Disclaimer: This dissertation has been written by a student and is not an example of our professional work, which you can see examples of here.

Any opinions, findings, conclusions, or recommendations expressed in this dissertation are those of the authors and do not necessarily reflect the views of UKDiss.com.

Impact of Liquidity Crisis on Banks in Italy from 2011 to 2016

Info: 7546 words (30 pages) Dissertation
Published: 10th Dec 2019

Reference this

Tags: FinanceBanking

CHAPTER 1

INTRODUCTION

1.1.1 Background of Study

Banks need to keep up great liquidity levels with a specific end goal to address the commitments when the issue emerges. The banks need to keep up money and fluid resources which may develop prior to withstand a transient crunch. The past monetary crisis displayed that liquidity dissipated when banks couldn’t advance to each other bank from the interbank market yet expected to rely upon national banks. At the point when a bank is profoundly fluid it prompts low profitability yet for a situation of low liquidity may prompt indebtedness. For banks to develop and survive the banks need to oversee hazard, look for increases in returns, develop great corporate administration and fulfill investors’ aims. This makes it imperative to consider the connection between bank liquidity and benefit and how these effect on each other.

The Italian banking segment was depicted as strong and exhibited a decent limit of strength in the current monetary emergency of 2007-2008. This implies that  the Italian banking model is built  around small and medium scale business and lending to individuals which is safe. At first, the customary Italian banking segment gave a sound insurance to the banking division against the crisis. The Italian banking division which adds to the administration segment of Gross Domestic Product (GDP) isn’t large when contrasted with Germany and France yet contributes significantly towards GDP (seventy-four percent as at 2016). In any case, the Italian banking segment is troubled and as of now faces challenges in managing gigantic non-performing advances. The GDP annual growth of Italy on the average is poor when contrasted with the Euro territory average (1.8% real GDP growth). According to Ministry of Finance report, in 2014, there was ten percent decline in GDP and a twenty-five percent decrease in industrial production. The Italian banking sector inaugurated changes in 2015 to help to curb the decline in the growth. There is a couple of reforms that have been introduced in the Italian banking sector such as the reform of the mutual banks; the reform of the banking foundations supported by the government; the change of the Cooperative Credit Banks (CCB); the foundation of the Guarantee on Securitization of Non-Performing Loans (GSNPLs); and the speeding up of the timing given to credit office. The implementation of new regulations by Basel III such as Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR) in the Italian banking sector is also to help banks when they face a crisis. The implication of the requirement is that the banks have to increase their capital to prevent solvency. Moreover, the Basel III committee established two standards in order to prevent liquidity shortages of the banks which have phases of implementation. Many other countries’ banking sector were victims to the shock of the worldwide monetary crisis also known as subprime stage Cosma & Gualandri (2012). Later, the Italian banking sector felt the impact of the 2007-2008 crisis during the period known as sovereign debt and recovery risk stage (2010-2012) and the impact has brought several changes in policies. The current financial crisis of inferred that banks need to focus on liquidity risk management. Bank for International Settlement (BIS) (2013) the banks that went through hardship during the financial crisis were as a result of not following the basic principles of managing risk. The Basel III Committee has established principles for managing liquidity risk (‘’Sound Principles’’) which were published in 2008. Furthermore, the committee has introduced two main standards for funding liquidity. In this research, the study focusses on the impact of liquidity crisis on a sample of twelve “significant supervised” banks in Italy from 2011 to 2016 after the immediate past financial crisis of 2007-2008. The significant supervised Italian Bank refers to “significant supervised entity”. The “significant supervised entity” refers to a critical administered entity directed in a euro territory and a huge regulated entity having an interest non-euro zone. The “significant supervised group” means an administered group that has achieved the title of “significant supervised group” based on a European Central Bank (ECB) advise in the light of “Article 6(4) or Article 6 (5) (b)” of the Single Supervisory Mechanism (SSM) Regulation[1] spelling out particular obligations given by the ECB regarding approaches including the prudential organization of credit institutions.

