Italian cooperative credit banks are preparing for one of the most delicate assessments in their history. The Bank of Italy,acting at the suggestion of the European Central Bank, is preparing a combination of Asset Quality Review (AQR) and stress tests that should be held in the second half of this year and at the latest at the start of 2018.
It is an exam aimed at the credit quality of these banks, in light of the creation of big groups which will absorb them by next year. The test is necessary to verify the asset quality of these groups – at the moment there are set to be three – Iccrea, Cassa Centrale Banca and the Alto Adige group – and therefore their effective stability.
Once the cooperative credit banks merge into these groups, due to the size of their assets they will be monitored by the ECB, which is why the European supervisory authorities are calling for the AQR, like for all banks who take this step.
For the cooperative credit banks however, there are at least a couple of reasons that make the transition more complex and delicate.
The Bank of Italy is assessing how to organize the inspections to be able to carry out this examination. The orientation, shared by the cooperative credit banks, is to first do a close assessment at the aggregate level, to then focus on the biggest banks and the most problematic cases.
In this context, the International Monetary Fund comes into play, which also focused attention last month on the non-performing loans of non-systemic and smaller banks that can elude the prudential management rules imposed by EU regulation on the banks monitored by the ECB.
The IMF’s approach would be to conduct a widespread AQR on all the 310 cooperative credit banks. But this operation risks taking a lot of time and costing a lot. Not to mention the fact that the Bank of Italy does not have the staffing to do it. The question remains open and the procedures to carry out the credit tests on the cooperative credit banks are still unknown.
The system of the cooperative credit banks does not want to find itself unprepared and the pressure to increase coverage on credit is strong. The aim is to bring coverage on bad loans from the 57.9% at the end of 2016 to more than 60%, and on the unlikely to pay loans from 29.5% to more than 30%. The figures at the end of 2016 point to gross bad loans worth €13.6 billion and net bad loans of €5.7 billion. In any case, 64.4% of deteriorated credit of cooperative credit banks is covered by real guarantees compared to 51.1% in the rest of the banking industry.
The candidates for group leaders are also doing the sums. Iccrea is expecting involvement of at least 160-170 banks, with invested assets totaling €124 billion and group capital of €15-16 billion. Iccrea itself has assets worth €1.7 billion, of which free capital is equal to about €500 million. According to the first estimates, there should be ample room to absorb potential credit devaluations which may become necessary following the AQR and the stress tests. The Common Equity Tier 1 of the group at the end of the process should turn out to be above 15%.
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