Compliance in Progress Summary

According to the International Monetary Fund's (IMF) 2004 detailed assessment of Italy's compliance with the Basel Core Principles (BCPs) for Effective Banking Supervision, Italy's observance of the BCPs is high. Per the IMF report, the Italian supervisory system was found to be in compliance with twenty-four BCPs; largely compliant with five; and non-compliant with one BCP. In a subsequent (2006) Financial System Stability Assessment, the IMF notes that Italian authorities have addressed some of the recommendations addressed in the 2004 IMF report. The Bank of Italy namely introduced a new reporting requirement for banks to monitor the impact of moving to a 180-day (ultimately 90-day) past-due definition for non-performing loans. The authorities also made some progress in addressing the lack of regulation on lending to related parties. However, weaknesses remain with regards to the legal protection for supervisors, and the independent validation of supervisory information through on-site examination or external auditors. Since 1990, the Italian banking system has undergone a rapid process of consolidation, involving about 60 percent of total Italian banking assets, as stated in the U.S. Department of Commerce's 2009 Country Commercial Guide. The State has also significantly reduced its direct ownership in the Italian banking system.

General Overview

According to recent publications like a 2009 International Monetary Fund (IMF) report, and a 2009 US Department of Commerce (DoC) Country Commercial Guide report, Italy’s financial sector has been relatively strong despite the 2007-08 global financial crisis. The 2009 IMF report attributes this to the banking sector’s conservative lending practices, and the “prudent and systematic” (p. 3) response to the crisis. According to this report, none of Italy’s financial institutions failed or fell short of regulatory requirement. However, the reports raise concerns about the banking sector’s ability to remain resilient, particularly with respect to maintaining sufficient funding, capitalization, profitability, credit quality, regional exposure to Central and Eastern Europe (CEE), as well as cross-border regulatory risk. The IMF recommends that to further strengthen the financial sector against these vulnerabilities, the Italian authorities must: (1) fully implement their bank support packages in order to instill sector confidence; (2) continue to foster international cooperation to mitigate any spillover effects from their bank support actions for other countries, particularly the CEE states; and (3) continue their agenda to achieve long-term financial sector goals, particularly in strengthening the supervisory and regulatory regime. The Italian authorities agreed with the IMF and acknowledged the rising vulnerabilities the financial system is exposed to. They expressed their willingness to implement the above recommendations in order to safeguard financial sector stability.

In June 2003, the IMF conducted a detailed assessment of Italy's compliance with the Basel Core Principles (BCPs) for Effective Banking Supervision and published its results in April 2004. The report finds that the Italian supervisory system is of a high standard, achieving full compliance with twenty-four of the thirty BCPs (with Principle 1 being divided into 6 sub principles). Five principles, namely BCP 8 on loan evaluation and loan loss provisioning; BCP 10 on connected lending; BCP 14 on internal control; BCP 19 on validation of supervisory information; and BCP 21 on accounting standards, were assigned a "largely compliant" rating. With regard to BCP 1(5) on the legal protection for supervisors, the supervisory system was found to be "non-compliant". In a subsequent (2006) Financial System Stability Assessment (FSSA), the IMF noted that the Italian authorities had addressed some of the recommendations of the 2004 IMF assessment. The Bank of Italy (BoI), Italy’s banking supervisor, introduced a new reporting requirement for banks to monitor the impact of moving to a 180-day (ultimately 90-day) past-due definition for non-performing loans (NPLs). The authorities also made some progress in addressing the lack of regulation on lending to related parties. However, the BoI continues to lack the legal powers to remove expeditiously those banks' directors or senior officers who may have become unfit for their duties. There has also been limited progress in granting the BoI the authority to remove bank external auditors when their performance is deficient.

