association
• 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
IAS/IFRS adoption: 2007 onwards
3. The adoption of IAS/IFRS and Basel 2 in Italy
IFRS and Basel 2: the Italian experience20
20Luca Giannini ABI - Italian Banking Association
1. Tool for supervisory information
2 Starting point for prudential supervisory requirements
3. Tool for market disclosure (Pillar 3)
The different functions of the banking financial statement
3. The adoption of IAS/IFRS and Basel 2 in Italy
IFRS and Basel 2: the Italian experience21
21Luca Giannini ABI - Italian Banking Association
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.
The different functions of the banking financial statement
3. The adoption of IAS/IFRS and Basel 2 in Italy
IFRS and Basel 2: the Italian experience22
22Luca Giannini ABI - Italian Banking Association
• 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).
• In Italy the "prudential filters“ are applied:a) Banking groups, from 31st December 2005; b) Banks, from 30th June 2006.
These "prudential filters“ are in line with guidelines of the Basel Committee and of the CEBS (Committee of European Banking Supervisors).
Regulatory Capital
• The new rules introduced by IAS/IFRS could affect the amount, the quality and volatility of bank’s capital.
4. IAS/IFRS impacts
IFRS and Basel 2: the Italian experience23
23Luca Giannini ABI - Italian Banking Association
GENERAL PRINCIPLES:
• The general structure of the supervisory capital doesn’t change (e.g. T2 =< 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).
Regulatory Capital
4. IAS/IFRS impacts
IFRS and Basel 2: the Italian experience24
24Luca Giannini ABI - Italian Banking Association
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.
Regulatory Capital
4. IAS/IFRS impacts
IFRS and Basel 2: the Italian experience25
25Luca Giannini ABI - Italian Banking Association
• 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.
First Time Adoption (FTA)
4. IAS/IFRS impacts
IFRS and Basel 2: the Italian experience26
26Luca Giannini ABI - Italian Banking Association
Main IAS/IFRS impacts of First Time Adoption
• Loans
• Securitisation
• General banking reserve and general provisions
• Goodwill amortisation
• Investment property
4. IAS/IFRS impacts
IFRS and Basel 2: the Italian experience27
27Luca Giannini ABI - Italian Banking Association
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.
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.
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).
4. IAS/IFRS impacts
IFRS and Basel 2: the Italian experience28
28Luca Giannini ABI - Italian Banking Association
IAS/IFRS vs Basel 2 – Main differences:
i) 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 don’t 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.
Loan Loss provisioning: IAS/IFRS vs. Basel 2
4. IAS/IFRS impacts
IFRS and Basel 2: the Italian experience29
29Luca Giannini ABI - Italian Banking Association
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 statement2. calculate the capital requirements 3. calculate the taxable income4. prepare the internal report for management purposes
using a single set of data
5. Conclusions
IFRS and Basel 2: the Italian experience30
30Luca Giannini ABI - Italian Banking Association
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.
5. Conclusions