1.1.2 Financial Crisis of 2007-2008

As per BIS (2013), financial crises might be grouped into banking, currency and sovereign debt crisis. Claessens and Kose (2013) gave a detailed explanation of a financial crisis. A financial crisis has characteristics of one or two of the subsequent occurrences: significant deviations in the quantum of financial instruments and asset prices; deep malfunction in monetary intermediation and the lending outside financing for members in the economy, enormous issues in a critical statement of financial position (of firms, people, money related establishments and sovereigns); and increment in government help (for example, liquidity infusion and recapitalization). In the current monetary crisis, housing cost expanded and soon afterwards it melted down. Bordo (2008) the financial crisis is preceded by a drastic increase in rate of interests in the United States. The factors attributed to the monetary crisis are huge deviations in laws, application of soft standards of lending and delayed time of unusual low financing costs. The household division broke down on account of defaults in the division and this affected the banks for investment and banks for commercial activities in the United States and worldwide through infection impact of financial instruments. As a result, it kept on entering into the economy through a destructive credit crunch and capital market failure which will probably deliver a noteworthy retrogression. This headed towards the fate of the banking between banks in at the latter part of 2007 for loans and broad liquidity increases progressively by the Federal Reserve and other main banks. Laeven and Valencia (2008) states that the fundamental driver of monetary emergencies have been a mix of country obligation, exorbitant credit blasts, vast capital inflows and statement of financial position prone to precarious monetary framework, joined with poor decision making as result of a combination of political and striking component, while in others the statement of financial position operations of the banking division were noticeable. Moreover, several authors like Taylor and Williams (2008), Calomiris (2008) and Flannery et al. (2013) stated that the global financial crisis which affected large banks commenced on August 2007 and February 2008, reflecting the closure of BNP Paribas (France) and the failure of Northern Rock Bank (United Kingdom), respectively. Kazi and Salloy (2013) the worldwide financial crisis began in September 2008, and it likewise includes when Lehman Brothers liquidated and/or the accepted nationalization of two giant companies that is, Fannie Mae and Freddie Mac in the United States.

1.1.3 Liquidity Creation and Liquidity Crisis of Banks

Borio (2009) discusses liquidity as an unexpected and protracted dissipation of market and subsidizing liquidity, with conceivably genuine repercussions for the dependability of the money related framework and economy in general. The model of liquidity and bank run was given by Diamond and Dybvig in 1983. Their model depicts how the money related intermediation functions. They utilized three outlines; to begin with, banks that with enough stores can expand their intensity by giving better hazard retaining to individuals at various arbitrary periods, second, the giving out contract for request stores has a bothersome balance (a bank run) in which all investors feel under risk and haul out momentarily, with even the individuals that would not desire to take their monies in the chance that they were not exasperates about the bank flopping, third, bank runs can change into disasters in light of the fact that even “sound” banks can wind up plainly indebted, making advances be crossed out and the finish of profitable investment. The significance of liquidity has made controllers to build liquidity guidelines of banks to keep another budgetary crisis. Krishnamurthy et al. (2016) the liquidity crush made the Basel III advisory group to think of least necessities to help business banks for example, the liquidity scope proportion and net stable financing. As a component of supervision of substantial banks in the United States, Federal Reserve actualized a liquidity stretch test known as the Comprehensive Liquidity Assessment and Review. Diamond and Rajan (2003) stressed that the disappointment one bank can bring about other comparative bank disappointments can decrease the basic pool of liquidity making or intensifying total liquidity deficiencies. Banks are considered in charge of assuming a part in the midst of fundamental monetary emergencies.

Choudhry et al. (2009) specified the prime supporters of the credit and liquidity crunch: the “shadow keeping money” framework, globalization, prompting greatly joined markets around the world, the capacity of Central Banks, and an environment of low loan fees, budgetary curiosity and securitization, political obstruction, and the US government-propelled open approach of expanding home proprietorship, awful quality principles of advance beginning, the credit scoring offices, and uncouth administration activities.

1.1.4 Italian Commercial Banks amid the Crisis of 2007-2008

Financial Stability Board (FSB) (2011) as contrasting to other created markets, the Italian monetary framework persevered through the negative impacts of the monetary crisis well. Despite the market costs of different securities instruments dropped, the underlying consequences for managing an account and insurance division activities were generally restricted. This can be credited to a couple of key variables including; the dependence of Italian puts money on a more conventional plan of action, portrayed by a moderately high dependence on loaning, solid client connections, little exchanging exercises, and negligible presentation to poisonous resources; the qualities of their financing base, with a power of stable retail subsidizing sources (including the deposits and securities); and the nonappearance of a residential subprime contract showcase portion given the constrained response of Italian family units to the obligation advertise and reasonable loaning rehearses.

