## EXECUTIVE SUMMARY (1itaea2020007)

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### Institutional arrangement and governance
- Macroprudential oversight combines local elements with the European framework.
- Key domestic authorities:
  - Banca d’Italia (BdI): national central bank and prudential authority for banks and other financial institutions; national competent authority and designated authority under CRR and CRD IV.
  - CONSOB: markets authority.
  - IVASS: insurance supervisor.
  - COVIP: pension funds supervisor (contributes to oversight though it does not have a clear financial stability mandate).
- BdI plays a leading role in surveillance and coordination, easing coexistence of national and European frameworks.
- Recommendation:
  - Establish a national macroprudential policy authority (single institution or board) to provide formal dispute-resolution across agencies and help fill data gaps; such authority would make recommendations under a “comply or explain” mechanism. Given BdI’s mandate and experience, BdI should play a leading role.

### Macroprudential toolkit and borrower-based measures
- The Systemic Risk Buffer (SyRB) in CRD IV has not been introduced in the Italian macroprudential framework.
- Rationale for incorporating the SyRB:
  - Flexibility to mitigate systemic risks unaddressed by other tools.
  - SyRB could be calibrated to consider concentration of exposures (e.g., sovereign holdings).
- Borrower-based tools:
  - Household- and housing-related risks are currently low in Italy, but borrower-based tools (LTV and DSTI restrictions) could become valuable as the cycle turns.
  - Experience from other countries indicates that adding such tools may take time if legal action and calibration are needed.
  - Recommendation: Ensure regulation establishes structure and operating procedures for these tools to permit quick deployment; take actions while sector risks are limited.

### Financial stability surveillance and stress testing
- Surveillance and assessment are strong, using state-of-the-art quantitative techniques and expert judgement, covering many sectors.
- Areas for enhancement:
  - More prominent discussion of systemic risk in the Financial Stability Report (FSR), including interconnections across sectors (for example via sovereign exposures).
  - More regular use of prospective simulations for the banking sector to assess forward-looking risks.
- Main surveillance vehicles and models:
  - Semi-annual Financial Stability Report (FSR) and triannual risk dashboard (about 80 indicators across nine categories).
  - BdI household model uses microeconomic data from household surveys and defines household vulnerability as ratio of debt service to income above 30 percent and disposable income below the median.
  - Corporate model uses micro data from Cerved; corporate debt at risk defined as firms with negative operating income or net interest expenses to net operating income above 50 percent.
  - Sovereign CDS spreads explain about 60 percent of the variation of CDS spreads of Italian financial intermediaries; the passthrough coefficient from sovereign to financial firms is close to 1.
  - Median CoVaR for Italian financial intermediaries increased during the last year from about 20 to 40 daily basis points.

### Sovereign-bank nexus and prudential responses
- Holdings and distribution:
  - Central government securities represented 13 percent of total financial assets of Italian intermediaries at the third quarter of 2018, compared with 5 percent in the Euro Area.
  - Sovereign holdings have been increasing for Italian banks, reaching about 10 percent at end-2018.
  - The relative importance of sovereign securities by intermediary type (as reported): about 37 percent, 3 percent, 20 percent, and 19 percent of their financial assets, respectively.
  - Italian intermediaries hold the lion share of the stock of government securities (37 percent), followed by the rest of the world (33 percent) and the BdI (20 percent).
- Vulnerabilities:
  - Large sovereign debt holdings make intermediaries vulnerable to a sovereign shock and could exacerbate feedback to the real economy.
- Policy options and constraints:
  - Consider prudential policies to encourage banks to diversify sovereign holdings and build capital buffers that incorporate sovereign debt risk.
  - Options include a carefully calibrated SyRB, Pillar II measures, or risk weights linked to concentration limits (noting that the use of risk weights based on concentration of exposures is not possible under EU regulations).
  - Policies should be phased in carefully to avoid procyclicality and disruptions to sovereign debt markets and bank lending, and weighed against costs and coordination considerations with European and global partners.
  - For insurers, favorable treatment of sovereign exposures in Solvency II may lead to excessive sovereign debt holdings; IVASS should explore options to limit concentrated sovereign exposures if they grow further.

### Macroprudential stance and cyclical buffers
- Cyclical stance:
  - Macrofinancial indicators suggest the Italian economy is beyond the point of a preemptive cyclical accumulation of buffers, consistent with BdI keeping the CCyB at zero.
  - The countercyclical capital buffer has remained at zero since its implementation in 2015; BdI conducts a quarterly assessment following ESRB recommendations with methodological modifications.
- Liquidity and capital:
  - Capital ratios increased to their highest levels in 17 years but remain below EU averages.
  - Gross NPLs remained high at 9.5 percent of loans at the third quarter of 2018.
  - Profitability: ROE recently reached 7 percent after several years in negative territory and is below the estimated cost of equity capital.
  - Liquidity metrics (LCR and NSFR) are high, partly due to ECB TLTRO and large sovereign holdings qualifying as HQLA under Basel III.

### O-SII buffers
- Observation:
  - Both fully-loaded and transitional buffers of Italian O-SIIs are at the lower end of European peers; overall CET1 capital levels of Italian O-SIIs are also comparatively low.
- Exact O-SII bucket mappings (Italy) from Table 2:
  - Score range: >= 4,000 — Buffer: 1.25percent
  - Score range: 3,000-3,999 — Buffer: 1.00percent
  - Score range: 2,000-2,999 — Buffer: 0.75percent
  - Score range: 1,000-1,999 — Buffer: 0.50percent
  - Score range: 350-999 — Buffer: 0.25percent
- ECB floor mappings (exact):
  - Score range: >=2,900 — Buffer: 1.00percent
  - Score range: 1,950-2,899 — Buffer: 0.75percent
  - Score range: 1,250-1,949 — Buffer: 0.50percent
  - Score range: 350-1249 — Buffer: 0.25percent
- Recommendation:
  - BdI should review adequacy of O-SII buffers and, if necessary, consider raising them with an adequate phase-in period to allow organic accumulation through internal resources and to avoid procyclicality.