The regulatory framework for banking supervision in Italy is mainly comprised of Legislative Decree No. 385 of 1993 (Banking Law) and Legislative Decree No. 58 of 1998 (Consolidated Law on Financial Intermediation). The European Union (EU) Capital Requirements Directives (CRD) No. 2006/48/EC and No. 2006/49/EC, which implement Basel II in the EU regulatory framework, were implemented in 2006 through the BoI's Circular No. 263 of 2006. According to the IMF's 2004 report, Italy's banking supervision system is a component of the supervisory framework for the financial services sector that is organized around four independent authorities, namely the BoI for the banking industry, the Supervisory Authority for Private Insurance Undertakings and Insurance Undertakings of Public Interest (ISVAP) for the insurance industry, the Supervisory Authority for Pension Funds (COVIP) for pension funds, and the National Commission for Listed Companies and the Stock Exchange (CONSOB), together with the BoI, for the securities industry. Per the same report, at the time, the large banks were at an advanced stage of preparation for adopting Basel II and International Accounting Standards (IAS) requirements, supported by the BoI and the Italian Banking Association. These preparations significantly helped strengthen credit risk management in the Italian financial system. A 2006 report by the BoI mentions that per EU’s Capital Requirements Directive (CRD) requirements, Italy implemented enabling acts to adopt Basel II requirements in its prudential regulations for banks. At the EU level, the 2006 report states that, the Banking Supervision Committee of the European System of Central Banks' and the Committee of European Banking Supervisors formulated a set of joint recommendations with the aim of "reinforcing cooperation and information exchange in the event of systemic crises with potential cross-border implications, affecting banks, financial markets and infrastructure" (p. 157). Pursuant to a White Paper on Financial Services Policy for 2005-2010, the EU Commission continues to monitor regulatory activity and prudential supervision in Europe.

According to the International Institute of Bankers’ (IIB) 2009 Global Survey, Italy experienced its most significant legislation developments in the area of banking regulation and supervision between July 2008 and June 2009. The report mentions that Decree No. 185 of 2008 partially implemented EU’s Directive No. 2007/44/EC on the acquisition of holdings in banks into Italian law. The decree removes the 15 percent threshold that non-banks must meet to invest in Italian banks. As of the writing of the 2009 IIB report, the BoI was drafting a secondary legislation to facilitate the implementation of this decree by precluding potential conflicts of interest and other related party operations arising from its implementation. In addition, the BoI communicated on issues regarding governance and internal organization; and the Inter-ministerial Committee for Credit and Savings (CICR) Resolution No. 277 of 2008 on the regulation of risky activities and other conflicts of interests of banks and banking groups with respect to associated entities, in accordance with the Consolidated Banking Law. Furthermore, the 2009 IIB report mentions that the BoI implemented a CRD option. In conjunction with the 2006 Circular No. 263 on ‘New Regulations for the Prudential Supervision of Banks’ (third update), the BoI relieved banks from being obliged to deduct their financial instruments from regulatory capital.

Since 1990, the Italian banking system has undergone a rapid process of consolidation, involving about 60 percent of total Italian banking assets, as stated in a 2009 U.S. Department of Commerce's Country Commercial Guide. The consolidation process in Italy is among the largest in Europe in terms of bank assets, and is expected to continue over the coming years. According to the 2009 IIB report, as of December 31, 2008, Italy had 799 banks, seven less than in December 2007. However, the report mentions that there was an increase in branch numbers. (34,146 in 2008 as compared to 33,229 in 2007). Per the 2008 BoI annual report, the structure of the Italian banking system consists of four classes of intermediaries. The top tier is composed of two groups, namely, UniCredit and Intesa Sanpaolo. These groups are large with significant international operations. The next tier is comprised of three medium-sized/large groups that generally have significant domestic operations. The third class of banks consists of 58 institutions, whose operations are predominantly domestic. The fourth tier consists of 594 small size banks whose activities deal with financing the local economy. Since 1992, the State has significantly reduced its direct ownership in the Italian banking system, the BoI report remarks. The 2009 IIB report notes that Italy’s banking sector had seen an increase in activities in 2008. For example, by the end of 2008, the banking system possessed 11.6 percent of the total banking assets of the Eurozone countries, placing Italy on the third spot behind Germany and France. The Italian banking sector also saw an increase in loan issuance, with bank loans rising to 100 percent of the country’s GDP, compared to 90.5 percent in 2006. With respect to Italian banks’ capital, the government permitted subordinated debt instruments to be included as bank core tier 1 capital. According to the IIB report, “capital endowment will be within 2 percent of the banks’ risk weighted assets and in principle within a level of 8 percent of tier 1 capital” (p. 112).

The Principles

FC1. (1) Clear responsibilities and objectives for each supervisory agency.