Gai and Catelani (2009) notwithstanding, some critical “supervised” Italian banks confronted challenges in meeting the necessities recommended by control tenets of Bank of Italy. In particular, the Core Tier 1 proportion, that is the base of barrier of movement saving money hazard, is diminished now and again sensibly, from 2007 to 2008, for the foremost Italian banking body. For instance, core Tier 1 ratio decreased for Unicredit (from 5.99% in March 2007 to 5.67% in September 2008), Monte dei Paschi di Siena (from 6.40% in March 2007 to 5.20% in September 2008), and Intesa Sanpaolo (from 7.20% in March 2007 to 6.20% in September 2008).

1.1.5 Sovereign Debt Crisis

An unexpected ascent in the loan cost looked by an administration because of frenzy that it won’t pay its obligation is known as a sovereign obligation crisis. Until the latter part of 2010, Italian banks experienced no deep repercussions of the sovereign obligation crisis, since their exposure to the obligation of the fringe states (Greece, Ireland, Portugal and Spain) was low: around 1 percent of the benefits of the managing an account framework all in all. Nearing the last quarter of 2010, Italy’s sovereign risk began to ascend, with impeding consequences for the discount subsidizing markets (Gualandri and Cosma, 2012). The sovereign obligation crisis and the extension in the spread amongst Italian and German security yields hit Italian banks especially with respect to subsidizing, prompting an ascent in the relative cost and lessening the assets accessible. The negative impacts then continuously additionally stretched out to retail subsidizing, because of the decay of the general circumstance, the vulnerability and the swarming out of bank securities by the profits accessible on government bonds.

Bank of Italy (2011) demonstrated that the sovereign obligation in Greece activated restored pressures in the budgetary markets. This antagonistically influenced the money related markets also in Italy and Spain. The irritation of the sovereign obligation pressures reached out to the banks of nations most impacted by the crisis, whose inside financing turned out to be all the more exorbitant and immediately evaporated.

Italy’s sovereign hazard began to ascend, with impeding impacts on the discount subsidizing markets (Gualandri and Cosma, 2012). The sovereign obligation crisis and the expansion in the spread amongst Italian and German security yields hit Italian banks particularly with respect to financing, prompting an ascent in the relative cost and decreasing the assets accessible. The negative impacts then steadily additionally stretched out to retail subsidizing, because of the weakening of the general circumstance, the vulnerability and the swarming out of bank securities by the profits accessible on government bonds.

Bank of Italy (2011) demonstrated that the sovereign obligation in Greece activated recharged pressures in the monetary markets. This antagonistically influenced the budgetary markets additionally in Italy and Spain. The disturbance of the sovereign obligation pressures stretched out to the banks of nations most influenced by the crisis, whose interior financing turned out to be all the more expensive and immediately went away. The Italian money related framework was affected by the expansion of European sovereign obligation chance since the mid-year of 2011. The execution and organization of subsidizing were intensely influenced by the spread of the sovereign obligation crisis to Italy, which prompted troubles in getting to the discount showcase and higher financing costs. The biggest banks were the most influenced by subsidizing challenges chiefly in light of the fact that they make more noteworthy response to worldwide markets for discount financing. The capital prerequisites standard required raising assets as four noteworthy banks were requested that all of them are supposed to meet capital necessities target. Specifically, UniCredit required an additional €8.0 billion, Banca Monte dei Paschi di Siena €3.3 billion, Banco Popolare €2.7 billion and Unione di Banche Italiane €1.4 billion. Amidst the crisis, interest for advance and loaning backed off. Additionally, Italian business banks performance decayed.

1.1.6 Liquidity Provision by Central Bank to Italian Commercial Banks

Laeven and Valencia (2008) communicated that in a key “banking crisis”, the nation is challenged by an expansive number of defaults and monetary organizations and partnerships confront awesome troubles reimbursing contracts on time. Italian banking crisis began after the budgetary crisis of 2007-2008 in the primary portion of 2011.