### Macroprudential toolkit: scope, availability, and gaps
- Toolkit basis and transposition:
  - Toolkit is essentially based on the banking tools established in CRR CRD IV; Circular 285 transposes macroprudential tools including CCyB, G-SII and O-SII buffers.
  - The SyRB has not been transposed to the Italian regulation.
- Non-bank measures:
  - Macroprudential tools for non-banks (asset managers, insurers, households, non-financial corporations) are in principle available but have not been formally recognized or used for macroprudential purposes.
  - Asset managers: regulation sets minimum capital and activity restrictions but does not set overall constraints to leverage nor impose minimum liquidity buffers; funds investing more than 20 percent in illiquid assets are required to be closed-ended.
  - Insurers: IVASS oversees Solvency II; measures that could limit procyclicality include volatility adjustment (VA), transitional measures on technical provisions (TTP), prohibition of certain activities in emergencies; a law (l.n. 58/2019) enacted after closing of the note broadened IVASS macroprudential powers.
  - Households: borrower-based measures (LTV and DSTI) are not part of current toolkit; legal framework does not explicitly cover them.
  - Non-financial corporations: no dedicated macroprudential tools, though Art. 458 CRR could be applied.
- Recommendation:
  - Authorities should incorporate the SyRB and ensure borrower-based measures can be deployed quickly through timely secondary regulation; gradual implementation is desirable given calibration difficulties.

### Households, corporate sector, and non-bank financial sector performance
- Households:
  - Household net wealth is high at almost six times annual GDP at the end of 2017.
  - Household debt to GDP is among the lowest in the EU and has remained largely unchanged between 2012 and 2018.
  - Debt service to income ratios declined across households between 2012 and 2016; aggregate indicators suggest the trend has persisted.
  - Loan to value ratios for mortgage credit are relatively low, at 65 percent, after increasing from below 60 since 2013.
  - Most mortgages are at variable rate; reference rate is Euribor.
- Corporates:
  - Corporate leverage has declined; Interest Coverage Ratio has increased; median firm profitability has rebounded approaching pre-crisis levels.
  - NPL ratios remain high for firms in the construction sector; debt at risk remains sensitive to adverse shocks in the cost of funding.
  - Corporate sector net financial assets at -112 percent of GDP.
- Non-bank financial sector:
  - Insurance: "Insurance premiums and profitability have stagnated in the last four years." Liquidity "has declined compared to 2016." Solvency "has recently declined after experiencing a sustained increase since 2016."
  - Asset managers and mutual funds: experienced outflows and negative returns during 2011/early 2012 and again during 2018; open-ended mutual funds have large liquidity buffers mostly concentrated in Italian government bonds.

### Communications, accountability, and coordination
- Coordination arrangements:
  - BdI’s Coordination Committee for Financial Stability (CCFS) meets three times a year; High-level staff from IVASS are usually invited.
  - BdI and CONSOB meet on an ad-hoc basis; no regular dedicated platform for financial stability issues between them.
  - Other coordinating bodies (e.g., CSFS chaired by MEF) have not met regularly in recent years.
  - BdI, CONSOB, IVASS and COVIP participate in EBA, ESMA, EIOPA; BdI is a voting member of the ESRB, others participate non-voting.
- Resources and accountability:
  - BdI and IVASS have dedicated staff for financial stability analysis and surveillance; CONSOB does not have dedicated staff for financial stability analysis.
  - BdI publishes a semi-annual FSR; accountability through legally required annual reports.
- Recommendation:
  - Advance in defining intermediate objectives for financial stability mandate (IVASS, CONSOB); map macroprudential policies and tools (BdI, IVASS); strengthen communications on financial stability mandate, surveillance, and actions (BdI, IVASS); expand discussion of systemic risk in the FSR and make more frequent use of prospective simulations for the banking sector (BdI).

### Specific numeric and implementation details on SyRB usage in Europe (Box 1 summary)
- As of December 2018, 15 jurisdictions had an active SyRB.
- The size of active SyRBs averages about 2 percent (considering the midpoint of the range reported).
- Examples of SyRB measures (selected):
  - Austria: 13 banks: 0.5%–2%
  - Bulgaria: All banks: 3%
  - Croatia: All banks: 1.5%–3%
  - Czech Republic: 5 banks: 1%–3%
  - Denmark: 7 banks: 0.5%–3%
  - Estonia: All banks: 1%
  - Hungary: 1 bank: 1%
  - Iceland: All Banks: 2%–3%
  - Liechtenstein: 3 banks: 2.5%
  - Netherlands: 3 banks: 3%
  - Norway: All banks: 3%–5%
  - Poland: All banks: 3%
  - Romania: 24 banks: 1%–2%
  - Slovakia: 3 banks: 1%
  - Sweden: 4 banks: 3%

### Priority recommendations and timing (from Table 1)
- Short Term (ST — within 1–2 years):
  - Establish a macroprudential policy authority (MEF, BdI, IVASS, CONSOB, COVIP).
  - Incorporate the CRD IV Systemic Risk Buffer and borrower-based tools into the regulation and macroprudential toolkit (BdI).
  - Evaluate adequacy of O-SII buffers and, if deemed necessary, consider raising them with an adequate phase-in period (BdI).
  - Advance in defining intermediate objectives for financial stability mandate (IVASS, CONSOB).
  - Map macroprudential policies and tools (BdI, IVASS).
  - Strengthen communications on financial stability mandate, surveillance, and actions (BdI, IVASS).
  - Expand discussion of systemic risk in the FSR (BdI).
  - Make more frequent use of prospective simulations for the banking sector in the FSR (BdI).
- Medium Term (MT — within 3–5 years):
  - Consider implementing prudential policies to moderate the sovereign-bank nexus with an appropriate phase-in period to avoid market disruptions (BdI).