Italy complies with this principle, as stated in the IMF's 2004 report, and the objectives and responsibilities of the credit authorities are set out in the legislation. The Banking Law and the Consolidated Law on Financial Intermediation establish the general framework of laws governing the banking and financial system, and clearly identify the powers and tasks of the different authorities involved in supervising the financial sector. Pursuant to the Banking Law, as stated in the IMF's 2004 report, the BoI is responsible for the overall stability of the financial system, as well as the promotion of competition in the Italian banking system. The BoI is also provided with a range of instruments to achieve remedial action at individual institutions. According to the IMF's 2004 report, the supervisory program is broad, and covers prudential supervision of deposit taking institutions and other financial institutions, assessment of transparency controls in banking and financial transactions, and cooperation with judicial authorities. The Banking Law identifies the Inter-Ministerial Committee on Credit and Savings (ICCS) as the administrative body which issues broad guidelines on prudential supervision in the area of credit activities and the protection of savings.

FC1.(2) Operational independence and adequate resources.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, the BoI recommends regulatory and supervisory policies, and is operationally independent in its day-to-day supervisory activities. At the time of the 2004 assessment, the BoI supervised approximately 1,430 credit institutions and investment firms, and committed significant resources to an advanced off-site monitoring capacity. While, in practice, the ICCS and the Minister of Economy and Finance (MEF) do not have direct operational involvement in the supervision and regulation of financial institutions, it is difficult to determine whether supervisory policies, plans, and processes are entirely independent from the government.

FC1.(3) A suitable legal framework for authorization and ongoing supervision.

Italy complies with this principle, as stated in the IMF's 2004 report and the legal framework and practices governing the entry of credit institutions are satisfactory. The regulatory framework for banking supervision in Italy is mainly comprised of the Banking Law, and Consolidated Law on Financial Intermediation.

FC1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

Italy complies with this principle, as stated in the IMF's 2004 report, and the enforcement powers of the bank supervision authorities are satisfactory. Furthermore, the BoI's enforcement capacity, stemming from coordination arrangements between on-site and offsite supervisors and sound legal enforcement powers, is generally adequate.

NC1.(5) Legal protection for supervisors.

Italy is non-compliant with this principle, as stated in the IMF's 2004 report. Per the same report, "the Italian system does not offer legal protection to its supervisors against court proceedings stemming from measures adopted in the performance of their functions in good faith" (p. 13). While the BoI covers the costs of legal defense for its employees, it does not fully ensure legal protection. Amendments to the legislation are encouraged to provide legal protection to the supervisory authority and its officers. According to the IMF's subsequent 2006 FSSA, the supervisory authority and its officers continue to be liable for legal procedures stemming from measures adopted in good faith in the performance of their functions.

FC1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

According to the IMF's 2004 report, Italy complies with this principle. The BoI, the ISVAP, the CONSOB, the Pension Fund Supervisory Authority, and the Foreign Exchange Office are required to cooperate through ongoing formal and informal contacts. Furthermore, Memoranda of Understanding (MoU), and, in some cases, bilateral confidentiality agreements, have been signed with EU counterparts and a number of non-EU countries to ensure adequate cross-border information exchange.

FC2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

As noted in the IMF's 2004 report, Italy complies with this principle. Per the same report, "the framework and practices governing the activities of credit institutions, their licensing and investment criteria, as well as their ownership structure are satisfactory" (p. 13). The Banking Law defines bank as "an undertaking authorized to engage in fund raising on a public basis and the granting of credit" (p. 31). While banks are authorized to engage in financial activities subject to mutual recognition, their direct involvement in collective asset management and insurance business is restricted.

FC3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "the framework and practices governing the activities of credit institutions, their licensing and investment criteria, as well as their ownership structure are satisfactory" (p. 13). The Banking Law, regulations and supervisory instructions set out comprehensive criteria and conditions for licensing. In the case of the establishment of branches or subsidiaries of foreign banks, the BoI obtains the prior consent of the home-country supervisory authority and evaluates the existence of conditions for effective supervision. The BoI continues to lack the legal powers to remove expeditiously those banks' directors or senior officers who may have become unfit for their duties. There has also been limited progress in granting the BoI the authority to remove bank external auditors when their performance is deficient.

FC4. Authority to review and reject transfer of ownership.