The role of national banks as loan specialist of final resort is completed when banks are in trouble amid the money related crisis. The different national banks on the planet responded to the monetary crisis by mediating in the issues of business banks. A portion of the intercessions were liquidity infusions, arrangements and usage of benchmarks. Trichet (2010) in the worldwide monetary crisis of 2007-2008, the ECB has affirmed to grant credit funding to the euro region economy despite remaining completely lined up with its essential order of protecting medium-term value dependability. In light of the crisis, the ECB gave Main Refinancing Operation (MRO) and Long Term Refinancing Operation (LTRO). The ECB uses the LTRO to lend at very low interest rates to Eurozone banks at three months, six months, twelve months and thirty-six months maturity. The aim of LTRO is to provide enough liquidity to enable banks to increase lending activities. In 2012, the ECB conducted an auction of LTRO maturing thirty-six months. These Italian banks benefited from LTRO; Intesa Sanpaolo (€24 billion), Unicredit (€12.5 billion), Mediobanca (€4 billion), Banco Popolare (€3.5 billion) and UBI Banca (€6 billion). Unlike the above banks, Monte dei Paschi di Siena’s recent financial problem is a series of transactions in 2008-2009. It cannot be singled out to be a liquidity crisis since it also includes an issue of acquisition of a new bank. The problem at Monte dei Paschi di Siena necessitated intervention by Bank of Italy to restructure through recapitalization and also monitoring the bank’s liquidity. In 2014, Targeted Longer-Term Refinancing Operations (TLTROs) was launched to give fund to credit organizations to up a four year period. The aim of this was to increase banks’ lending activities to businesses and consumers in the euro area. In addition to liquidity injection, capital adequacy requirements must also be maintained to prevent solvency of banks. The government of Italy in 2009 provided capital injection facilities to help commercial banks known as “Tremonti Bonds”. The Tremonti bonds are issued by Italian commercial banks in healthy condition signed by the government that targets the strengthening of regulatory capital Core Tier 1. The “Trementi Bonds” package estimated around €4 billion only used by four commercial banks namely Banco Popolare (€1.45 billion), Banca Popolare di Milano (€500 million), Monte dei Paschi di Siena (€1.9 billion), and Credito Valtellinese (€200 million).

1.1.7 Profitability of Italian Commercial Banks

The profitability of Italian commercial banks during the crisis of 2007-2009 remained positive but on the other hand was negative in the UK and Germany in 2008 and 2009 and in France in 2008 (De Bonis et al. 2012). As mentioned earlier, the Italian banks suffered less under subprime crisis. This was due to the fact that the Italian banks were practicing traditional banking. The Italian model known as traditional banking revolves around lending to households, smaller firms, and retailers. The banks did not also trade in a lot of exotic commodities which were affected by the crisis. However, there was a drop in profit in the subsequent sovereign debt crisis. Italian business banks did not get substantial open offices. For example, net interest margin dropped because of a distinction in high cost of acquiring and drop in enthusiasm on advances and administrations as loan fees were ordered to a low Euribor. Notwithstanding, in 2015, “significant supervised” banks’ Return on Average Equity (ROAE) and Return on Average Assets (ROAA) enhanced because of the capacity to loan, bring down operational cost and new credit gauges. For example, Intesa Sanpaolo, Monte dei Paschi, and Banco Popolare accomplished positive change in ROAE and ROAA.

1.2 Statement of Problem

The core purpose of banks is to receive money known as deposit and give assistance to customers also known as loans and make profits. However, in a period of financial distress, a bank cannot perform its core responsibility to the maximum best. The ability of the banks to perform during the crisis and continue to survive is what has led me to carry out this research in order to find out the performance of banks based on funding liquidity and liquid assets held. In this paper, I looked at significant large banks in Italy and their performance in times of liquidity crisis. These banks have a large share of the market size thus in terms of their customer base, total assets, and number of branches both local and international. These banks have made several necessary changes after the financial crisis by implementing several policies to their banking activities in order to comply with both local and international standards. Liquidity dried up during the financial crisis because the lenders were not giving out to financial institutions which faced challenges. This made Basel Committee on Banking Supervision to start the liquidity scope and net stable financing ratios. The presentation of liquidity necessity depends on article thirty-eight of the Delegated Regulation. The liquidity scope necessity will be slowly executed beginning from 60% in October 2015, 70% in January 2016, and 80% in 2017 except completely in January 2018. Engida (2015) researched the determinants of banks liquidity and their effect on profitability in Ethiopia. The exploration gives prove that the effect of liquidity on benefit was non-direct. Liquidity possessions in Ethiopia must be made strides. In addition, productivity enhanced for banks that held fluid resource in the United States and Canada (Bordeleau and Graham, 2010).