*Source: EXECUTIVE SUMMARY and chapter excerpts (1itaea2020007) — IMF technical note.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Institutional arrangement and governance
- Macroprudential oversight combines local elements with the European framework.
- Key domestic authorities:
  - Banca d’Italia (BdI): national central bank and prudential authority for banks and other financial institutions; national competent authority and designated authority under CRR and CRD IV.
  - CONSOB: markets authority.
  - IVASS: insurance supervisor.
  - COVIP: pension funds supervisor (contributes to oversight though it does not have a clear financial stability mandate).
- BdI plays a leading role in surveillance and coordination, easing coexistence of national and European frameworks.
- Recommendation: Establish a national macroprudential policy authority (single institution or board) to provide formal dispute-resolution across agencies and help fill data gaps; such authority would make recommendations under a “comply or explain” mechanism. Given BdI’s mandate and experience, BdI should play a leading role.

### Macroprudential toolkit and borrower-based measures
- The Systemic Risk Buffer (SyRB) in CRD IV has not been introduced in the Italian macroprudential framework.
- Rationale for incorporating the SyRB:
  - Flexibility to mitigate systemic risks unaddressed by other tools.
  - SyRB could be calibrated to consider concentration of exposures (e.g., sovereign holdings).
- Borrower-based tools:
  - Household- and housing-related risks are currently low in Italy, but borrower-based tools (LTV and DSTI restrictions) could become valuable as the cycle turns.
  - Experience from other countries indicates that adding such tools may take time if legal action and calibration are needed.
  - Recommendation: Ensure regulation establishes structure and operating procedures for these tools to permit quick deployment; take actions while sector risks are limited.

### Financial stability surveillance and stress testing
- Surveillance and assessment are strong, using state-of-the-art quantitative techniques and expert judgement, covering many sectors.
- Areas for enhancement:
  - More prominent discussion of systemic risk in the Financial Stability Report (FSR), including interconnections across sectors (for example via sovereign exposures).
  - More regular use of prospective simulations for the banking sector to assess forward-looking risks.

### Sovereign-bank nexus and prudential responses
- Italian financial intermediaries hold large sovereign debt positions:
  - Central government securities represented 13 percent of total financial assets of Italian intermediaries at the third quarter of 2018, compared with 5 percent in the Euro Area.
  - Sovereign holdings have been increasing for Italian banks, reaching about 10 percent at end-2018.
  - The relative importance of sovereign securities by intermediary type (as reported): about 37 percent, 3 percent, 20 percent, and 19 percent of their financial assets, respectively.
  - Italian intermediaries hold the lion share of the stock of government securities (37 percent), followed by the rest of the world (33 percent) and the BdI (20 percent).
- Vulnerabilities and recommendations:
  - Large sovereign debt holdings make intermediaries vulnerable to a sovereign shock and could exacerbate feedback to the real economy.
  - Consider prudential policies to encourage banks to diversify sovereign holdings and build capital buffers that incorporate sovereign debt risk.
  - Options include a carefully calibrated SyRB, Pillar II measures, or risk weights linked to concentration limits (noting that the use of risk weights based on concentration of exposures is not possible under EU regulations).
  - Policies should be phased in carefully to avoid procyclicality and disruptions to sovereign debt markets and bank lending, and weighed against costs and coordination considerations with European and global partners.

### Macroprudential stance and cyclical buffers
- Cyclical stance:
  - Macrofinancial indicators suggest the Italian economy is beyond the point of a preemptive cyclical accumulation of buffers, consistent with BdI keeping the CCyB at zero.
- Liquidity and capital:
  - Capital ratios increased to their highest levels in 17 years but remain below EU averages.
  - Gross NPLs remained high at 9.5 percent of loans at the third quarter of 2018.
  - Profitability: ROE recently reached 7 percent after several years in negative territory and is below the estimated cost of equity capital.
  - Liquidity metrics (LCR and NSFR) are high, partly due to ECB TLTRO and large sovereign holdings qualifying as HQLA under Basel III.

### O-SII buffers
- Observation:
  - Both fully-loaded and transitional buffers of Italian O-SIIs are at the lower end of European peers; overall CET1 capital levels of Italian O-SIIs are also comparatively low.
- Recommendation:
  - BdI should review adequacy of O-SII buffers and, if necessary, consider raising them with an adequate phase-in period to allow organic accumulation through internal resources and to avoid procyclicality.

### Other recommendations and operational steps (from Table 1)
- Main recommendations (authorities responsible in parentheses; ST = Short Term (within 1–2 years); MT = Medium Term (within 3–5 years)):
  - Establish a macroprudential policy authority (MEF, BdI, IVASS, CONSOB, COVIP) — ST.
  - Incorporate the CRD IV Systemic Risk Buffer and borrower-based tools into the regulation and macroprudential toolkit (BdI) — ST.
  - Consider implementing prudential policies to moderate the sovereign-bank nexus with an appropriate phase-in period to avoid market disruptions (BdI) — MT.
  - Evaluate adequacy of O-SII buffers and, if deemed necessary, consider raising them with an adequate phase-in period (BdI) — ST.
- Other recommendations — ST:
  - Advance in defining intermediate objectives for financial stability mandate (IVASS, CONSOB).
  - Map macroprudential policies and tools (BdI, IVASS).
  - Strengthen communications on financial stability mandate, surveillance, and actions (BdI, IVASS).
  - Expand discussion of systemic risk in the FSR (BdI).
  - Make more frequent use of prospective simulations for the banking sector in the FSR (BdI).