As noted in the IMF's 2004 report, Italy complies with this principle. Per the same report, "the framework and practices governing the activities of credit institutions, their licensing and investment criteria, as well as their ownership structure are satisfactory" (p. 13). While the concept of significant ownership is not clearly stipulated in the law, per the IMF report, supervisory instructions of the BoI define a significant shareholder as "a person that directly or indirectly holds at least 5 percent of the voting capital or, in any case, control of the banking group holding company or an unaffiliated bank" (p. 36).

FC5. Authority to review major acquisitions and investments.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "the framework and practices governing the activities of credit institutions, their licensing and investment criteria, as well as their ownership structure are satisfactory" (p. 13). The IMF report notes that regulations define acquisitions and investments which need the BoI's approval, and provide criteria to judge individual proposals. It is crucial that new acquisitions and investments do not expose the investor to undue risks or hinder effective supervision.

FC6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "prudential regulations are in line with established best practices and close consultation between the regulators, and the banking community facilitates the smooth introduction of regulatory reforms" (p. 13). Furthermore, capital requirements comply with the Basel Capital Accord. More recently, the 2006 BoI annual report mentions that per EU requirements, Italy implemented enabling acts to implement Basel II requirements to its prudential regulations for banks. In the EU context, per the 2006 annual report, "the transposition of the new capital adequacy requirements (Basel II) was concluded in 2006 with the adoption, on 14 June, of Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions, and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions" (p. 158). In 2006, the BoI issued Circular No. 263 containing the New Regulations for the Prudential Supervision of Banks, which sets out a new framework for the capital adequacy supervision of banks and banking groups, and implements the CRD. According to the 2009 IIB Global Survey report, the BoI, in conjunction with the Circular No. 263 of 2006 on ‘New Regulations for the Prudential Supervision of Banks’ (third update), relieved banks from being obliged to deduct their financial instruments from regulatory capital. Furthermore, the report mentions that the BoI implemented a CRD option.

The 2008 BoI annual report states that to offset any negative effects of the global financial crisis, which started in mid-2007, anti-crisis legislations were passed to recapitalize banks, foster financing of the economy, sustain liquidity, and protect depositors. The legislation passed include Decree Law No. 155 of 2008, Decree Law No. 157 of 2008, and Decree Law 157 of 2008. These were subsequently converted into Laws Nos. 190 of 2008, and 2 of 2009. Although Italy meets regulatory requirements for capitalization, a 2008 IMF Article IV report notes that a few large banks’ capital have fallen below the core Tier I capital since late 2007. The report further states that the government passed two decrees that will allow the government to inject capital into troubled banks on a case to case basis via non-voting preferences with attached conditionalities. The decrees also guarantee new bank liabilities and permit the BoI to swap government debt for low-quality bank collateral. Furthermore, they enhance the BoI’s powers to initiate prompt and early bank resolution to avoid any losses.

FC7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "prudential regulations are in line with established best practices and close consultation between the regulators, and the banking community facilitates the smooth introduction of regulatory reforms" (p. 13). Furthermore, the regulatory framework regarding the internal controls of credit institutions, and the monitoring by the supervisory authorities of their implementation, is satisfactory.

CP8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

The rules for the recording of loans in the annual accounts are established by law in compliance with the EU Directives. In its 2004 report, the IMF notes that securitization of loans is monitored comprehensively by the BoI through very extensive reporting requirements. Securitization has allowed banks to improve credit risk management. However, the 2004 IMF report rated Italy to be only largely compliant with this principle. The IMF's 2004 report stated that the system in place delayed "the recognition of impairment in the performance of a loan and the suspension of recognition of income from impaired loans" (p. 16). In this regard, it recommended aligning Italy's criteria for NPLs to international standards. This shortcoming was expected to be addressed following the adoption of the new International Financial Reporting Standards (IFRS) in 2005. In December 2005, according to a 2007 report published by the European Committee of Central Balance Sheet Data Offices (CBSO), the BoI issued regulations for the implementation of IFRS for banks and financial institutions.

As a follow-up to the 2004 recommendations, according to the IMF's subsequent 2006 FSSA, the BoI introduced "a new reporting requirement for banks to monitor the impact of moving to a 180-day (ultimately 90-day) past-due definition for impaired loans" (p. 43). Banks will have to converge from the 180-day to the standard 90-day past due criteria for NPLs at the latest by 2011, in line with the definition of default applied under Basel II. With regards to the quality of bank assets, the BoI's 2006 Annual Report highlighted that "the overall quality of banking groups' exposure improved in 2006" (p. 150). According to a 2009 report by PricewaterhouseCoopers, Italy was planning to achieve partial convergence with IFRS in the second half of 2009.