1.3 Research Objectives

The main purpose of the exploration is to estimate the effect of liquidity crisis on the benefit of business banks utilizing twelve business banks in Italy after the monetary crisis time of 2007-2008.

1.3.1 Specific Objective of the Study

The exact goal of the study are as per the following:

• To recognize the reasons for liquidity crisis

• To recognize the estimates of performance of banks

• To assess the effect of liquidity crisis on productivity of banks

1.4 Research Question

• Does liquidity crisis affect the productivity of business banks?

• How did bank perform when liquidity dried up?

• How did the national banks’ liquidity arrangement affect profitability?

1.5 Significance of Research

The investigation has a huge contribution to the field of the liquidity crisis and their effect on the performance of banks as for Italy. The primary significance of the investigation are;

  • To highlight the need for liquidity supervision in banks
  • To prevent another liquidity crisis in banks
  • To ensure that banks role as liquidity providers are not affected by crisis
  • To manage liquidity by implementing policies in banks
  • To increase liquidity buffers
  • To provide solution to liquidity crisis

1.6 Organization of the Study

This exploration paper is sorted out in five sections. The study is sorted out in Chapters. Chapter one gives the prologue to the exploration paper. Chapter two of this paper is about the writing on different wordings, ideas and exact audit specifically identified with the investigation. Chapter three discusses the approach to be utilized. It includes quantitative and subjective research strategy. Information will be gathered from BankScope. The profitability of the twelve business banks amid the time of 2011-2016 will be assessed utilizing unequal pooled conventional slightest squares. Chapter four manages information investigation and introduction of the discoveries of the examination set out. Chapter five contains the conclusion and suggestion, facilitate zones to be looked into and confinements of the exploration. Chapter five contains the conclusion and recommendation, further areas to be researched and limitations of the research.

 

CHAPTER 2

LITERATURE REVIEW

2.1 Introduction

This section begins with a short foundation of the European banking framework, supervision, rules, and regulations. The Italian banking framework is introduced subsequently. The following subsection gives detail on the expansive information in the field of liquidity and profitability. The different ideas under liquidity and profitability will be featured and clarified as follows. The reviews and articles by different authors’ publications identifying with the field of study that is the financial crisis and the effect on returns gained by banks. There exist a great deal of writing about liquidity and profitability of commercial banks.

2.1.1 Background of the European Banking System

The financial crisis raised the requirement for monetary supervision and application of new norms among European nations. The European Council, in its decisions in 2009, enunciated that a European System of Financial Supervisors (ESFS), including three additional European Supervisory Authorities (ESA), ought to be built up. They are the European Securities and Markets Authorities (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA). The EBA’s capacity is to make compelling and consistent prudential direction and supervision over the European place of keeping money. The main mission of the EBA is to elevate and to set up a sole market for the EU keeping money area. The EBA is in charge of keeping the standard administrative system which ties all the banking organizations and investment banks over the EU in an equivalent way: the EU single rulebook on banking.

2.1.2 Banking Union

The Banking Union is an imperative segment of the Economic and Monetary Union (EMU) and it rotates around the Single rulebook for bank supervision and resolution across the European Union (EU). The banking union is framed because of the current monetary crisis of 2008 and the accompanying sovereign obligation crisis. It is obvious that a monetary union should be established for the euro area. This is because the difficulties caused by close links between public sector finances and the banking sector can simply move to other nations borders and cause financial mayhem in other EU countries. The objective of the banking union is to make European banking: first, more exposed by regularly applying same rules, ethics and standards for supervision, recovery and resolution of banks, secondly, putting all countries into one same group by handling national and cross-border banking activities similarly and by cutting links to the financial health of banks from the countries in which they are located and thirdly, safer by responding on time if banks face difficulties in order to help prevent them from failing, and if necessary by resolving banks efficiently (www.bankingsupervision.europa.eu/about/bankingunion). The banking union has two pillars:

• Single Supervisory Mechanism (SSM)

• Single Resolution Mechanism (SRM)

2.1.3 Single Supervisory Mechanism

The Single Supervisory Mechanism (SSM) states that the structure of banking administration in Europe. The ECB and the national competent bodies of the nations involved make up the SSM (www.bankingsupervision.europa.eu/about/thessm).