*Source: EXECUTIVE SUMMARY (1itaea2020007) — IMF technical note.*

### 6.      Beyond banks, insurance companies and asset managers have also recovered from the

### 1itaea2020007 - 6.      Beyond banks, insurance companies and asset managers have also recovered from the

### Non-bank financial sector performance
- Insurance sector:
  - "Insurance premiums and profitability have stagnated in the last four years."
  - Liquidity "has declined compared to 2016."
  - Solvency "has recently declined after experiencing a sustained increase since 2016."
  - Figures referenced: Figure 3, panel 1 (premia and ROE); Figure 3, panel 2 (solvency and liquidity ratios).
- Asset managers and mutual funds:
  - Asset managers "experienced outflows and negative returns during 2011 and early 2012, closely tracking movements in sovereign spreads."
  - After recovery and significant inflows, "mutual funds again experienced some outflows and negative returns during 2018."
  - Open-ended mutual funds "have large liquidity buffers relative to redemptions," with these buffers "mostly concentrated in Italian government bonds."
  - Figures referenced: Figure 3, panel 3 (performance); Figure 3, panel 4 (liquidity).

### Households and corporate sector: resilience and vulnerabilities
- Households:
  - "Household net wealth is high at almost six times annual GDP at the end of 2017—the latest date available."
  - "Household debt to GDP is among the lowest in the EU and has remained largely unchanged between 2012 and 2018" (Figure 4, panel 1).
  - "Debt service to income ratios declined across households between 2012 and 2016 (last year of household survey) and aggregate indicators suggest the trend has persisted" (Figure 4, panel 2).
  - "Loan to value ratios for mortgage credit are relatively low, at 65 percent, after having consistently increased from below 60 since 2013" (Figure 4, panel 3).
  - Residential and commercial real estate: "After a period of rapid growth before 2008, prices of residential and commercial real estate have declined, with only some recent weak stabilization observed in residential prices" (Figure 4, panel 4).
- Corporates:
  - "Corporate leverage has declined across firms" (Figure 4, panel 5).
  - "The Interest Coverage Ratio (the EBIT to interest expense ratio) has increased because of the policy driven low cost of funding observed in recent years."
  - "Median firm profitability has rebounded in recent years and it is approaching pre-crisis levels."
  - Risks: "NPL ratios remain high for firms in the construction sector, and debt at risk remains sensitive to adverse shocks in the cost of funding (see Technical Note on the Corporate Sector in this FSAP)."
  - Cross-reference: See Figure 30 of Technical Note on Systemic Risk Analysis and Stress Testing of the Banking and Corporate Sector.

### Institutional arrangement: mandates, powers, coordination
- Mandates and responsibilities:
  - Financial stability responsibility is shared between the BdI, IVASS and CONSOB.
  - "The law assigns a clear and broad financial stability mandate to the BdI in all its regulatory and supervisory activities."
  - IVASS "is also charged with a financial stability mandate, although the law subordinates it to the primary objective of ensuring suitable protection to the insured."
  - The Consolidated Law on Finance "establishes financial stability as one of the five objectives of the supervision of all entities and activities" and designates BdI and CONSOB as supervisors; BdI responsible for risk containment, CONSOB for transparency and proper conduct.
  - COVIP contributes to oversight despite "lacking a clear financial stability mandate."
- Macroprudential framework and EU interaction:
  - BdI is "both the national competent authority and the designated authority for the macroprudential powers under the CRR CRD IV, a responsibility shared with the ECB."
  - Under the SSM Regulation (EU Regulation No 1024/2013), "the ECB has been assigned specific powers in the field of macroprudential policies" including top-up powers.
  - BdI defined intermediate objectives for macroprudential policy consistent with ESRB recommendations: mitigate excessive credit growth and leverage; mitigate excessive maturity mismatch and market illiquidity; limit exposure concentrations; limit systemic impact of misaligned incentives and moral hazard; strengthen resilience of financial infrastructures.
  - IVASS follows intermediate objectives identified by EIOPA to develop a harmonized macroprudential framework for insurance.
- Information, powers and perimeter:
  - All agencies "have broad powers to gather information" and "are required to share information with each other."
  - BdI can request information from banks, investment firms, asset managers, mutual funds, trading venues, and other entities covered by the Consolidated Law on Finance.
  - The legal framework gives BdI "hard powers to activate and calibrate the macroprudential tools contemplated under the CRR CRD IV." The SyRB "has not been incorporated in local regulation."
  - The regulatory perimeter is broad, covering banks (including cooperatives and credit unions), investment firms, issuers of electronic money, insurance and reinsurance services, collective asset management services and products (including mutual funds and crowdfunding platforms), trading venues, CCPs, central securities depositories, and issuers of securities.
- Coordination and governance:
  - Internal coordination: BdI’s Coordination Committee for Financial Stability (CCFS) meets three times a year; chaired by a governing board member; attended by senior BdI staff and "High-level staff from IVASS are usually invited."
  - BdI and CONSOB "meet on an ad-hoc basis" and maintain ongoing communications; no regular dedicated platform for financial stability issues between them.
  - Other coordinating bodies, such as the committee for the safeguard of financial stability (CSFS) chaired by the MEF, "have not met regularly in recent years."
  - International coordination: BdI, CONSOB, IVASS and COVIP participate in EBA, ESMA, EIOPA; BdI is a voting member of the ESRB, others participate non-voting.
- Resources and accountability:
  - "The BdI and IVASS have dedicated staff for financial stability analysis and surveillance."
  - CONSOB "does not have dedicated staff for financial stability analysis" given its focus on market conduct.
  - Accountability through legally required annual reports; BdI publishes a semi-annual financial stability report (FSR).

### Assessment and recommendations
- Key assessment:
  - "The coexistence of the local and European framework for financial stability poses some challenges that are eased by the leading role assigned to the BdI and the bank-based nature of the financial system."
  - The current system "relies on informal coordination across agencies," which "could affect the willingness to implement preemptive macroprudential actions, especially in cases of disagreement about their need across authorities."
- Recommendation:
  - "Italy should establish a national macroprudential policy authority."
    - Background: a 2016 delegation law mandated the Ministry of Finance to create such an authority within a year; the legislative decree was not issued and the mandate expired.
    - Rationale: a formal authority would improve coordination, help implement preemptive macroprudential actions, cover macroprudential policies beyond banking, and assist in filling data gaps.
    - Design guidance: "The macroprudential policy committee considered in the delegation law of 2016 would fill this role" and "a new body would make recommendations to members under a 'comply or explain' mechanism."
    - Role for BdI: "Given the breadth of the BdI’s mandate, its role as national designated authority under CRR CRD IV, and its extensive experience in systemic risk surveillance, the BdI should have a leading role in this body and its role as national designated authority should be preserved."