FC9. Prudential limits and management information system on concentration of exposure.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "prudential regulations are in line with established best practices and close consultation between the regulators, and the banking community facilitates the smooth introduction of regulatory reforms" (p. 13). Furthermore, there is proper prudential supervision of large exposures. The IMF report notes that prudential limits on large exposures and connected lending are set in line with EU Directives on large exposures, and with tighter limits for connected persons, on both a solo and a consolidated basis. Furthermore, the concentration of credit portfolio is examined through off-site supervision and on-site inspections, and banks are required to have information systems and procedures able to ensure constant compliance with the rules on large exposures. The 2008 BoI annual report states that, European Directive on banks’ capital requirements, as amended in May 2009, introduces provisions that improve the rules on risk concentration.

CP10. Arm's length rule and monitoring for connected lending.

Italy is only largely compliant with this principle, as stated in the IMF's 2004 report, due to the lack of provisions requiring that exposures to connected or related parties only be granted on market terms. There is also no comprehensive definition of, or lending limits on, connected or related parties. The IMF report strongly recommended issuing "a comprehensive regulation on connected lending to address its definition, overall limits, and reporting to the BI" (p. 78). The IMF report notes that prudential limits on large exposures and connected lending are set in line with EU Directives on large exposures and with tighter limits for connected persons, on both a solo and a consolidated basis. According to the IMF's subsequent 2006 report, authorities have made some progress in addressing the lack of regulation on lending to related parties. In July 2005, per the same report, the ICCS approved a guideline on connected lending, and entrusted the BoI with issuing a more detailed regulation in this area. The BoI has prepared a draft regulation to implement the ICCS guideline. However, there is little further information publicly available regarding this draft regulation.

FC11. Policies and procedures for country risk and transfer risk.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "prudential regulations are in line with established best practices and close consultation between the regulators, and the banking community facilitates the smooth introduction of regulatory reforms" (p. 13). Furthermore, prudential supervision of country risk is of high standard. The IMF report notes that banks are required to adopt internal procedures to evaluate country risk and monitor their own exposure. The BoI assesses banks' exposures to country risk on a quarterly basis. The BoI's 2006 annual report notes that, "the Italian banking system's exposure to developing countries and off shore centers (defined using BIS criteria) rose by 47.9 percent in 2006 to 135 billion at the end of the year" (p. 152). However, the report also states that the exposure represents only a small portion of Italian banks' assets at 4.8 percent.

FC12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "prudential regulations are in line with established best practices and close consultation between the regulators, and the banking community facilitates the smooth introduction of regulatory reforms" (p. 13). Furthermore, prudential supervision of market risk is of high standard. The IMF report notes that capital requirements and organizational standards are adequate for the measurement and control of market risks by banks. Furthermore, compliance with the rules is ensured through "model validation, statistical analysis, meetings with risk control managers, and on-site inspections" (p. 51). According to the 2008 IMF Article IV report, since 2007, the BoI has intensified its monitoring and disclosure of banks’ exposure to risks and made the results available to the markets.

FC13. Comprehensive risk management processes.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "prudential regulations are in line with established best practices and close consultation between the regulators, and the banking community facilitates the smooth introduction of regulatory reforms" (p. 13). Furthermore, the supervisory and regulatory framework to ensure sound risk management systems is satisfactory. The BoI examines four broad types of risks, namely, credit risk, market risk, country risk, and interest rate risk, using a "bottom-up" approach to financial surveillance. The IMF report notes that the BoI meets with banks' risk control officers, and monitors the exposure to risk using indicators based on the residual maturity and the currency of transactions. Although it has legal powers to do so, the BoI does not require banks to hold capital against operational risks, which are addressed in the broader context of the rules on internal controls. This shortcoming was expected to be addressed with the implementation of Basel II. Basel II was implemented in 2006 through BoI’s Circular No. 263 of that year which implemented the EU Capital Requirements Directives. According to the 2008 IMF Article IV report, since the crisis begun in mid-2007, the BoI has placed emphasis on “prudential oversight of risk management and contingency plans of banks” (p. 8). Per the 2008 BoI annual report, some banking groups in Italy developed advanced systems for measuring credit and operation risk. The BoI has been approached by these groups to validate their risk management systems for the calculation of capital charges.