Its main aims are to:

  • make a safe and complete European banking system
  • encourage financial incorporation and stability
  • make reliable supervision

The words “competent authority” signifies a general specialist or body formally acknowledged by state law, or it is affirmed by state law to manage organizations as a major aspect of the supervisory framework in operation in the Member State concerned. The SSM approach depends on standards: utilization of best practices, honesty and decentralization, homogeneity inside the SSM, consistency with the single market, freedom and responsibility, chance based approach, proportionality, sufficient levels of supervisory action for all credit, and successful and auspicious therapeutic methods (www.bankingsupervision.europa.eu).

2.1.4 Single Resolution Mechanism

Resolution implies the consistent rearrangement of a bank by a determination specialist when the bank is fizzling or liable to fall flat. The point of this resolution is to avert bank failure from hurting the more extensive economy or cause money related unsteadiness. The Single Resolution Mechanism (SRM) rules are implied for banks that are secured by the SSM. The SRM is the second mainstay of the managing an account union. The point of the SRM is to build up a systematic resolution of collapsing banks with negligible expenses for citizens and to the country at large. The SRM regulation guarantees the structure for the resolution of banks in EU nations involved in the banking union (https://ec.europa.eu/info/business-economy-euro/banking-union/single-resolution-mechanism_en). The moment a bank comes up short regardless of more grounded supervision, the SRM permits bank resolution to be overseen successfully through

• a single determination board

• a single determination support that is financed by the banking division

The Single Resolution Board

The Single Resolution Board (SRB), built up by the SRM regulation, it is a totally independent EU organization going about as the focal resolution authority inside the banking union. The SRB works with the national resolution specialists of nations involved, it adds up to SRM. (https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/single-resolution-mechanism_en).

The mission of the SRB is

  • make a step by step resolution of dying banks with least influence on the economy and the general finance of banking union countries
  •  managing the single resolution fund

The body of the Single Resolution Mechanism that makes the decision is the Board:

  • makes resolution structures  for dying banks
  • it is handling directly the planning and resolution phases of the banking union’s cross-border and large banks,  which are supervised directly by the European Central Bank
  • it is assigned to take resolution cases, irrespective of the size of the bank if resolution requires recourse to the Single Resolution Fund
  • solely responsible for all banks in the banking union implying that at any time it may decide to exercise its powers in respect of any bank in the union. (http://www.consilium.europa.eu/en/policies/banking-union/single-resolution-mechanism/)

When a bank is said to be in a crisis situation, the board organizes a resolution scheme that is forwarded to the European Commission for formal approval. If the Commission has no objections, the scheme should be adopted within a day. The Commission specifies the request to the Council (i.e. EU governments) to accept its modifications to the scheme. A resolution scheme that draws less than €5 billion from the single resolution fund is decided in a restricted board meeting made up of the national authorities from the country where the bank in crisis is located. When the amount needed exceeds €5 billion decisions are taken by the full board (http://eur-lex.europa.eu/legal-content).

The Single Resolution Fund

The Single Resolution Fund (SRF) as its name suggests is a fund established to resolve the failing banks, when options, such as the bail-in tool, have been utilized. The source of finance to the fund is from the contributions from the banking sector. The SRF will be constructed over eight years. It should attain no less than 1% of the measure of secured deposits of all credit organizations approved in all the managing an account union part states. Its anticipated sum will be around €55 billion. The extraordinary commitment of each bank will be assessed proportional to the measure of its liabilities in view of the aggregate liabilities of all the credit bodies affirmed in the nations included. Commitments will be balanced in extent to the risk taken by every establishment (http://www.consilium.europa.eu/en/policies/banking-union/single-resolution mechanism/).