*ITALY — INTERNATIONAL MONETARY FUND*

### 21.      A clearer map between macroprudential objectives and tools would enhance

### 21.      A clearer map between macroprudential objectives and tools would enhance

### Macroprudential objectives and tools
- The BdI is the only agency that has established intermediate objectives for its financial stability mandate, making it more concrete and enhancing accountability.
- The map between objectives, indicators, and tools could be enhanced, especially for objectives beyond mitigating excessive credit growth and the systemic impact of misaligned incentives (tackled through the CCyB, GSII, and OSII).
- Example gap: BdI’s objectives include limiting direct and indirect exposure concentration, but BdI has not explicitly declared how these exposures are assessed, nor what tools could be deployed if exposures were judged to be excessive.
- The activation of a tool should not be mechanically linked to specific indicators and can affect various objectives; nonetheless, establishing a map between intermediate objectives and specific instruments would:
  - help staff think in advance of policy options when facing emerging vulnerabilities;
  - enhance accountability and communications when tools are eventually activated.
- The CCyB is presented as a clear example: it is linked to a specific objective, combines quantitative indicators and judgement, and has a clear communication and accountability framework to increase the willingness to act.
- IVASS and CONSOB should advance in clearly identifying the intermediate objectives behind their financial stability objectives.

### Communications and awareness
- Written reports and descriptions of actions on institutional websites are valuable resources but may be insufficient to raise awareness of the financial stability mandate, surveillance, and actions among other branches of government or the general public.
- Greater awareness and societal vigilance are important for accountability and can strengthen both the willingness and the ability to act.

### Incorporation of SyRB and borrower-based measures
- The formal incorporation of the SyRB and steps toward incorporating borrower-based measures would enhance BdI’s ability to tackle a broader set of risks.
- As part of CRD IV, implementation of the SyRB requires action by member countries; BdI did not incorporate the SyRB into its norms because of a perceived lack of clarity about the necessity of this buffer.
- The broad nature of SyRB allows for flexible deployment; countries have used it to tackle various systemic risks unaddressed by other tools (see Box 1).
- Borrower-based tools (e.g., restrictions to LTV and DSTI ratios) could become valuable as the financial cycle turns.
- Current legislative framework does not explicitly cover borrower-based measures but grants BdI the ability to use its broad supervisory powers for macroprudential purposes.
- Before using that power, BdI should issue secondary regulation establishing the structure of and the operating procedures for borrower-based measures.
- Because of difficulties in calibration, a gradual implementation is desirable, suggesting early availability is useful.

### Systemic risk surveillance — Current situation
- The BdI conducts regular and sophisticated financial stability assessments. Main surveillance vehicles are:
  - semi-annual Financial Stability Report (FSR);
  - newly-created triannual risk dashboard (first issued in February 2018).
- Semi-annual FSR:
  - describes current state of the Italian financial system and prospective risks;
  - outcome of an analysis process involving various BdI and IVASS directorates coordinated through the CCFS;
  - covers: global and local macrofinancial environment, real estate markets, financial vulnerability of households and non-financial corporations, monetary and financial market trends, banks’ solvency, liquidity, profitability, and indicators from insurance and asset management industry.
  - maintains structure across issues to ease comparability; overall assessment combines multiple indicators, sophisticated models, and expert judgement.
  - models combine macroeconomic indicators and granular microeconomic data from household surveys and non-financial corporations to simulate vulnerability under adverse scenarios.
- Triannual risk dashboard:
  - provides a panoramic view of the vulnerability of the Italian financial system;
  - incorporates about 80 indicators across nine categories of risks;
  - uses various statistical and pre-determined thresholds to flag heightened risks and statistical techniques to compute aggregate indicators of risk along key dimensions.
- IVASS and CONSOB activities:
  - IVASS: quarterly insurance sector risk dashboard following EIOPA methodology, assessing risks in eight categories; quarterly surveys to institutions representing about 80 percent of the sector; monthly liquidity monitoring; top-down stress tests; sensitivity analysis; analyses of ORSA and SCR reports.
  - CONSOB: produces a market risk dashboard with indicators on market liquidity and spillovers for equity and bond markets, and key indicators for solvency and profitability of non-financial corporations and banks; CONSOB used to publish its risk outlook but there has been no publicly available version in the last two years.
- BdI models and topic analyses:
  - detailed analysis of consequences of an increase in sovereign spreads on solvency and liquidity of Italian banks and insurance companies;
  - household model uses microeconomic data from household surveys, imputes debt dynamics and econometric relations to macro aggregates;
  - corporate model uses micro data from Cerved to estimate relationships between firms’ profitability, interest expenses, and macro aggregates;
  - household vulnerability defined as ratio of debt service to income above 30 percent and disposable income below the median;
  - corporate debt at risk defined as firms with negative operating income or net interest expenses to net operating income above 50 percent.
  - real estate sector: detailed analysis of early warning properties of multiple price and credit indicators to forecast flow of bad loans and NPLs from residential and commercial real estate loans.
- Interconnections and exposures:
  - Significant exposure of Italian financial intermediaries to Italian sovereign assets creates indirect linkages across sectors.
  - Sovereign CDS spreads explain about 60 percent of the variation of CDS spreads of Italian financial intermediaries; the passthrough coefficient from sovereign to financial firms is close to 1.
  - This comovement may limit the ability of one type of intermediary to step in when others face troubles associated with sovereign-related risk.
- Connectedness and non-bank contributions:
  - Connectedness (share of variance in stock market returns and volatility explained by other firms) has increased since 2015.
  - Connectedness indices for Italian financial intermediaries average about 75 percent, high compared to other countries.
  - Increase in volatility connectedness is particularly marked in recent years.
  - Large insurance companies and asset managers are among the largest contributors to overall connectedness, alongside the largest banks.
- CoVaR and systemic tail risk:
  - CoVaR of an Italian financial institution measures change in system VaR (at 5 percent) when that institution experiences distress, relative to normal times.
  - Median CoVaR for Italian financial intermediaries increased during the last year from a level of about 20 to 40 daily basis points, similar to late 2012.
  - Intermediaries with highest average and maximum CoVaR include not only largest banks but also insurance companies and asset managers (example: both average and maximum CoVaR of Generali are larger than those of Unicredit).
  - CoVaR positively correlates with CDS spreads of the Italian sovereign; sovereign CDS explains about 50 percent of the variance of the median Italian CoVaR and 30 percent of the 90th percentile of CoVaR.

### Assessment and Recommendations
- Overall assessment:
  - Systemic risk surveillance in Italy is sophisticated, timely, and follows a sectoral approach.
  - BdI and IVASS use state-of-the-art quantitative techniques combined with qualitative insights and expert judgement.
  - Surveillance covers many sectors and relevant risk dimensions comprehensively; analyses and simulations are regularly used for real estate, corporate, household sectors, and sometimes for banks and insurance companies.
- Recommendations to strengthen surveillance and communication:
  - Complement sectoral approach with more prominent and regular discussion of systemic risk in the FSR, including financial system exposure to the Italian sovereign.
    - Expand use of interlinkage indicators in the BdI dashboard and systematically discuss them in the FSR.
    - Potential expansions: inclusion of non-banks (e.g., life insurance companies and large asset managers) in delta CoVaR calculations; tracking connectedness measures; gathering indicators of exposure to government assets of all financial intermediaries in the interlinkages component; computing measures of portfolio similarity within and across sectors; including measures of interconnections through CCPs.
  - Regularly incorporate simulations for the banking sector to assess prospective risks:
    - Complement EBA biennial stress tests with single-factor simulations or frequent top-down exercises focused on Italy-specific risks.
    - Use careful communication strategies for these exercises; examples of practice include Austria, Germany, and Spain which regularly use these simulations or top-down stress tests to inform financial stability reports.

*Source: IMF staff summary of content unit 1itaea2020007.*

### 33.      The macroprudential toolkit is essentially based on the banking tools established in

### 33.      The macroprudential toolkit is essentially based on the banking tools established in

### Scope and legal basis of the macroprudential toolkit
- The macroprudential toolkit is essentially based on the banking tools established in CRR CRD IV.
- Circular 285 of the BdI transposes to local regulation the macroprudential tools established in the European directive: the countercyclical capital buffer (CCyB)—including mandatory reciprocity, and the buffers for global and other systemically important institution (G-SII and O-SII buffers).
- The toolkit also includes measures covered in CRR: higher risk weights and higher LGD floors for real estate exposures, and the flexibility package Art 458 CRR (e.g., sectoral capital requirements, limits to large exposures, risk weights for certain sectoral exposures) that, as part of an EU regulation, do not require local transposition.
- All these measures apply to Italian banks on a residency basis (local banks, and subsidiaries of EU and non-EU banks).
- Other bank-based measures with some macroprudential elements such as the LCR, NSFR, and limits to the leverage ratio also apply to Italian banks.
- The SyRB, which is part of CRD IV but is not a mandatory buffer, has not been transposed to the Italian regulation.

### Macroprudential tools for non-banks (availability and use)
- Macroprudential tools for non-banks are in principle available but have not been formally recognized as part of the toolkit nor used with these purposes. Applies to asset managers, insurers, households, and non-financial corporations.
- Asset managers:
  - BdI regulation for management of collective investment vehicles sets minimum capital levels for asset managers and restrictions to investment activities of various types of collective investment vehicles, including different types of open- and closed-ended mutual funds.
  - Restrictions include concentration limits, limits to the use of derivatives, borrowing limits, and some restrictions to securities lending activities; type and limits vary by fund type.
  - These are microprudential in principle but could be used for macroprudential purposes to limit interconnections and constrain leverage and liquidity transformation.
  - Regulation does not set overall constraints to leverage (borrowing, use of derivatives, and repo operations are not targeting a maximum level of overall leverage) nor impose minimum liquidity buffers.
  - Funds investing more than 20 percent in illiquid assets are required to take a closed-ended form, and managers and authorities can temporarily suspend redemptions.
  - Legal basis for adopting additional measures is in place; only a regulatory change would be required.
- Insurers:
  - At global level, macroprudential framework and tools for insurance are still debated.
  - In Europe, EIOPA issued reports laying a framework for identification of systemic risks and discussed the potential role of Solvency II tools and need for additional tools; ESRB issued a report on possible macroprudential measures for insurers.
  - In Italy, IVASS oversees Solvency II implementation. Measures available in Italy that could limit procyclicality (per EIOPA 2018) include: extension of recovery period, prohibition of certain activities/products in case of financial stability concerns, volatility adjustment (VA), and transitional measures on technical provisions (TTP).
  - IVASS can set limits in emergency situations to technical bases used for calculation of premium rates and guaranteed rates in life assurance products.
  - Most of these measures limit procyclicality in the downside rather than the upside.
  - Note: A law enacted after the closing of this technical note (l.n. 58/2019) has broadened IVASS macroprudential intervention powers.
- Households:
  - Main tools for taming excessive household borrowing are borrower-based measures (limits to LTV and DSTI ratios, and sectoral capital requirements).
  - Sectoral capital requirements for banks are part of the CRR CRDIV framework and are already part of the toolkit.
  - Borrower-based measures are not part of the current macroprudential toolkit; the legal framework does not explicitly refer to them, which could complicate implementation and result in legal challenges and delays.
- Non-Financial Corporations:
  - Currently no macroprudential tools aimed at limiting vulnerabilities in non-financial corporations or building buffers related to them, although it could be possible through application of Art. 458 of the CRR.

### Countercyclical capital buffer (CCyB): assessment and status
- The countercyclical capital buffer has remained at zero since its implementation in 2015.
- Following CRDIV requirements, BdI conducts a quarterly assessment of the adequacy of the CCyB and communicates its decision to the ECB and ESRB.
- The methodology follows ESRB recommendations with methodological modifications aimed to better capture the Italian credit cycle.
- Information from various quantitative indicators, including the estimated credit gap, is complemented with expert judgement from staff from various directorates of the BdI to reach a recommendation on activation and calibration, which is subject to Board approval.
- A simple look at traditional credit gap and credit growth indicators suggest the credit cycle has remained on a weak phase in the last five years, consistent with maintaining the buffer at zero.
- The EU framework includes mandatory recognition of CCyB rates set by member countries and a process for recognizing and setting CCyB rates for exposures to material third countries.

### Systemic buffers (G-SII and O-SII): methodology and calibration
- One Italian bank has been designated as GSII and, for 2019, three banks are classified as OSIIs.
- BdI follows BCBS and EBA methodologies to compute systemic scores for G-SIIs and O-SIIs. Scores consider dimensions such as size, complexity, interconnectedness, substitutability/financial institution infrastructure, and cross-jurisdictional activity.
- A score is computed for each dimension and averaged; banks with total scores above a predefined threshold are in principle identified as systemic, though judgement can be used.
- Scores are used to calibrate buffers. For GSIIs, mapping between scores and buffers is defined annually by BCBS and supervisory judgement adjustments have a high bar. For OSIIs, bucket mapping is determined by national authorities; ECB has defined minimum buffers for score ranges.
- Based on these methodologies, Unicredit is currently the only Italian GSII and is also an OSII together with Intesa Sanpaolo and Banca BPM.
- Systemic buffers for Italian OSIIs are currently the minimum levels recommended by the ECB and are to be met over a phase-in period.
- BdI uses a cluster analysis method to map scores into buckets and assign buffer levels. Current calibration assigns each Italian bank a buffer equal to the corresponding ECB floor for its score.
- The buffers consistent with current score are phased-in over a 4-year period to be completed by 2022.
- The phase-in period for OSII buffers in Italy is among the longest in the EEA. For Unicredit and Intesa Sanpaolo the phase-in period ends in 2021, and for Banco BPM in 2022.
- The current calibration sets the OSII buffer of Unicredit (the single Italian GSII) at 1 percent—its current GSII buffer—at the end of the phase-in period. The OSII buffers of the other two Italian OSII fall below that level.
- Observation: Some countries have G-SIIs with same G-SII and O-SII buffers (France and Spain); the UK has not implemented O-SII buffers; Norway and Sweden have had O-SII buffers above G-SII ones.

### Reciprocity of foreign macroprudential measures
- The BdI has not reciprocated macroprudential measures adopted by other EU countries because of no material exposure of Italian banks.
- ESRB set a process for reciprocity of measures across member countries. Until end-2018, ESRB issued recommendations for reciprocity for measures adopted by Belgium, Estonia, and Finland.
- Based on assessment of materiality of exposures of Italian banks, BdI decided not to reciprocate these measures and permanently reassesses exposures of Italian banks to these countries.
- Materiality criteria can include absolutes and relative exposures, such as 1 billion euros or 1 percent of risk weighted assets.

### Vulnerabilities: households, housing, and corporate sector
- Households and housing:
  - Household debt in Italy is about 60 percent of disposable income.
  - Average LTV ratios of newly-originated mortgages in Italy are relatively low, at 65 percent, although they have been increasing rapidly by 7 percent in the last five years, getting back to levels observed in the two years before the GFC.
  - No data on distribution of LTV ratios across households to assess pockets of vulnerability.
  - Data on debt-service-to-income (DSTI) available from household surveys every two years; latest available survey was conducted in 2016.
  - Distribution of DSTI among households with mortgage loans shows a relatively low mean of about 20 percent and a 75 percent percentile below 30 percent.
  - Most mortgages in Italy are at variable rate; reference rate for these loans is Euribor, which limits interest risk faced by households in case of sudden increase in Italian sovereign spreads.
- Corporate sector:
  - Vulnerability indicators for the corporate sector (leverage, debt-service-to-income ratios) have improved but sector remains sensitive to shocks.
  - Sector remains more indebted than the euro area average, with net financial assets at -112 percent of GDP.
  - Corporate stress tests conducted in this FSAP show sector remains vulnerable to macroeconomic and interest rate shocks.
  - Capital held by banks for exposure to SMEs is lower than recommended by current Basel rules (due to change). Given concentration of vulnerabilities in small firms, capital levels held for this sector could be challenged in a stress scenario.

### Assessment and policy recommendations
- Incorporate SyRB and ensure borrower-based measures can be deployed quickly:
  - Authorities should incorporate the SyRB into the macroprudential toolkit and ensure regulatory framework permits quick deployment of borrower-based measures, were they needed in future.
  - SyRB is not mandatory to introduce in national legal frameworks and not incorporated in Italy to date. Its flexibility allows application against systemic risks not addressed by other tools (e.g., sovereign risk concentration).
  - Borrower-based tools (LTV and DSTI restrictions) could be valuable as the financial cycle turns; adding them can take time if legal action and calibration are required.
  - Legal framework grants BdI broad supervisory powers with macroprudential purposes, but secondary regulation establishing structure and operating procedures should be timely issuable.
  - Gradual implementation is desirable given calibration difficulties; early availability is useful.
- Cyclical stance:
  - From a cyclical perspective, macroprudential policy stance seems adequate given weak economic and credit growth and negative credit gap in recent years.
  - BdI decision to keep CCyB at zero is consistent with indicators (employment, credit growth across sectors, commercial and real estate prices).
- Structural vulnerabilities and buffer adequacy:
  - Several structural vulnerabilities remain elevated; adequacy of current buffers needs assessment.
  - High exposure of banks and other financial intermediaries to the sovereign may strain the financial system if market assessment of fiscal situation worsens.
  - Financing cost of cyclically weak non-financial corporate sector would be affected, adding challenges to financial intermediaries (as shown in stress tests).
- Options to moderate sovereign-bank nexus:
  - Authorities could consider prudential policies to moderate sovereign-bank nexus, with gradual phasing-in to minimize market disruptions.
  - Possible approaches include:
    - Implementing a carefully calibrated SyRB that considers concentration of sovereign exposures.
    - Pillar II supervisory measures.
    - Establishment of positive risk weights for banks’ sovereign exposures and capital surcharges reflecting concentration of these exposures (currently not part of European regulatory framework and would require EU agreement).
  - Policies should be designed to avoid procyclicality and be gradually phased in.
  - For insurers, favorable treatment of sovereign exposures in Solvency II may lead to excessive sovereign debt holdings; EIOPA discussion mentions concentrated exposures as a source of systemic risk requiring enhanced monitoring and macroprudential action.
  - IVASS should explore options for implementing further macroprudential measures to limit risks from concentrated sovereign exposures if such concentration grows further.

*Source: IMF staff assessment and description in the provided chapter excerpt.*

### 45.      Overall buffers and capital ratios for Italian O-SIIs are low compared to other similar

### 45.      Overall buffers and capital ratios for Italian O-SIIs are low compared to other similar European banks

### Key findings
- Overall buffers and capital ratios for Italian O-SIIs are low compared to other similar European banks.
- Current O-SII and overall buffers (the sum of the G-SII, O-SII, and SyRB) of Italian banks at their transition levels are at the lower part of the distribution across European banks with a comparable overall score.
- The largest Italian bank has a G-SII and O-SII buffer that are similar despite its O-SII score being an order of magnitude larger than its G-SII score, suggesting current calibration may not fully account for systemic importance.
- The mapping between O-SII scores and buffers shows a high degree of dispersion across EA jurisdictions; the ECB is assessing need for further harmonization.

### Rationale and context
- The SII buffer was incorporated into the Basel III framework after the GFC to internalize externalities of large and complex institutions and reduce moral hazard (BCBS, 2012).
- In practice, countries use a bucketing system that maps scores to buffers because direct determination of proportional buffers is challenging.
- The current regulatory treatment under international standards reflected in CRD IV and CRR (zero risk weights; exemption from concentration limits) provides incentives for sovereign holdings.
- A systemic risk buffer (SyRB) has the added benefit of being potentially more countercyclical than risk weights on exposures, and more transparent than Pillar 2 measures.

### Systemic Risk Buffer (SyRB) use in Europe (summary of Box 1)
- The SyRB is one of the macroprudential tools introduced in CRD IV, aimed to address systemic risks of a long-term non-cyclical nature not covered by other CRR tools.
- Most EU jurisdictions have transposed the SyRB to local regulation, except for Ireland and Italy.
- As of December 2018, 15 jurisdictions had an active SyRB.
- The size of the SyRB is large compared to other buffers, averaging about 2 percent (considering the midpoint of the range).
- Eight countries set maximum rates of 3 percent and one at 5 percent.
- Rules and procedures for SyRB use include:
  - It cannot address cyclical risks, or risks adequately covered by other CRR CRD IV tools.
  - It cannot top-up SII buffers, but can replace them if higher; it cannot be used on top of SII buffers unless the SyRB targets only domestic exposures.
  - A single buffer should be calculated for each institution even if the SyRB covers more than one type of risk.
  - Authorities must notify the ECB and ESRB when activating the SyRB and explain the systemic risk targeted and scope; if proposed buffer is not above 3 percent there is no further notification or approval.
  - The calibration of the SyRB should be evaluated at least every two years.
- Countries have used the SyRB to substitute or complement O-SII buffers, address structural risks from similarity in business models, increase resilience to external shocks in open small economies, and target other vulnerabilities (e.g., commercial real estate, high levels of NPLs).

### Examples of SyRB implementation (selected numeric measures)
- Austria: 13 banks: 0.5%–2%
- Bulgaria: All banks: 3%
- Croatia: All banks: 1.5%–3%
- Czech Republic: 5 banks: 1%–3%
- Denmark: 7 banks: 0.5%–3%
- Estonia: All banks: 1%
- Hungary: 1 bank: 1%
- Iceland: All Banks: 2%–3%
- Liechtenstein: 3 banks: 2.5%
- Netherlands: 3 banks: 3%
- Norway: All banks: 3%–5%
- Poland: All banks: 3%
- Romania: 24 banks: 1%–2%
- Slovakia: 3 banks: 1%
- Sweden: 4 banks: 3%

### O-SII buffer buckets (Italy and ECB floor) — exact mappings from Table 2
- Italy
  - Score range: >= 4,000 — Buffer: 1.25percent
  - Score range: 3,000-3,999 — Buffer: 1.00percent
  - Score range: 2,000-2,999 — Buffer: 0.75percent
  - Score range: 1,000-1,999 — Buffer: 0.50percent
  - Score range: 350-999 — Buffer: 0.25percent
- ECB floor
  - Score range: >=2,900 — Buffer: 1.00percent
  - Score range: 1,950-2,899 — Buffer: 0.75percent
  - Score range: 1,250-1,949 — Buffer: 0.50percent
  - Score range: 350-1249 — Buffer: 0.25percent

### Policy recommendations
- The BdI should keep monitoring adequacy of O-SII buffers to ensure they reflect systemic nature of these institutions.
- Authorities should evaluate the adequacy of the O-SII buffers and consider the case for raising them with an adequate phase-in period that minimize potential disruptions to financial markets.
- Consider use of the SyRB where appropriate, given its flexibility and potential for countercyclical application, subject to notification and calibration requirements.

_ Source: ESRB and ECB._

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1itaea2020007.pdf_