CP14. Adequate internal controls.

Italy is only largely compliant with this principle, as stated in the IMF's 2004 report. While the supervisory and regulatory framework to ensure sound internal controls is satisfactory, the supervisory authority lacks sufficiently clear legal authority to require expeditious change in the composition of a bank's board of directors and management when "fit and proper" criteria are no longer met. In this regard, authorities are encouraged to amend the Banking Law and applicable regulations "to legally empower the BoI to remove expeditiously those bank directors or senior officers who may have become unfit for their duties" (p. 78), per the IMF report. According to the IMF's subsequent (2006) FSSA, the BoI continues to lack the legal power to remove bank directors or senior officers in a timely manner. According to the 2008 BoI annual report, the BoI continued to promote stable and reliable organizational structures through preventive action in 2008. The BoI placed emphasis on, among other things, “the contribution and responsibilities of internal control bodies” (p. 176); particularly on compliance with regulations that aimed at safeguarding banks against legal and reputational risks. In 2008, the BoI sanctioned corporate officers of about 600 banks and financial intermediaries for shortcomings in their internal control systems.

FC15. Strict "know-your-customer" rules and high ethical and professional standards.

As stated in the IMF's 2004 report, Italy complies with this principle, and has a satisfactory supervisory and regulatory framework to control money laundering. The regulatory framework for anti-money laundering (AML) and combating the financing of terrorism (CFT) in Italy includes the 1991 AML Law No. 143, and the 2001 Law for the Establishment of the Financial Security Committee (FSC) No. 431 of 2001. The 2008 U.S. Department of State (DoS) International Narcotics Country Strategy report mentions that the EU's Third Money Laundering Directive No. 2005/60/EC was transposed into Italian law, and that Legislative Decree No. 231 of 2007 implements parts of the EU Directive. In its 2004 report, the IMF notes that the AML Law No. 197 of 1991 establishes strict requirements "to ensure that banks know their customers fully and promptly report suspicious transactions to the competent authorities" (p. 58). According to the 2009 U.S. DoS report, the FSC became a permanent establishment through Legislative Decree No. 109 of 2007. The report further states that Italy has a comprehensive AML/CFT regime. Customer Due Diligence in Italy is reviewed by Legislative Decree No. 231 of 2007, using a risk-based approach. Per the 2009 DoS report, while banks are not exclusively required to submit Suspicious Transaction Reporting (STR), banks are more severely punished for non-compliance. Financial Institutions must have and maintain a centralized electronic AML database for all transactions over EUR 15,000. The 2009 DoS report notes that Italy has comprehensive internal auditing and training requirements for its financial sector institutions.

The Unità di informazione finanziaria (UIF), according to the 2009 DoS report, replaced the Ufficio Italiano dei Cambi (UIC) as Italy’s Financial Intelligence Unit (FIU) on January 1, 2008. The UIF is part of the BoI, but has autonomous powers. The 2008 BoI annual report states that the FIU examined the supervisory framework for anti-money laundering at various head offices of financial institutions in 2008. The BoI also worked with the Italian judiciary to issue instructions to banks on the correct anti-money laundering procedures when dealing with counterparties. In addition, the 2009 IIB report mentions that Italy passed a Ministerial Decree in August 2008 that aims at identifying non-EU and foreign countries with similar provisions as EU Directive 2005/60/EC, which deals with anti-money laundering prevention.

FC16. Effective supervisory system consisting of on-site and off-site supervision.

Italy is compliant with this principle, as stated in the IMF's 2004 report. Per the same report, the information available to the BoI for monitoring and early detection of troubled institutions is "abundant and timely" (p. 15). Integrated on-site and offsite inspections allow the BoI to stay well informed on banks' financial condition and management quality. Banking supervision relies heavily on offsite supervision. Conversely, on-site supervision often takes place at somewhat long intervals of 3 to 6 years, and does not depend on external auditors. Pursuant to the Banking Law, the BoI has strong legal authority to ensure the reliability of data submitted by banks. However, the 2004 report found a lack of procedures to assess the effectiveness of on-site and offsite functions. The 2008 Article IV report states that since 2007, the BoI has regularly monitored banks, particularly their liquidity; and conducted targeted inspections and frequent stress tests.

FC17. Regular contact with bank management and understanding of bank's operations.

Italy is compliant with this principle, as stated in the IMF's 2004 report. Per the same report, the information available to the BoI for monitoring and early detection of troubled institutions is "abundant and timely" (p. 15). Frequent contact with banks' management and staff allows the BoI to keep well informed on banks' financial condition and management quality. Per the 2008 Article IV report, the BoI is in contact with banks, and requires the banks, particularly the leading large ones, to frequently report any counterparty risk situations, in order to promptly address any distress situation.

FC18. Analytical reports and statistical returns on solo and consolidated basis.

Italy complies with this principle, as noted in the IMF's 2004 report. Per the same report, the information available to the BoI for monitoring and early detection of troubled institutions is "abundant and timely" (p. 15). Detailed statistical data requirements also allow the BoI to keep well informed on banks' financial condition and management quality. The 2008 BoI annual report states that in 2008, corporate officers of about 600 banks and financial intermediaries were sanctioned for their omissions or insufficient reporting to the BoI.

CP19. Independent validation of supervisory information through on-site examination or external auditors.

According to the IMF's 2004 report, Italy largely complies with this principle. While the BoI requests auditors to examine specific aspects of banks' financial accounts, it does not rely on external auditors for the purpose of on-site inspections. Furthermore, on-site supervision often takes place at somewhat long intervals of 3 to 6 years. In this context, it is recommended that the BoI review the use of external auditors in specific areas, including AML, in the execution of its own mandate. The BoI should also establish the scope and standards for banks' external audits, and review the status of banks which are not subject to external audits. Finally, amendments to the Banking Law are desirable to give the BoI powers to revoke the appointment of banks' external auditors when their performance is deficient. According to IMF's subsequent 2006 FSSA, limited progress has been made toward granting BoI the authority to remove bank external auditors when their performance is deficient. In this regard, it is recommended that the BoI cooperates closely with the CONSOB to ensure that deficient external auditors are removed promptly from their audit responsibilities.

FC20. Ability to supervise on a consolidated basis.

According to the IMF's 2004 report, Italy complies with this principle. The IMF report notes that the Banking Law gives legal powers to the BoI "to perform supervision across the entire activities of an institution, whether those activities be carried on directly (including via branch operations outside of Italy) or via subsidiaries and/or affiliates" (p. 68). The BoI conducts consolidated supervision by means of on-site inspections, prudential supervision, and information monitoring. Although the integration between the banking and insurance sector is increasing, financial conglomerates are still at an early stage of development in Italy. At the end of 2001, there were 32 banking groups holding significant equity interests in the capital of insurance companies, and 10 insurance groups with participation in the capital of banks and securities firms. The 2008 BoI annual report states that the European Directive on banks’ capital requirements was amended in May 2009, and includes a significant provision on consolidated supervision. Supervisory authorities responsible for consolidated supervision are required to institute colleges of supervisors for EU banking groups with establishments abroad. The supervisor’s duties extend to capital adequacy assessment in relation to the second pillar of Basel II, pertaining to disclosure and supervisory review of the banks’ capital adequacy. Per the 2008 BoI report, the amended directive strengthens communication between supervisory bodies and central banks in emergency situations and makes it obligatory for national authorities to consider potential impact of their decisions on other EU member states. The 2008 BoI report also mentions that exposures connected with securitizations will incur heavy capital charge fines for any risky exposures, followed by rigorous organizational and operational safeguard requirements.

CP21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

Italy was found to be only largely compliant with this principle, according to the IMF's 2004 report. The report also stated that the system in place delayed "the recognition of impairment in the performance of a loan and the suspension of recognition of income from impaired loans" (p. 16). In this regard, it was recommended to align Italy's criteria for impaired loans to international standards. This shortcoming was expected to be addressed following the adoption of IFRS in 2005. In December 2005, according to the 2007 CBSO report, the BoI issued regulations for the implementation of IFRS for banks and financial institutions.

Per the same IMF report, as a follow-up to the 2004 recommendations, the BoI "introduced a new reporting requirement for banks to monitor the impact of moving to a 180-day (ultimately 90-day) past-due definition for impaired loans" (p. 43). According to a regulatory and standard-setting framework assessment published by the National Board of Chartered Accountants and Accounting Experts in 2005, the BoI has the power to enact regulations regarding the drawing up of financial statements of the banks and similar financial institutions contained in Legislative Decree No. 87 of 1992 on the balance sheets of banks and financial companies. Pursuant to the Legislative Decree, banks and financial institutions are required to provide the BoI with information, data and any requested documents, including financial statements. According to the 2009 report by PricewaterhouseCoopers, Italy was planning to achieve partial convergence with IFRSs in the second half of 2009.

FC22. Adequate supervisory measures to ensure timely corrective action.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, the BoI's enforcement powers are adequate. More specifically, the BoI "has the power to impose penalties on a problem bank's governing bodies" (p. 73). The 2008 BoI annual report states that in 2008, the BoI issued sanctions on corporate officers of about 600 banks and financial intermediaries for shortcomings in internal control systems, organization, and irregularities for omission or insufficient reporting to the BoI.

FC23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "prudential regulations for banking groups are in line with established best practices and the close cooperation between the BoI and foreign regulators supports the growth of sound cross-border financial activities" (p. 16). Moreover, the regulatory framework for global consolidated supervision over internationally-active banking organizations is satisfactory. Cooperation agreements have been entered into with a large number of countries for the sharing of information, periodic meetings and the performance of supervisory activities. According to the 2009 IMF Article IV report, although Italy’s financial system is relatively sound, it was susceptible to among other things, regional exposures and cross-border regulatory risk. The 2008 IMF report explains that Europe “still lacks a well-defined and binding mechanism of cross-border supervision and crisis-resolution and effective information-sharing” (p. 17). The IMF noted that Italy supports a more coordinated international approach to crisis resolution as well as stronger cross-border supervision, and encouraged the Italian authorities to continue to pursue that agenda, particularly in ensuring close coordination with other EU countries.

Per the 2008 BoI annual report, the European Directive on banks’ capital requirements, as amended in May 2009, introduces provisions that improve cross-border supervision of groups and cooperation among supervisory bodies, risk management derived from securitizations and the rules on risk concentration. It also harmonizes “the criteria for counting hybrid instruments in regulatory capital” (p. 170). The provisions also includes a significant provision on consolidated supervision. Supervisory authorities responsible for consolidated supervision are required to institute colleges of supervisors for EU banking groups with establishments abroad. The supervisor’s duties extend to capital adequacy assessment in relation to the second pillar of Basel II. The amended directive, according to the 2008 BoI report, strengthens communication between supervisory bodies and central banks in emergency situations and makes it obligatory for national authorities to consider potential impact of their decisions on other EU member states. The 2008 BoI report mentions that exposures connected with securitizations will incur heavy capital charge fines for any risky exposures, followed by rigorous organizational and operational safeguard requirements.

FC24. International exchange of information with other supervisors.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "prudential regulations for banking groups are in line with established best practices and the close cooperation between the BoI and foreign regulators supports the growth of sound cross-border financial activities" (p. 16). Moreover, coordination with foreign supervisors to cover operations by Italian banks abroad is adequate. As stated in the IMF's 2006 FSSA, the BoI has established close cooperation, including MoUs, with many foreign supervisory authorities responsible for the foreign operations of Italian banks. The BoI's 2006 annual report highlights that MoUs were signed in 2006 with the supervisory authorities of Poland and Serbia, where Italian banks account for approximately 20 percent of market share.

FC25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

According to the IMF's 2004 report, Italy complies with this principle. Per the same report, "prudential regulations for banking groups are in line with established best practices and the close cooperation between the BoI and foreign regulators supports the growth of sound cross-border financial activities" (p. 16). Moreover, foreign banks' operations in Italy are adequate. A November 2009 publication entitled, “Supervision of Foreign Banks in Italy” by BoI Director-General, Anna Tarantola, states that the BoI’s supervision consists of “important controls on the transparency of banking services” (p. 6), particularly regarding money-laundering. In addition, beginning September 2008, the BoI has tightened controls on banks and requires them to maintain a positive net liquidity position on maturities up to one month. In addition, supervision focuses on risk management. To this end, the BoI has held regular meetings with subsidiaries of foreign groups, in order to coordinate activities between the home and host country authorities. This is to keep abreast with the Basel II Accord’s new prudential framework. The BoI has also intensified its conduct of inspections of and strengthen risk management and internal control systems of all banks, including branches of foreign banks in Italy.