2.1.5 Single Rulebook

The single rulebook offers support to the managing an account union and it is essential to the monetary part direction in the EU by and large. It comprises of legitimate acts that every single money related foundation in the EU must take after. The single rulebook, in addition to other things:

• highlights capital prerequisites for the banks

• makes better insurance for contributors

• regulates the avoidance and administration of bank breakdown

The single rulebook depends on strongholds- the principles that are most imperative for the banking union – are:

• capital requirements directive IV (CRD IV) and capital requirements regulation (CRR)

• amended mandate on deposit guarantee schemes (DGS)

• bank recuperation and resolution directive (BRRD) (http://www.consilium.europa.eu/en/policies/banking-union/single-rulebook/)

The Capital Requirements Directive IV (CRD IV)

This directive as a component of the Basel III requirements is passed on to countries involved to be included in the law of the countries, expressing the rules on capital supports, brokers’ compensation, prudential control and corporate administration. The obligatory figure of 4.5% of common equity tier 1 capital prerequisite established in the Capital Requirements Regulation (CRR). The banks are likewise required by control to keep a capital protection support and a countercyclical capital cushion with the goal that they assemble a sufficient capital base in prosperous circumstances to help retain misfortunes in case of an emergency. The banks need to hold a capital preservation support of the most elevated nature of its capital (Common Equity Tier 1 capital) equivalent to 2.5 % of a bank’s aggregate hazard presentation. The motivation behind the support is to monitor a bank’s capital. A bank that neglects to agree to this cradle, it should stop installments of profits or farthest point rewards. The Basel III understanding acquainted the countercyclical with balance the impacts of the monetary cycle on banks’ loaning movement. A manage an account with an additional entirety of capital Common Equity Tier 1 (CET 1) in great circumstances, can discharge when the financial cycle turns, and monetary action backs off or even contracts. This support will enable the bank to continue loaning to the genuine economy. On the off chance that a bank ruptures this necessity, an indistinguishable guidelines from on account of the capital preservation cradle apply (http://www.consilium.europa.eu/en/strategies/keeping money union/single-rulebook/capital-prerequisites/).

Capital Requirements Regulation (CRR)

As clarified above, this direction expects banks to have put aside enough cash-flow to cover startling misfortunes and keep themselves dissolvable in an emergency. The standard behind is the measure of capital required relies upon the hazard related with the advantages of a specific bank. In the CRR, this is alluded to as the ‘claim stores prerequisite’ and is communicated as a level of hazard weighted resources. The hazard weighted resources allude to more secure resources are ascribed a lower designation of capital, while more hazardous resources are given a higher hazard weight. Also, the more hazardous the advantages, the more capital the bank needs to set aside. The capital is doled out specific evaluations as per its quality and hazard. Level 1 capital is respected to be the going concern capital. The going concern capital enables a bank to proceed with its exercises and keep it dissolvable. The most elevated nature of Tier 1 capital is called regular value level 1 (CET1) capital. Level 2 capital is viewed as gone concern capital. The gone concern capital allows a foundation to reimburse investors and senior leasers if a bank ended up plainly wiped out. A base aggregate capital proportion that banks and speculation firms are required to hold ought to be equivalent to no less than 8%. (http://www.consilium.europa.eu/en/arrangements/managing an account union/single-rulebook/capital-prerequisites/).

Deposit Guarantee Schemes (DGS)

Deposit Guarantee Schemes (DGS) are schemes set up in every nation that renegotiate investors if their bank comes up short and stores end up noticeably inaccessible. One of the goals of building up the managing an account union has been to enhance the current EU controls on insurance of investors in instances of bank disappointment. The progressions bring together contributor assurance around the EU and are intended to forestall freeze withdrawals in cases in which a bank winds up plainly indebted

The primary enhancements presented by the corrected order on deposit guarantee schemes:

• reduced as far as possible for payouts to 7 days by 2024

• improved data for depositors

• announced ex-ante financing arrangements set, all in all, at 0.8% of secured deposits

• made accessible the assets for the certification plans financed by the banking area

The critical highlights of the 1994 mandate on store ensure plans (Directive 94/19/EC) were amended in 2009 because of the 2008 monetary crisis. The payback level was expanded from €20 000 to €50 000, and later to €100 000. The end time frame for pay-outs was abbreviated from 3 months to 20 working days (extendable to 30 working days). The alterations executed in 2014 were recommended by the Commission in 2010. The 1994 order is traded and repealed by the new system (http://www.consilium.europa.eu/en/approaches/saving money union/single-rulebook/store ensure plans/).

Bank Recovery and Resolution Directive (BRRD)

The Bank Recovery and Resolution Directive (BRRD) manage the evasion of bank emergencies and put in measures to sort out a resolution for fizzling banks while lessening their effect on the real economy and on open funds. The directive thus gives one of the establishments of the single rulebook. The bank recuperation and resolution rules:

• offer regular instruments and powers for state organizations to deal with solidly with national and cross-outskirt banks that are biting the dust or are nearly falling flat

• minimize the negative effect of bank disappointments on citizens (by building up safeguard in rules)

• launch stores for settling, outfitted by the keeping money area, to offer help for coming up short banks if necessary

The directive empowers the EU national specialists to handle potential bank emergencies at three levels: right off the bat, the arrangement and introduction, also, early intercession, when the bank is weak or in rupture of capital prerequisites, thirdly, determination, when the bank winds up noticeably unviable (http://www.consilium.europa.eu/en/policies/banking-union/single-rulebook/bank-recovery-resolution/).

2.2 Italian Banking System

2.2.1 An Overview

The structure of the Italian Banking framework is small. Italian banking sector contributes to sources of funding for companies especially Small and Medium Enterprises (SMEs). Italian banks are less internationalized, cooperative/commercial/mutual banks, low leverage, and little interbank funding. The Italian banking division resisted the initial impacts of the crisis due to the more traditional business model. In contrast, Italian banks are now facing challenges with growing huge figures of non-performing loans (NPLs) in the statement of financial position.

2.2.2 Italian Banking Sector Structure

Size

The European Central Bank (ECB) published the list of significance assessment as a fulfillment of the Single Supervisory Mechanism (SSM). The Italian banking system consists of both significant and less significant banks based on the bank size. A bank is termed as significant when it is worth an amount of €30 billion in financial assets or above 20% of GDP. The Italian banks that are significant are directly supervised by the SSM. As at 2014 (beginning of significance assessment), fourteen banks were directly supervised by SSM. A lot of the Italian banks are less significant. The less significant banks are supervised by National Competent Authority (NCA). Furthermore, banks are categorized by market share. This indicates that major banks have dominance in terms of the number of branches as compared to the rest. The table below summarizes the components of Italian banking system.

Table 2.1 Size of Banks

Economic phenomenon Banks (number)
Reporting institution Banks Major banks Large banks Medium banks Small banks Minor banks
Observation date Value Value Value Value Value Value
31-12-2015 643 7 16 34 123 463
31-12-2014 664 5 7 30 119 503
31-12-2013 684 5 7 31 125 516
31-12-2012 706 5 8 31 128 534
31-12-2011 740 4 10 31 135 560

Source: Bank of Italy

Ownership

The Italian banking system consists of cooperative banks, società per azioni banks, foreign banks and mutual banks. The società per azioni banks are public limited company popularly known as the S.p.A. The cooperative banks are also known as “Società cooperativa a responsabilità limitata” (S.c.r.l.) and mutual banks referred to as “Banche di credito cooperativo” – (BCC). The remaining are foreign-owned banks.

 

 

 

Table 2.2 Ownership of Banks

TIMESERIES Banks and branches  – Banks established as società per azioni – Banks (number) – Italy Banks and branches  – Branches of foreign banks – Banks (number) – Italy Banks and branches  – Cooperative banks – Banks (number) – Italy Banks and branches  – Mutual banks – Banks (number) – Italy Banks – Italy
Observation date Value Value Value Value Value
31-12-2015 164 81 33 365 643
31-12-2014 171 80 37 376 664
31-12-2013 182 80 37 385 684
31-12-2012 197 78 37 394 706
31-12-2011 214 78 37 411 740

Source: Bank of Italy

2.2.3 Italian Banking Sector Credit

The Italian banking system is faced with difficulties in providing credit to Italian firms and households after the crisis. Italian banks funding gap is low. The traditional model of Italian banks where household deposits were a major source of funds to lend became insufficient. Another reason for low credit was an increase in credit risk. Supply of credit is granted to firms with healthy balance sheets but risky firms are not. The bad debts, non-performing loans, and loan loss provision have risen after the recent crisis which has negatively affected credit.

2.2.4 Italian Banking Sector Capital and Profitability

Italian banking sector faced challenges with capital requirements introduced by European Central Bank (ECB) in 2014. The capital shortfall of banks required capital increases through


[1]  Regulation (EU) No 468/2014 ECB

Cite This Work

To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Related Services

View all

DMCA / Removal Request

If you are the original writer of this dissertation and no longer wish to have your work published on the UKDiss.com website then please: