## 1itaea2026008 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1itaea2026008 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2026/english/1itaea2026008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2026/english/1itaea2026008.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2026/english/1itaea2026008.pdf.json) --- ### INTRODUCTION AND SCOPE - Targeted assessment of banking regulation and supervision of Italy’s Less Significant Institutions (LSIs) conducted under the 2026 Financial Sector Assessment Program (FSAP). - Review based on regulatory and supervisory frameworks in place as of November 2025. - Focus areas: prudential regulation and supervision of LSIs, taking into account recommendations of the 2020 Italy FSAP and relevant Euro Area and global developments. - Review covered institutional setting; licensing, mergers and acquisitions; supervisory approach, tools and cooperation; corrective actions and sanctioning; corporate governance; transactions with related parties; Pillar 2 capital adequacy; supervision of key risks (credit risk and problem assets, liquidity and funding risk, operational risk, IRRBB), and AML/CFT considerations. - Mission took place in Rome and Milan during November 2025; IMF team received partial BdI self-assessment on the 2024 BCP and inputs from the ECB. ### PROGRESS SINCE THE 2020 FSAP - BdI has made “remarkable progress” strengthening LSI sector safety and soundness. - Key financial and prudential indicators improved: profitability, capital and liquidity buffers, and NPL ratio. - Reforms completed: cooperative and popolari banks reformed; first Italian Institutional Protection Scheme (IPS) established. - LSI sector consolidation: restructuring and transformation affected 30 percent of LSIs. - Significant supervisory actions on fragile banks; enhanced regulatory/supervisory framework to reduce NPLs and improve corporate governance and operational resilience. - Some 2020 FSAP recommendations remain in process (example: transactions with related parties); certain recommendations not addressed (see Appendix V). ### MARKET STRUCTURE AND KEY STATISTICS (select) - As of March 31, 2025: - 12 SIs with total assets of €2.53 trillion. - 118 LSIs holding €338 billion in aggregated assets. - LSI segment: 112 banking groups and stand-alone banks, and six branches of third-country banks (~9 percent of Italian banking system). - Composition: 39 cooperative banks (Raiffeisen banks) operating under an IPS; 16 popolari banks; remaining banks are joint stock companies. - Evolution of LSIs — Number (preserved exactly): - Number of LSIs, of which: 2022: 127; 2023: 123; 2024: 120; Q1 2025: 118 - JSC: 2022: 62; 2023: 60; 2024: 58; Q1 2025: 57 - Popolari banks: 2022: 18; 2023: 16; 2024: 16; Q1 2025: 16 - Cooperative banks: 2022: 39; 2023: 39; 2024: 39; Q1 2025: 39 - Third country bank branches: 2022: 8; 2023: 8; 2024: 7; Q1 2025: 6 - LSIs’ Assets (in Euro billion), of which: 2022: 338; 2023: 329; 2024: 333; Q1 2025: 338 - JSC: 2022: 258; 2023: 256; 2024: 258; Q1 2025: 261 - Popolari banks: 2022: 52; 2023: 47; 2024: 49; Q1 2025: 49 - Cooperative banks: 2022: 17; 2023: 16; 2024: 17; Q1 2025: 17 - Third country bank branches: 2022: 11; 2023: 10; 2024: 9; Q1 2025: 11 - Liquidity and NPL metrics: - LCR – 278 percent; NSFR – 151 percent. - Aggregate net NPL ratio as of June 2025: 4.7%; coverage ratio: 27.9%. - Traditional LSIs: net NPL ratio: 2%; coverage ratio: 48.4%. - Capital, NPLs and Profitability Ratios (in percent, preserved exactly): - CET1 Capital Ratio, of which: 2022: 16.5; 2023: 17.4; 2024: 18.1; Q1 2025: 18.7 - Traditional banks: 16.6; 17.7; 18.7; 19.9 - Asset management banks: 18.4; 20.8; 24.2; 19.5 - Specialized credit banks: 15.6; 14.9; 14.4; 14.9 - NPL ratio, of which: 2022: 5.8; 2023: 6.0; 2024: 7.0; Q1 2025: 6.6 - Traditional banks: 4.3; 4.3; 3.9; 3.9 - Asset management banks: 1.9; 2.3; 3.2; 2.5 - Specialized credit banks: 12.3; 12.3; 17.1; 18.4 - ROE, of which: 2022: 7.6; 2023: 9.5; 2024: 9.3; Q1 2025: 10.7 - Traditional banks: 6.0; 7.9; 8.1; 9.9 - Asset management banks: 8.5; 15.3; 16.1; 16.6 - Specialized credit banks: 13.1; 12.4; 9.6; 9..6 ### REGULATORY AND INSTITUTIONAL SETTING - Framework grounded in EU legislation with national adjustments; BdI as NCA since joining SSM in 2014. - ECB directly supervises SIs; NCAs directly supervise LSIs with ECB oversight responsibility for consistency. - Legal basis: Consolidated Law on Banking (TUB, Legislative Decree 385/1993), Consolidated Law on Finance (TUF, Legislative Decree 58/1998); TUB amended to implement CRD V/CRR2 (Legislative Decree No. 182/2021) and DORA via Legislative Decree no. 23/2025; EU Directive 2024/1619 (CRD VI) under transposition. - Remaining legislative issues: no transfer of certain prudential powers from MEF to BdI; ICCS role reduced; recommendation to consider amendments to primary legislation to transfer powers under paragraph 15 sub i) from MEF to BdI and clarify ICCS role. ### SUPERVISORY APPROACH, TOOLS, AND RESOURCING - Priorities: governance, business models, IT/cybersecurity, and credit risk. - Innovations: reorganization by business models; Support and Quality Assurance (SQA) Division; horizontal off-site reviews; benchmarking; proactive communication of supervisory expectations; SupTech tools; branch oversight strengthened. - Staffing (May 2025): 1,077 staff employed in prudential supervision and regulatory activities (663 at Head Office; 414 in Branches), including around 183 staff members for LSIs sector; turnover rate: 1.2 percent. - SREP: - Applied across business model/profitability, governance, capital adequacy, liquidity and funding. - Risk scores 1 to 4 with +/− qualifiers; documented in SIGMA. - SREP 2024 aligned several modules with SSM Manual for LSIs; updates ongoing. - SupTech and digitalization (Appendix IV): NOR.R.IS, S.O.FI.A, CGOV project, Fit and Proper Automation, VIG ownership mapping, IT modernization program, Microsoft Copilot pilot. ### ON-SITE INSPECTIONS - On-site inspections essential for assessing fragile banks and corporate governance weaknesses. - Recommendation to increase coverage, emphasizing targeted, thematic, and follow-up inspections supported by streamlined processes. - On-site inspection resourcing (LSI share of total on-site resources): 2022: 22,2 percent; 2023: 22,6 percent; 2024: 29,2 precent. - Planned prudential on-site inspections 2022-2025 (numbers): - Number of prudential inspections: 2022: 23; 2023: 22; 2024: 26; Nov-2025: 21 - Full scope: 2022: 19; 2023: 17; 2024: 21 - Internal models: 2022: 3; 2023: 4; 2024: 0 - Targeted, Thematic, follow-up: 2022: 15; 2023: 12 - Full-scope inspections typically take three months or more; inspections generally conducted with 3–5 days’ prior notification to banks. - Recommendation: expand on-site inspection coverage for HI and HR LSIs, post-merger institutions, challenger banks, and institutions not inspected for extended periods. ### CORPORATE GOVERNANCE - Significant governance reforms since 2014; BdI prioritized strengthening governance via regulation, supervisory expectations, off-site/on-site work, horizontal reviews and SupTech. - BdI regulatory actions: 2021 regulation implementing CRDV and aligning with EBA Guidelines; national binding gender quota increased from 20 to 33 percent on LSIs boards. - Fit and proper framework: MEF Ministerial Decree no. 169/2020 issued for corporate officers; Ministerial Decree 144/1998 on suitability of major shareholders not yet updated. - Supervisory outputs: benchmarking of 2,600 individuals (67 percent of LSIs and NBFIs); Fit and Proper Assessment Manual drafted; Guidelines on the Composition and Functioning of LSIs Boards. - Key supervisory findings: strengthen boards’ oversight responsibilities; address dominant CEOs undermining boards; enhance independent directors’ proactive roles; strengthen control functions. - Recommendation: intensify on-site inspections and horizontal off-site reviews; structure prudential meetings with increased engagement of non-executive and independent directors. ### CORRECTIVE ACTIONS, SANCTIONING, AND ESCALATION - BdI increased use of sanctioning and early intervention measures for fragile LSIs. - Examples of measures: - 7 cases where banks were put under temporary administration (Article 70 of TUB). - 2 cases where BdI appointed temporary administrators (Article 75 of TUB). - 1 case where BdI initiated compulsory liquidation. - Financial penalties: - applied to four LSIs in 2023 and another four in 2024. - in 2024, penalties also imposed on natural persons of two LSIs (10 individuals in one LSI and 12 in the other). - in 2025, penalties applied to eight LSIs, including natural persons (limited to September 30, 2025). - PPPs to be introduced under CRD VI as an enforcement tool. - Recommendation: act early and decisively; apply corrective powers at first signs of deterioration; formalize an escalation ladder to expedite decision-making and enable timely exercise of corrective and sanctioning powers (including PPPs and pecuniary sanctions). ### CREDIT RISK AND PROBLEM ASSETS - Credit risk remains the dominant financial risk for LSIs; BdI maintains thorough requirements on credit risk management and problem assets treatment (Circular 285 transposed EBA Guidelines). - Power to require reclassification and provisioning: - BdI lacks explicit power to require LSIs to adjust asset classifications or impose provisioning levels for prudential purposes (BCP CP 18 EC7). - BdI can require application of specific provisioning methodology but cannot impose higher provisions on specific individual exposures. - BdI often uses moral suasion; non-compliance may lead to a Pillar 2 capital add-on (P2R). Currently 30 percent of Italian LSIs have a specific P2R add-on for potential under-provisioning. - NPLs and specialized NPL banks: - Majority removed legacy NPLs; many securitized and managed by servicers. - 16 specialized credit banks, including five specializing in NPL management; specialized banks hold 22 percent of LSI sector assets. - BdI reviewing NPL strategies for LSIs with NPLs >5 percent. - Upcoming: implementation of NPL calendar provisioning requirements for legacy NPLs originated before April 26, 2019—measures to apply starting end of 2025 with gradual introduction. ### LIQUIDITY, FUNDING RISK, AND ONLINE DEPOSIT PLATFORMS (ODPs) - Regulatory coverage: LSIs subject to LCR and NSFR. - LCR at 278 percent; NSFR at 151 percent (as of June 2025). - Reporting frequency: LCR monthly; NSFR quarterly. - TLTRO-III repayment: LSIs successfully repaid TLTRO-III; some used excess liquidity to repay; majority increased market access or raised deposits. - ODP risks and supervisory response: - Risks: potential volatility driven by online banking and social media; business model and operational/AML/CFT risks. - Supervisory actions: LSIs must submit detailed liquidity plans for ODPs; BdI collects targeted quantitative reports and integrates into liquidity monitoring; AML/CFT assessed via on-site inspections. - Recommendation: further address digitalization-related challenges affecting LSIs’ liquidity and funding risks, focusing on ODP funding and social media-driven depositor behavior scenarios; suggested measures include rapid outflow stress scenarios and contingency funding playbooks. ### OPERATIONAL RISK, IT AND CYBER - Since January 2025, all LSIs calculate operational risk capital via the standardized approach (Pillar 1) following CRR 3; Circular 285 updated in August 2025 to implement CRR 3 Chapter 8 on Operational Risk. - On-site inspections of LSIs and IT providers found over 100 findings mainly on outsourcing management/oversight, security processes, governance and IT risk management, and business continuity/disaster recovery testing. - Outsourcing landscape (as of December 2024): - 72 percent of LSIs (excluding Raiffeisen banks in Raiffeisen IPS) rely fully or extensively on outsourcers. - Main IT provider accounts for >75 percent of third-party IT services on average; two of six main IT providers serve more than half of LSIs. - Supervisory actions: five on-site inspections of IT providers; 43 letters in 2024 reminding LSIs of ultimate responsibility on outsourced functions; follow-up inspections at two main IT providers in 2024 verified remediation. - Institutional response: 2022 Outsourcers and Third-party Supervision Unit established; capacity-building and specialized hires conducted. - Recommendation: continue prioritizing on-site inspections of IT and cyber risk and increase supervisory capacity for IT and cyber risks. ### IRRBB, CSRBB AND UNREALIZED LOSSES - IRRBB framework based on EU legislation; BdI Circular 285 aligns with CRR2/CRDV and EBA Guidelines; simplified Italy-specific methodologies updated in June 2024 for EVE and NII perspectives. - Supervision: - BdI monitors IRRBB quarterly/semi-annually via regulatory metric; ICAAP quantification and Supervisory Outlier Test included in SREP. - Around 50 percent of Pillar 2 capital add-ons relate to IRRBB. - BdI plans thematic on-site inspections on IRRBB in 2026. - Exposure levels: - EVE: below 15 percent of Tier 1 capital. - NII: under 5 percent of Tier 1 capital. - Monitoring unrealized losses on amortized cost assets: - Semi-annual monitoring since December 2022 for HTC at amortized cost. - Between December 2022 and December 2024, potential impact of unrealized losses on CET1 decreased from 200 bp to an average 61 bp. - From 2026 SREP cycle, BdI plans to integrate quantitative assessment of unrealized losses and gains into IRRBB & CSRBB SREP methodology for LSIs. - Recommendation: continue carefully monitoring unrealized losses from held-to-maturity portfolios at amortized cost. ### LEGAL PROTECTION FOR SUPERVISORS - Current regime under Law no. 262/2005: BdI and members of governing bodies and staff are liable only for gross negligence or intentional acts. - Law no. 262/2005 does not include legal protection for professional service providers engaged in supervisory tasks nor explicit coverage of defense costs from the onset of proceedings. - BdI internal rules reimburse legal expenses after case closure and allow advance payments (loans); deemed insufficient for timely support given lengthy legal proceedings. - Recommendation: amend primary legislation to ensure BdI, current and former staff, and professional service providers engaged in supervisory tasks are adequately protected from legal proceedings, including full coverage of defense costs from the onset; conditions and procedures could be specified in secondary legislation. ### KEY FSAP RECOMMENDATIONS (selected with responsible authority and timeline) - Amend primary legislation to ensure BdI and its staff and professional service providers engaged in supervisory tasks are protected from legal proceedings, including full coverage of legal costs from the onset. - Responsible authority: MEF, BdI and other authorities - Timeline: ST - Increase coverage of on-site inspections for the LSI sector, focusing on common weaknesses and expand targeted, thematic and follow-up inspections with streamlined processes. - Responsible authority: BdI - Timeline: ST - Establish a more structured approach to prudential meetings—ensure sufficiently frequent engagement with LSIs’ non-executive board members and include separate meetings with independent board members. - Responsible authority: BdI - Timeline: MT - Strengthen preventive supervision by proactively applying corrective and sanctioning powers early and use a formalized escalation ladder to expedite interventions. - Responsible authority: BdI - Timeline: ST - Promptly issue the MEF Ministerial Decree to reinforce application of suitability criteria for major shareholders established in primary legislation. - Responsible authority: MEF - Timeline: ST - Finalize alignment of the regulatory framework on related party transactions with revised 2024 BCP elements. - Responsible authority: BdI - Timeline: MT - Grant BdI explicit power to require LSIs to adjust asset classification and provisioning for prudential purposes. - Responsible authority: BdI, MEF and other authorities - Timeline: ST - Address digitalization-related challenges to LSIs’ liquidity and funding risks, particularly funding from ODPs and depositor behavior shocks (social media-driven scenarios). - Responsible authority: BdI - Timeline: ST - Continue strengthening operational resilience and supervisory capacity for IT and cyber risks. - Responsible authority: BdI - Timeline: ST - Consider all forms of material concentration risk when setting Pillar 2 capital add-ons, including an explicit add-on for sovereign concentration with safeguards against double-counting. - Responsible authority: BdI - Timeline: MT - Timeline legend: I Immediate (within 1 year); NT Near Term (within 1-2 years); MT Medium Term (within 3−5 years). *Source: EXECUTIVE SUMMARY, 1itaea2026008 - EXECUTIVE SUMMARY __________________________________________________________________________ 6* ### EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### 1itaea2026008 - EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### INTRODUCTION AND SCOPE - The review is a targeted assessment of banking regulation and supervision of Italy’s Less Significant Institutions (LSIs) conducted under the 2026 Financial Sector Assessment Program (FSAP). - The review is based on the regulatory and supervisory frameworks in place as of November 2025. - The note focuses on prudential regulation and supervision of LSIs, taking into account recommendations of the 2020 Italy FSAP and relevant Euro Area and global developments. ### PROGRESS SINCE THE 2020 FSAP - BdI has made “remarkable progress” in strengthening the safety and soundness of the LSI sector. - Key financial and prudential indicators of the LSI sector—profitability, capital and liquidity buffers, and NPL ratio—have significantly improved. - Reforms completed: cooperative and popolari banks reformed; the first Italian Institutional Protection Scheme (IPS) established. - LSI sector consolidation included restructuring and transformation of 30 percent of LSIs. - Significant supervisory work with fragile banks and enhanced regulatory/supervisory framework to reduce NPLs and improve corporate governance and operational resilience. - Some previous FSAP recommendations remain in process (example: transactions with related parties); certain recommendations have not been addressed (see Appendix V). ### REGULATORY AND INSTITUTIONAL SETTING - Italy’s regulatory and supervisory framework is robust and primarily grounded in the EU framework with national adjustments. - BdI has modernized supervisory practices and implemented key elements of the SSM LSI supervisory methodology. - Skilled BdI staff have chaired multiple SSM task forces and working groups. - BdI applied a proportional SREP approach, prioritizing High Impact (HI) and High Risk (HR) LSIs. ### SUPERVISORY APPROACH, TOOLS, AND RESOURCING - Supervisory priorities: governance, business models, IT/cybersecurity, and credit risk. - Innovations introduced: reorganization by business models, support and quality assurance units, horizontal off-site reviews, benchmarking, proactive communication of supervisory expectations, and SupTech tools. - Branch oversight strengthened in response to the 2020 FSAP recommendation. - BdI continues to devote significant resources to intensively supervise and resolve fragile and troubled banks. ### ON-SITE INSPECTIONS - On-site inspections are essential to assess fragile and troubled banks and identify weaknesses in corporate governance. - Recommendation to increase coverage of on-site inspections for the LSI sector, with emphasis on targeted, thematic, and follow-up inspections, supported by streamlined processes. - Expanding on-site inspection coverage is needed for: HI and HR LSIs, institutions post-merger, and institutions not inspected for extended periods. - High demand for on-site inspections implies the need for increased resources allocated to the LSI sector. ### CORPORATE GOVERNANCE - Significant corporate governance reforms over the last decade have reshaped governance culture in the LSI sector. - BdI prioritized strengthening corporate governance via regulatory changes, supervisory expectations, off-site and on-site work, horizontal reviews, and SupTech tools. - Continued priority: intensify on-site inspections and horizontal off-site reviews to reinforce boards’ supervisory responsibilities, enhance independent directors’ proactive roles, and strengthen control functions. - BdI’s prudential meetings with non-executive board members, including separate meetings with independent directors, are sufficiently frequent and could be made more structured. ### CORRECTIVE ACTIONS, SANCTIONING, AND ESCALATION - BdI has increased use of sanctioning and early intervention measures for fragile and troubled LSIs. - Recommendation: continue to act early and decisively, apply corrective powers at first signs of deterioration, and use a more formalized escalation ladder to expedite decision-making and enable timely exercise of corrective and sanctioning powers (including Periodic Penalty Payments (PPPs) and other pecuniary sanctions). - Emphasis on moving from reactive to preventive supervision. ### CREDIT RISK AND PROBLEM ASSETS - Credit risk remains the dominant financial risk for the LSI sector. - BdI maintains thorough requirements on credit risk management and treatment of problem assets. - Recommendation from 2020 FSAP reiterated: BdI should be granted explicit power to require LSIs to adjust asset classifications and increase provisioning for prudential purposes. - Majority of LSIs removed legacy non-performing loans (NPLs) from balance sheets; several LSIs now specialize in legacy NPLs management. - Continued supervisory priorities: focus on worst-performing loan portfolios and sectors exposed to geopolitical and tariffs risks, state-guaranteed loans, and LSIs specializing in NPL management. - Recommendation: treat other dimensions of concentration risk within Pillar 2; consider an explicit Pillar 2 add-on for sovereign concentration exposures with safeguards against double-counting. ### OPERATIONAL RISK, IT AND CYBER - Regulatory framework and supervisory practices for operational risk have been reinforced since 2020, reflecting EU legislation and supervisory efforts. - Operational resilience assessed via off-site and on-site supervision and SREP, with focus on IT risks, business continuity, and disaster recovery. - Majority of Italian LSIs outsource IT functions to a small number of providers; BdI conducted seven on-site inspections of IT providers. - In 2022, BdI established a new Outsourcers and Third-party Supervision unit. - Continued prioritization: strengthen supervisory capacity for IT and cyber risks and increase supervisory focus on IT providers. ### LEGAL PROTECTION FOR SUPERVISORS - Current legal regime: under Law no. 262/2005, BdI and members of governing bodies and staff are liable only for gross negligence or intentional acts. - Law no. 262/2005 does not include legal protection for professional service providers engaged in supervisory tasks, nor coverage of defense costs incurred during legal proceedings. - BdI internal rules allow reimbursement of legal expenses only after case closure and offer advance payments, which are deemed insufficient for timely support. - Recommendation: strengthen legal protection in primary legislation to ensure full coverage of defense costs from the onset of proceedings, with conditions detailed in secondary legislation. ### KEY FSAP RECOMMENDATIONS (selected items from Table 1) - Amend primary legislation to ensure that the BdI, its current and former staff, and professional service providers engaged in supervisory tasks are adequately protected from legal proceedings, including full coverage of legal costs from the onset. - Responsible authority: MEF, BdI and other authorities - Timeline: ST - Continue to increase coverage of on-site inspections for the LSI sector, focusing on the common weaknesses, proactively identifying vulnerabilities for timely remediation, and expanding the use of targeted, thematic and follow-up inspections, supported by further streamlined processes. - Responsible authority: BdI - Timeline: ST - Establish a more structured approach to prudential meetings, ensuring sufficiently frequent engagement—particularly with the LSIs’ non-executive board members—and include separate meetings with the LSIs’ independent board members. - Responsible authority: BdI - Timeline: MT - Continue strengthening preventive supervision by proactively applying corrective and sanctioning powers (in case of material regulatory breaches) at an early stage, along with the timely and more active use of the escalation ladder, which leads to progressively stronger interventions, to address unsound and unsafe practices. - Responsible authority: BdI - Timeline: ST - Promptly issue the MEF Ministerial Decree to reinforce the application of the suitability criteria for major shareholders, established in the primary Italian legislation. - Responsible authority: MEF - Timeline: ST - Continue prioritizing corporate governance and intensifying supervisory activities—through on-site inspections and horizontal off-site reviews—focusing on strengthening oversight responsibilities of LSIs’ boards in supervisory functions, enhancing independent directors’ proactive role, and fostering a robust culture of control functions. - Responsible authority: BdI - Timeline: ST - Finalize the alignment of the regulatory framework on related party transactions to cover all elements of the revised 2024 BCP. - Responsible authority: BdI - Timeline: MT - Grant BdI the explicit power to require LSIs to adjust asset classification and provisioning for prudential purposes and continue prioritizing supervision of LSIs’ credit risk and problem assets. - Responsible authority: BdI, MEF and other authorities - Timeline: ST - Further address digitalization-related challenges affecting LSI sector’ liquidity and funding risks, particularly focusing on funding from online deposit platforms (ODPs) and hypothetical scenarios of sudden shifts in depositor behavior, such as social media-driven mobilization. - Responsible authority: BdI - Timeline: ST - Continue to proactively conduct supervisory work to strengthen LSIs' operational resilience and increase supervisory capacity for IT and cyber risks. - Responsible authority: BdI - Timeline: ST - Consider all forms of material concentration risk, when setting Pillar 2 capital add-ons, including an explicit add-on for sovereign concentration with safeguards against double-counting effects. - Responsible authority: BdI - Timeline: MT - Timeline legend as presented: I Immediate (within 1 year); NT Near Term (within 1-2 years); MT Medium Term (within 3−5 years). *Italic: Source: EXECUTIVE SUMMARY, 1itaea2026008 - EXECUTIVE SUMMARY __________________________________________________________________________ 6* ### INTRODUCTION ### INTRODUCTION ### Context and Scope - Since the 2020 FSAP, the EU regulatory framework and the oversight framework for euro area banks have been significantly strengthened. - The SSM assigns the ECB responsibility to directly supervise SIs, whereas LSIs are directly supervised by NCAs and indirectly overseen by the ECB. - The IMF and ECB/SSM agreed to focus on regulation and supervision of LSIs in euro area member country FSAPs. - This FSAP review covered: - Institutional setting: BdI’s supervisory powers, independence, accountability, and resources. - Licensing, mergers and acquisitions: national criteria and other Italy-specific aspects. - Supervisory approach, tools, and cooperation. - Corrective actions and sanctioning. - Corporate governance. - Transactions with related parties. - Capital adequacy: Pillar 2. - Supervision of LSIs’ key risks, including credit risk and problem assets, liquidity and funding risk, operational risk, interest rate risk in the banking book (IRRBB), and incorporation of anti-money laundering and countering the financing of terrorism (AML/CTF)-related considerations into prudential risk analysis and supervision. - The review is based on the regulatory framework and supervisory practices in place by November 2025. - The findings were guided by the 2024 Basel Core Principles for Effective Banking Supervision (BCP) and built on the most recent assessment of the euro area framework, drawing also on weaknesses identified by the 2025 EA FSAP where relevant. - The IMF team received a partial self-assessment from BdI on the 2024 BCP, responses to a complementary questionnaire, and inputs from the ECB. The mission took place in Rome and Milan during November 2025. ### Market Structure - As of March 31, 2025: - Italy’s banking sector comprised 12 SIs with total assets of €2.53 trillion, and 118 LSIs holding €338 billion in aggregated assets. - The LSI segment included 112 banking groups and stand-alone banks, and six branches of third-country banks, together accounting for approximately 9 percent of the Italian banking system. - There are 39 cooperative banks (Raiffeisen banks) operating under a recently established IPS, 16 popolari banks, and the remaining banks are joint stock companies. - Evolution of LSIs (Number and Assets) — table figures preserved exactly: - Number of LSIs, of which: 2022: 127; 2023: 123; 2024: 120; Q1 2025: 118 - JSC: 2022: 62; 2023: 60; 2024: 58; Q1 2025: 57 - Popolari banks: 2022: 18; 2023: 16; 2024: 16; Q1 2025: 16 - Cooperative banks: 2022: 39; 2023: 39; 2024: 39; Q1 2025: 39 - Third country bank branches: 2022: 8; 2023: 8; 2024: 7; Q1 2025: 6 - LSIs’ Assets (in Euro billion), of which: 2022: 338; 2023: 329; 2024: 333; Q1 2025: 338 - JSC: 2022: 258; 2023: 256; 2024: 258; Q1 2025: 261 - Popolari banks: 2022: 52; 2023: 47; 2024: 49; Q1 2025: 49 - Cooperative banks: 2022: 17; 2023: 16; 2024: 17; Q1 2025: 17 - Third country bank branches: 2022: 11; 2023: 10; 2024: 9; Q1 2025: 11 - Sector trends and drivers: - The number of LSIs continued to decline since the last FSAP due to consolidation and orderly market exits; total LSI assets remained broadly stable. - Two Italian Cooperative Banking Groups (CBG) were classified as SIs after cooperative bank reform, bringing 179 affiliated Cooperative Credit Banks (BCC) under direct ECB SSM supervision. - Reductions in LSI numbers also followed mergers and acquisitions, one compulsory liquidation initiated by BdI, and eight banks that changed business models due to ownership changes and capital injections. - BdI attributes the LSI decline partly to the need for economies of scale and scope to improve cost efficiency and diversify income. - Financial and prudential indicators: - Liquidity ratios: LCR – 278 percent; NSFR – 151 percent. - Aggregate net NPL ratio of Italian LSIs as of June 2025: 4.7%; coverage ratio: 27.9%. - Considering only traditional LSIs, net NPL ratio: 2%; coverage ratio: 48.4%. - Noted divergence between traditional LSIs and specialized LSIs: specialized LSIs have higher NPLs and lower coverage ratios largely due to business model features and purchased-credit pricing. - Table: Capital, NPLs and Profitability Ratios of the Italian LSI Sector (in percent) — preserved exactly: - CET1 Capital Ratio, of which: 2022: 16.5; 2023: 17.4; 2024: 18.1; Q1 2025: 18.7 - Traditional banks: 16.6; 17.7; 18.7; 19.9 - Asset management banks: 18.4; 20.8; 24.2; 19.5 - Specialized credit banks: 15.6; 14.9; 14.4; 14.9 - NPL ratio, of which: 2022: 5.8; 2023: 6.0; 2024: 7.0; Q1 2025: 6.6 - Traditional banks: 4.3; 4.3; 3.9; 3.9 - Asset management banks: 1.9; 2.3; 3.2; 2.5 - Specialized credit banks: 12.3; 12.3; 17.1; 18.4 - ROE, of which: 2022: 7.6; 2023: 9.5; 2024: 9.3; Q1 2025: 10.7 - Traditional banks: 6.0; 7.9; 8.1; 9.9 - Asset management banks: 8.5; 15.3; 16.1; 16.6 - Specialized credit banks: 13.1; 12.4; 9.6; 9..6 - Sector composition and business models: - 81 banks are traditional banks (including 39 Raiffeisen banks). - 15 banks specialize in asset management; others specialize in NPL purchase/management, leasing, factoring, SME lending, and consumer credit. - Traditional LSIs rely on physical branch networks (higher fixed costs, stable client relationships); specialized LSIs rely less on branches and more on digital platforms and external agents (operational efficiency but higher funding sensitivity). - Popolari bank reform: - Reform initiated in 2015 required largest popolari banks (total assets exceeding €8 billion) to convert to JSCs; implementation finalized at beginning of 2022. - Asset threshold raised to €16 billion in 2024 with no practical effect. - Currently 16 popolari banks with combined assets of €49 billion (15 percent of Italian LSIs total assets), mainly in Southern Italy. - Introduction of financing shares (first issuance in 2025) expected to enhance capital market access and governance. - The EBA assessed the first financing share issuance project in May 2025 as compliant with CET1 eligibility requirements. - Cooperative banks and IPS: - After cooperative bank reform, 39 cooperative banks classified as LSIs (Raiffeisen banks) operate under Italy’s first IPS, established under Article 113 (7) of the CRR. - The IPS has improved integration and resilience of the LSI segment through liquidity and solvency support arrangements. - Challenger banks: - Rise of mostly digital ‘challenger banks’ targeting niche segments (public sector factoring, SME loans backed by public guarantees, NPL management). - Typically operate without physical branches, rely on external agents, use innovative IT platforms, and depend on online deposits—making funding more sensitive to market fluctuations. - Some challenger banks have grown rapidly with strong returns but faced scaling and regulatory compliance challenges; some experienced increased distress in the recent macroeconomic and financial context. ### Institutional Setting A. Supervisory Responsibilities, Objectives and Powers - Since joining the ECB SSM in 2014, BdI has served as the NCA. - SSM arrangements: - ECB directly supervises SIs (114 banking groups including 12 Italian SIs, as of July 1, 2025). - NCAs directly supervise LSIs and perform supervision in areas not, or only partially, covered by the SSM Regulation. - For licensing, revoking a bank’s license, and authorization to acquire qualifying holdings, the ECB is the competent authority for all banks; the NCA is the “entry point” and responsible for preliminary investigation and submission of proposals to the ECB. - The ECB has oversight responsibility to ensure NCAs’ supervisory activities for LSIs align with high supervisory standards and foster consistency within the SSM. - BdI’s role: - BdI supervises 112 LSIs and six third-country bank branches operating in Italy, representing €338 billion aggregated assets as of March 31, 2025. - Other supervisors: CONSOB (securities and markets), IVASS (insurance), COVIP (pension funds). BdI cooperates closely with these authorities and has updated MoUs (e.g., with CONSOB related to issuers and the Markets in Crypto Assets Regulation). - Legal framework: - Prudential supervision is carried out pursuant to the Consolidated Law on Banking (TUB, Legislative Decree 385/1993) and, when applicable, the Consolidated Law on Finance (TUF, Legislative Decree 58/1998). - TUB was amended to implement CRD V/CRR2 (Legislative Decree No. 182/2021) and DORA via Legislative Decree no. 23/2025. EU Directive 2024/1619 (CRD VI) is under transposition in Italy. - Remaining legislative issues and recommendation: - No legislative initiatives have shifted prudential powers from MEF to BdI, nor implemented other 2020 FSAP recommendations. - Under TUB (Article 2), the Inter-ministerial Committee for Credit and Savings (ICCS) is designated as authority responsible for ‘high-level supervision’, but it can only adopt decisions based on proposals by BdI; ICCS role has been significantly reduced since 2014 (last meeting 2016). - Banking law grants MEF authority to: - Issue ministerial decrees—aligned with BdI’s preliminary opinion—regarding fit and proper requirements for major banks’ shareholders, board members, and senior management. - Place banks and companies in banking groups under compulsory administrative liquidation on BdI’s proposal. - 2020 FSAP recommended transferring these prudential powers from MEF to BdI. - Recommendation: Consider necessary amendments to primary legislation to implement the 2020 FSAP recommendations, particularly transferring powers under paragraph 15 sub i) from the MEF to BdI and clarifying the exact role of the ICCS. B. Supervisory Independence, Governance and Accountability Objectives - Objectives: - TUB stipulates BdI exercises powers for: (i) sound and prudent management of supervised institutions; (ii) stability, efficiency, and competitiveness of the financial system; and (iii) compliance of supervised institutions with laws and regulations. - For investment services, TUF assigns BdI responsibility for risk containment, asset stability, and sound and prudent management, while CONSOB is responsible for transparency and correct conduct. - TUB (Articles 5 and 127) assigns BdI financial consumer protection responsibilities complementary to prudential supervision. - Supervisory independence: - BdI statute provides robust safeguards for operational independence in prudential supervision. - BdI and members of its decision-making bodies shall act autonomously and independently; prohibited from seeking or accepting instructions from public or private entities. - No public authority can influence, veto, override, or annul BdI regulations or supervisory decisions; no prior approval by any public authority is required. - The sole exception is judicial review under Article 24 of the Italian Constitution to ensure legality of BdI’s regulations or decisions. *Source: 1itaea2026008 - INTRODUCTION (PDF).* ### 19. BdI’s ownership structure reflects its past history, with the main shareholders primarily ### 19. BdI’s ownership structure reflects its past history, with the main shareholders primarily ### Ownership and Board Structure - BdI capital is held by 175 shareholders: - 100 banks - 9 insurance firms - 43 foundations - 23 social security institutions - 8 pension funds - In 2022, the cap on single institutions’ stakes was raised from 3 to 5 percent (Law 234/2021). - BdI has a Board of Directors (BoD) chaired by the BdI Governor and composed of 13 Directors nominated by the shareholders’ meeting held at the main branches of BdI. - The BdI Statute allows Directors to serve 3 terms (15 years). - Changes in the Statute (2013 and 2022) specify that the Board of Directors has no power of intervention with respect to the performance of BdI’s institutional functions. - A Nominations Committee composed of three Directors and two alternates shall select candidates for nomination or reelection. Article 16 of the BdI Statute establishes criteria for Directors, including significant experience and requirements of integrity and independence; they should not hold, or have held within the two years preceding nomination, positions with banks or companies operating in financial or insurance sectors or entities subject to BdI oversight. ### Governing Board, Appointments and Removals - Since the 2020 FSAP, there have been no changes in the framework of appointments and removals within BdI’s governing bodies. - The Governing Board is BdI’s main supervisory decision-making body and consists of: - the Governor (appointed for a term of six years, possibly renewed only once) - the Senior Deputy Governor - three Deputy Governors - Appointment process for the Governor: decree issued by the President of the Republic, acting on a proposal from the President of the Council of Ministers, following a resolution by the Council of Ministers, after hearing the opinion of BdI’s BoD. - Appointment/reappointment/removal of Deputy Governors must be approved by a decree of the President of the Republic, acting on a proposal from the President of the Council of Ministers in agreement with the MEF after consulting the Council of Ministers. - The requirement to publicly disclose reasons for removal of a member of the Governing Board is included in recently adopted primary legislation; decrees concerning appointment, reappointment and removal are published in the Official Journal of the Italian Republic. - Paragraph 7-bis of Article 19 of Law No 262/2005 – as recently amended on occasion of the implementation of CRDVI – explicitly provides that “where a member of the Governing Board of the Bank of Italy is dismissed, the reasons for dismissal shall be made public, unless the member concerned raises a justified objection.” ### Legal Protection for Supervisors — Findings and Recommendation Findings: - Law no 262/2005: BdI, members of governing bodies and employees are liable only for gross negligence and for acts committed intentionally. - The Law does not include legal protection to professional service providers engaged in supervisory tasks, nor explicit protection against the costs for staff and former staff of defending actions or omissions made in good faith. - BdI internal rules reimburse legal expenses after conclusion of proceedings; an internal circular allows employees to request advance payments (loans) to cover defense costs. - These internal provisions may leave employees vulnerable because legal proceedings in Italy commonly take several years and timely financial support is not ensured. - Law No. 21/2024 (Article 20, paragraph 1 added paragraph 6-ter to Article 24 of Law 262/2005) introduced liability-related rules for BdI in cases where damage is caused by supervised entities; this does not explicitly extend protection to BdI board members or staff and increases the need for clarity on legal protection aligned with Basel standards. Recommendation: - Amend primary legislation to ensure that BdI, its current and former staff, and professional service providers engaged in supervisory tasks are adequately protected from legal proceedings, including full protection against the costs of defending actions or omissions undertaken in good faith while performing official duties, starting from the onset of such proceedings. Conditions and procedures for legal protection could be specified in secondary legislation. ### Supervisory Governance and Organizational Reforms - Directorate General for Financial Supervision and Regulation (DGSFR) reorganized with new divisions: - Supervisory Quality Assurance (SQA) Division — second-line oversight of methodologies and procedures used in supervisory activities. - SSM Coordination Division — supports and strengthens BdI participation in SSM decision-making. - An Anti-Money Laundering Supervision and Regulation Unit, reporting directly to the Board, has been established to enhance AML/CFT risk-based supervision and support preparations for the new European AML/CFT Authority (AMLA). - Changes in Banking Supervision Directorate 2 include: - distribution of banks by business model among supervisory units; - establishment of a Sector devoted to dealing with problematic banks and crisis management; - establishment of a Sector aimed at fostering coordination of small banks supervision ruled by BdI branches. SQA Division: - Reports directly to the Head of DGFSR and conducts comprehensive assessments focused on governance, risk oversight, and control of supervisory process. - Notable assessments: SREP process (governance and capital decisions), operational supervisory planning, on-site inspection planning, fit and proper requirements for LSI boards, updates to Guide to Supervisory Activities, and follow-up letters after on-site inspections. Delegation and Decision-Making: - Significant supervisory decisions for the LSI sector are taken by the Governing Board; delegation framework is publicly disclosed. - Resolution No. 426 of July 20, 2021 delegated authority to heads of DGFSR and BdI Branch Managers for certain measures and acts; delegation depends on simplification, proportionality to risk, and complexity. ### Supervisory Accountability and Transparency - BdI accountability mechanisms: - Annual "Report on operations and activities" (Article 19 of Law No. 262/2005) with a section on supervision of banks and non-bank intermediaries. - Governor presents report to the joint parliamentary finance committees and testifies before Parliamentary Commissions when needed: 9 hearings in 2023, 5 in 2024, and 2 in 2025. - Governor may consult the Committee for the Safeguard of Financial Stability. - Communication and publications: - BdI publishes financial stability reports, occasional papers, insights and clarifications on its institutional website. - BdI Strategic Plan 2023-25 published; state of the plan publicly disclosed twice a year. ### Supervisory Resources and Staffing - In May 2025, staff employed in prudential supervision and regulatory activities: 1,077 (663 at the Head Office and 414 in the Branches), including around 183 staff members for LSIs sector. - Turnover rate: 1.2 percent. - BdI recruits mainly via competitive public exams; hires include experts in banking, finance, law, statistics, accounting, and newer profiles: data science, IT security, and artificial intelligence. - Employment conditions and salary levels determined via bargaining agreements with trade unions; BdI does not typically conduct specific salary surveys. - Note: For Regulation and Macroprudential Analysis Directorate, SSM Coordination Unit and SQA Division, it was not possible to differentiate activities (in numerical terms) between LSIs and SIs. ### Licensing, Mergers and Acquisitions (LSIs and branches) Licensing and qualifying holdings: - ECB is competent authority for LSIs licensing, revoking license and authorizations to acquire qualifying holdings; BdI is entry point for notifications and responsible for preliminary investigation and proposals to ECB. - Since 2020 FSAP, BdI involved in issuing three banking licenses (including one for first Italian fintech bank in 2021) and in 44 qualifying holding acquisition procedures. - Main licensing requirements reflected in Italian TUB and implemented by BdI Circular 285/2013; applicants must submit Programme of operations and description of structural organization, internal controls and governance. - Specific condition for authorization of cooperative banks; all Italian cooperative banks must be part of a cooperative banking group. - MEF Ministerial Decree on fit and proper requirements for corporate officers issued in 2020 (169/2020); requirements for suitability of major shareholders have not yet been updated (Ministerial Decree 144/1998 not updated; draft underwent public consultation in 2022). Recommendation: - Promptly issue the MEF Ministerial Decree to reinforce application of suitability criteria for major shareholders established in primary Italian legislation. Notifications: - LSIs’ shareholders must notify BdI of any information that may affect or change assumptions on which authorization was issued (Article 20, paragraph 2-bis, of the TUB); shareholders must also notify the bank. Under Article 21 TUB, BdI may require banks to provide communications or data regarding shareholders. - Shortcoming: no explicit requirement that LSIs themselves must notify BdI as soon as they become aware of any material information that may negatively affect suitability of a major shareholder or controlling party (BCP CP6 EC6 standard). Recommendation: - Establish the requirement that LSIs notify BdI as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or controlling parties. Third-country branches: - BdI authorizes and supervises Italian branches of non-EU/EEA banks. There are six such branches with total assets of €11 billion. - Requirements for first branch of a non-EU bank include: minimum capital requirement of €10 million; submission of program of activity; fitness and propriety of branch managers; group structure not hindering prudential supervision; good standing letter from home authority; adequate supervisory and AML/CFT frameworks in home country; MoU for exchange of information; commitment to join a depositor guarantee scheme. - Implementation of CRD VI will change authorization, regulation, and supervision of third-country branches. Major acquisitions and material holdings: - Italian legislation covers direct and indirect equity investments and other investments entailing equity risk. Banks must comply with a general quantitative limit: book value of all real estate and equity holdings shall not be greater than the bank’s consolidated own funds. - Acquisitions in financial entities subject to prior authorization when holding exceeds 10 per cent of acquirer’s consolidated own funds or involves control/significant influence (with limited exceptions); ex-post communication required when holding exceeds 1 percent of the bank’s own funds. - Transfers of assets and liabilities exceeding 10 percent of bank’s own funds require prior authorization from BdI; transactions where transfer price exceeds 5 percent of transferee’s own funds are subject to ex-post communication (TUB, Circulars 285/2013 and 269/2008). ### Supervisory Approach, SREP, Horizontal Reviews and On-site Inspections Supervisory planning and priorities: - BdI’s supervisory planning process outlined in Circular 269/2008 and based on ECB joint supervisory standard on supervisory planning. - BdI supervisory priorities for 2023-2025: credit risk; IT/cyber risk and impact of new technologies; profitability and sustainability of business models (including exposure to interest rate and liquidity risk); governance; climate risk; updating the regulatory framework. - Updated supervisory priorities will be shared after publication of BdI Strategic Plan 2026-2028. Recommendation: - Develop a procedure for maintaining regular public communication of LSI supervisory priorities. SREP: - SREP is central to BdI off-site supervisory activities; applied to solo LSIs and LSI consolidated groups across assessment areas: - (i) business model and profitability - (ii) internal governance and risk management - (iii) capital adequacy and risks to capital - (iv) liquidity and funding risks - Risk assessment scores range from 1 (best) to 4 (worst); introduction of score qualifiers + or - within middle categories produces eight gradings. - Evaluations documented in SIGMA procedure (BdI tool supporting SREP). - BdI has aligned increasingly with ECB SSM methodology; SREP 2024 aligned Business Model and Profitability, Credit Risk and Market Risk modules with SSM Manual for LSIs. Updates ongoing for Operational Risk, IRRBB, Governance and Internal Control Framework modules. Recommendation: - Continue updating Supervisory Guide (Circular 269/2008) to reflect changes in the LSI sector, recent regulatory/supervisory developments, and alignment with updated ECB SSM LSIs Manual. National tailoring and judgement: - Specificities vs SSM SREP: calibration of indicator thresholds with respect to the Italian banking system; strong role of on-site inspection outcomes in SREP scoring; use of additional national data sources (National Credit Register, maturity ladder reports for IRRBB, CSRBB) complementing COREP and FINREP. - Supervisory judgment applied at multiple phases; indicators often based on peer group analysis. - BdI increased supervisory judgment and flexibility since 2019 recommendation, particularly for specialized business models; introduced annual benchmarking exercise. HI and HR classification and proportionality: - 2022 ECB SSM classification for LSIs prioritizes HI and HR LSIs. Process managed by ECB with BdI collaboration. - As of Dec. 31, 2024, there were 6 Italian LSIs in HI category—Banca Sella, Banco Desio, CR Bolzano, Banca Generali, MCC group, Cassa Centrale Raiffeisen—which represent 28 percent of the Italian LSIs sector in terms of assets; 4 LSIs have exceeded the €15 billion threshold in total assets. - SREP risk profiles assessed every year; capital decisions (Pillar 2 requirement (P2R) and Pillar 2 guidance (P2G)) generally issued every two years, except for HI LSIs (issued annually). Supervision of fragile banks and benchmarking: - BdI devotes significant resources to supervising and resolving fragile and troubled banks; actions are labor-intensive and involve cooperation with ECB SSM, CONSOB, DGS, Legal and Resolution units. - Since 2019 fragile banks used mergers and acquisitions as exit strategies; voluntary fund by Italian DGS has started supporting turnaround of fragile banks. - Dedicated task force started annual benchmarking to ensure proportionality and consistency in SREP scoring and capital add-ons (P2R/P2G). Horizontal off-site reviews: - Notable increase in horizontal reviews on business models, credit risk, board composition, fit and proper, IT risks, ESG risks, state-guaranteed loans, online deposit platforms, IRRBB, recovery plans. - Horizontal reviews conclude with follow-up actions/recommendations to all LSIs or subsets; task forces typically formed ad hoc but processes are not formalized. Recommendation: - Formalize supervisory procedures for horizontal off-site reviews and officially acknowledge pool of specialized experts (e.g., IT/cyber, IRRBB, internal models, credit risk, liquidity risk, business models, corporate governance), preserving flexibility for dynamic task force composition. On-site inspections: - Existing deep and high-quality on-site inspections should be further increased for the LSI sector. - On-site inspection resourcing (LSI share of total on-site resources): 2022: 22,2 percent; 2023: 22,6 percent; 2024: 29,2 precent. - Planned prudential on-site inspections 2022-2025 (numbers): - Number of prudential inspections: 2022: 23; 2023: 22; 2024: 26; Nov-2025: 21 - Full scope: 2022: 19; 2023: 17; 2024: 21 - Internal models: 2022: 3; 2023: 4; 2024: 0 - Targeted, Thematic, follow-up: 2022: 15; 2023: 12 - Full-scope inspections remain predominant; each full-scope inspection typically takes three months or more, with reports issued three months afterward. - On-site inspections are generally conducted on a surprise basis with prior bank notification only 3–5 days before kick-off meeting. Recommendation: - Continue to increase number of on-site inspections for LSI sector, ensuring coverage of HI and HR LSIs, ‘challenger banks’, post-merger institutions, and those not inspected for long periods. Recommendation: - Enhance preventive supervision by expanding use of targeted, thematic, and follow-up on-site inspections, supported by streamlined processes. Prudential meetings and engagement with boards: - Circular 269 requires frequency of meetings with senior management or corporate bodies for high-priority banks; low-priority banks must be met at least once every three years. - Actual number of prudential meetings during last three years exceeded Circular minimums. - Meetings typically with CEO/General Manager and heads of control functions; lower frequency observed for meetings with individual and independent non-executive directors. - New tool in Circular 269 supports targeted deep dives via analysis of minutes and structured interviews with non-executive and independent directors. Table: Prudential Meetings 2022-2024 (numbers) - Meetings with LSI Boards members: 2022: 281; 2023: 276; 2024: 276 - Meetings with individual members: 2022: 71; 2023: 110; 2024: 133 - Meetings with independent directors: 2022: 19; 2023: 27; 2024: 29 - Meetings with Statutory Auditors: 2022: 27; 2023: 29; 2024: 27 Recommendation: - Establish a more structured approach to prudential meetings to ensure sufficiently frequent engagement—particularly with LSIs’ non-executive board members—and include separate meetings with LSIs’ independent board members. Branch oversight and coordination - Out of 112 LSIs, 70 decentralized smaller LSIs fall under direct supervision of BdI branches (including 39 Raiffeisen banks supervised by BdI Bolzano branch). - Measures to strengthen branch oversight: - 2022 establishment of a Coordination Unit within Banking Supervision Directorate 2 for decentralized LSIs. - Periodic HQ-branch meetings, benchmarking on SREP scores and capital add-ons, temporary staff exchanges. - Centralization of on-site inspections with mixed teams from HQ and branches. - Ongoing consolidation: reduce number of branches responsible for prudential tasks from 11 hubs supported by 16 collaborating branches to 8 branches. SSM oversight - ECB SSM performs risk-based oversight of LSIs relying on information and views exchanged with NCAs, thematic reviews, country desk interaction, senior management visits, bilateral technical calls/visits. - 2024: ECB SSM published a report on LSIs supervision. *Source: 1itaea2026008* ### 59. BdI has a wide range of corrective and sanctioning measures to address unsafe and ### 59. BdI has a wide range of corrective and sanctioning measures to address unsafe and ### Corrective and sanctioning powers, application and outcomes - BdI’s corrective and sanctioning powers were significantly enhanced following transposition of the CRD IV; implementation of CRD VI will introduce PPPs as an enforcement tool. - PPPs “act as an ongoing deterrent and incentive for a bank to quickly remediate the issue for which they are being penalized.” - BdI undertook measures that facilitated LSI sector consolidation (e.g., 10 M&A were related to problem bank cases). - Restructuring and transformation affected 30 percent of LSIs. - BdI increased application of early intervention measures for problem banks, including: - 7 cases where banks were put under temporary administration (based on Article 70 of TUB); - in 2 cases the BdI appointed temporary administrators (Article 75 of TUB); - 1 case where the BdI started directly the compulsory liquidation procedure. - Financial penalties: - applied to four LSIs in 2023 and another four in 2024; - in 2024, financial penalties also imposed on the natural persons of two of these LSIs (affecting 10 individuals in one LSI and 12 in the other); - in 2025, financial penalties were applied to eight LSIs, including natural persons (limited to September 30, 2025). - Circular 269 provides criteria and procedures for corrective actions and allows BdI to follow an escalation ladder, applying supervisory measures with flexibility and judgment based on individual circumstances. - Negative SREP results (score of 3 or 4), critical on-site inspection findings, or deteriorating bank conditions typically trigger corrective measures. - Financial deterioration reporting set by the ECB: institutions that breach a fixed set of thresholds based on key solvency and performance indicators are followed up and discussed more closely with the ECB. - Recommendation: - Continue strengthening preventive supervision by proactively applying corrective and sanctioning powers (in case of material regulatory breaches) at an early stage, along with timely and more active use of the escalation ladder; consider developing a more formalized escalation ladder process. ### Corporate governance - Major reforms since 2014 reshaped governance structures for LSIs; however “further efforts are still needed to advance these changes.” - Notable structural reforms: transformation of the largest popolari banks into JSCs; cooperative banks reform with Raiffeisen banks operating under an IPS; MoU signed by the Banking Foundations Association and the MEF. - BdI actions since 2020: regulatory enhancements, supervisory expectations, off-site and on-site supervision, innovative horizontal analyses, and SupTech tools; progress recorded annually during SREP. - 2021 BdI regulation updated to implement CRDV and align with EBA Guidelines on internal governance (EBA/GL/2017/11) with two national requirements: - larger and more complex LSIs required to develop policy on dialogue between management body and shareholders; - binding gender quota increased from 20 to 33 percent female presence on the LSIs board of directors. - MEF Ministerial Decree established comprehensive fit and proper requirements and criteria for LSIs’ corporate officers and key function holders, covering integrity, good reputation, professional experience and competence, independence requirements, time commitment, limits on multiple directorships, and collective suitability. - BdI utilizes the ECB Fit and Proper Handbook for Supervisors and the ECB Guide to Fit and Proper Assessments in assessments. - Supervisory initiatives and outputs: - Benchmarking exercises covering 2,600 individuals (representing 67 percent of LSIs and NBFIs). - BdI recommended limiting LSIs board members’ participation in multiple directorship positions to 10, with no more than three being executive roles. - A new Fit and Proper Assessment Manual drafted, including: internal assessment methodology, a self-assessment checklist, and standardized note and feedback templates. - Industry workshop in June 2024. - Horizontal off-site review (2020 task force) used SupTech tools to examine minutes and reports (22 percent of all LSIs) and conducted targeted interviews of board members; outcomes published in Guidelines on the Composition and Functioning of LSIs Boards. - On-site inspections: full-scope missions are primary tool; evidence-based findings align with horizontal reviews and show need to intensify governance supervision. - Key supervisory findings: need to strengthen boards’ oversight responsibilities, address cases where shareholders prefer a dominant CEO weakening board supervisory function, foster proactive role of independent directors, and enhance culture of control functions. - Recommendation: - Continue prioritizing corporate governance and intensifying supervisory activities—on-site inspections and horizontal off-site reviews—focusing on strengthening oversight responsibilities of LSIs’ boards, enhancing independent directors’ proactive role, and fostering a robust culture of control functions. ### Transactions with related parties - BdI is finalizing update of regulatory framework for transactions with related parties to cover all elements of the revised 2024 BCP (CP20), including definitions, limits or other mitigants, reporting on aggregate exposures, and public disclosure using prudential definitions; work expected to be finalized in 2026. - 2020 FSAP recommended reviewing definition of related parties and connected persons to include directors, senior management, and key staff of affiliated companies (BCP CP20 EC1). - BdI plans to introduce an aggregate prudential limit for related parties’ transactions and corresponding reporting obligation towards BdI. - Current practice and governance: - Circular requires LSIs to implement oversight processes for related-party transactions, involving independent directors; role of independent directors limited to issuing non-binding advice. - Larger LSIs have Board’s Related Parties Committee composed of non-executive and independent directors. - Limits and mitigants: - BdI established limits on individual related parties, but no aggregate mitigants (e.g., deduction from capital or collateralization). - Individual limits for non-financial related parties: 5 percent of equity for banks’ officers and shareholders with significant influence or control powers; 7.5 percent for other shareholders; 15 percent in all other cases. - For financial related parties: limit varies from 5 percent to 20 percent of equity on each related party and its respective connected persons. - For banking groups, limits applied at consolidated level; on standalone basis higher 20 percent limit toward a single group of related parties may apply. - Supervisory monitoring: - Circular 269 mandates assessment of related party transactions with objectives: i) evaluate compliance with regulatory framework through periodic monitoring (quarterly, based on supervisory reporting); ii) assess potential adverse effects on governance within SREP. - If individual prudential limits are breached, LSI must approve plan to restore compliance within 45 days from the breach and send it to BdI within the following 20 days. - Remediation may include excess capital in ICAAP. - Since 2012 prudential regime introduction, related party transactions decreased by more than half, with only two breaches of individual limits reported by end-2024. - Recommendation: - Finalize alignment of the regulatory framework for transactions with related parties to cover all elements of the revised 2024 BCP, including definitions, limits (or deductions from capital or collateralization) and reporting on aggregate exposures, and public disclosure using prudential definitions. ### Capital adequacy: Pillar 2 - Capital requirements (Pillar 1) and regulatory own funds established in EU CRR and apply directly to LSIs; capital buffers and Pillar 2 capital add-ons transposed into Italian legislation (BdI Circular 285). - BdI formulates a formal capital decision for each LSI with frequency depending on prioritization level: at least every year for HI LSIs, two years for remaining LSIs. - Two capital buffers designed to be released in adverse scenarios: - Countercyclical Capital Buffer (CCyB), currently set at zero percent; - Systemic Risk Buffer (SyRB), with initial calibration of 0.5 percent and fully phased in at 1 percent since June 2025. - BdI introduced structured horizontal analysis (‘benchmarking’) on SREP scores and Pillar 2 capital add-ons since 2020 to enhance comparability and consistency. - Improvements to Pillar 2 methodology: - risk-by-risk capital quantification for P2R; challenging ICAAP estimates with supervisory proxies and benchmarks; - consistency check of overall P2R against LSI’s overall score (minimum add-on set for every score); - methodological improvements in proxies for IRRBB; - ICAAP dashboards for horizontal comparisons; - introduction of EBA bucketing approach for P2G determination to increase correlation between stress-test capital depletions and imposed P2G; - specific methodology for determining P2R and P2G for excessive leverage ratio exposures. - Concentration risk: - BdI treats concentration risk as a subset of credit risk within P2R; recommended that all dimensions of concentration risk be covered by Pillar 2, not only those linked to credit risk. - Example: LSI sector holds more than 20 percent of sovereign exposures in its assets. - BdI reported sovereign exposures are included within P2R IRRBB framework and supervisory units may impose specific P2R for sovereign exposures; P2G also captures sovereign risk via stress test capital depletions. - Recommendation: - Consider all dimensions of material concentration risk when setting Pillar 2 capital add-ons, including an explicit add-on for sovereign concentration with safeguards against double-counting effects. ### Credit risk and problem assets - Circular 285 and other BdI regulations set requirements for identification, measurement, monitoring, and reporting of credit risk and management of problem assets; Circular 285 transposed EBA Guidelines on definition of default (EBA/GL/2016/07) and EBA/GL/2017/06 on credit risk management and expected credit losses. - In 2022 BdI attained full compliance with EBA Guidelines on management of non-performing and forborne exposures (EBA/GL/2018/06). - A-IRB models: - Recently four larger LSIs authorized to use A-IRB models for prudential purposes (corporate and retail portfolios). - Floors on total consolidated RWA based on corresponding standardized approach RWA ranging between 80 and 95 percent; add-ons at parameter level (LGD) applied. - Credit risk is BdI’s supervisory priority; off-site, on-site, and SREP activities intensified, including horizontal off-site reviews and intrusive full-scope on-site inspections with extensive credit file reviews. - Focus on public-guaranteed loans: - One quarter of corporate lending carries public guarantees with zero risk weight. - June 2024 BdI letter required internal audit to conduct in-depth assessment of PGS processes and sample of credit files. - Follow-up April 2025 letter recommendations: i) public guarantees cannot derogate from general credit standards; ii) strengthen control measures across commercial loan supply chain; iii) assess consistency between declared loan purpose and business activity; iv) ensure robust AML/CFT systems and controls for transactions involving new customers. - Power to require reclassification and provisioning: - BdI currently lacks explicit power to require LSIs to adjust asset classifications or impose provisioning levels for prudential purposes (BCP CP 18 EC7). - BdI can require application of specific provisioning methodology but not impose higher provisions on specific individual exposures. - BdI commonly uses moral suasion; if non-compliant BdI can impose a Pillar 2 capital add-on (P2R). Currently 30 percent of Italian LSIs have a specific P2R add-on for potential under-provisioning. - Recommendation: - As recommended in the 2020 FSAP, BdI should be granted the explicit power to require LSIs to adjust their asset classification and increase provisioning levels for prudential purposes. - NPLs and specialized NPL banks: - Majority of LSIs removed legacy NPLs from balance sheets; many NPLs securitized and managed by servicers. - Substantial stock of NPLs remains with investors pending resolution due to slow insolvency and foreclosure processes. - There are 16 specialized credit banks, including five that specialize in managing NPLs; these specialized banks hold 22 percent of LSI sector assets. - BdI continues reviewing NPL strategies submitted by high-NPL LSIs (NPLs >5 percent). - Recommendation: - Keep intense supervision of LSIs specialized in NPL management banks to promptly identify vulnerabilities related to business model sustainability. - Upcoming initiative: - BdI preparing for implementation of NPL calendar provisioning requirements for legacy NPLs following ECB SSM initiative for exposures originated before April 26, 2019; measures will apply starting from the end of 2025 with gradual introduction and full implementation to follow. *Source: 1itaea2026008 - 59. BdI has a wide range of corrective and sanctioning measures to address unsafe and (PDF).* ### 2028. BdI will use the outcomes of its assessments of LSIs’ coverage of NPL exposures as part of the ### 1itaea2026008 - 2028. BdI will use the outcomes of its assessments of LSIs’ coverage of NPL exposures as part of the ### A. Credit risk and non-performing loans (NPLs) - Finding: Maintaining vigilant supervision of LSIs’ credit risk and problem assets remains essential despite NPL levels being lower compared to the past. - Supervisory approach: - Off-site supervision through bank-specific and horizontal analyses. - On-site inspections with continued focus on the worst-performing loan portfolios (e.g., commercial real estate), sectors impacted by geopolitical and tariff risks, and public-guaranteed loans. - Recommendation: - Continue prioritizing and vigilantly supervising LSIs credit risk and problem assets, focusing on worst-performing loan portfolios, sectors exposed to geopolitical and tariff risk, and state-guaranteed loans. ### E. Liquidity and Funding Risk — overview and metrics - Regulatory coverage: - LSIs in Italy are subject to the LCR and the NSFR as applied in the EU legislation. - Key statistics (as of June 2025): - LCR at 278 percent. - NSFR at 151 percent. - Reporting frequency: - LCR: monthly. - NSFR: quarterly. - Regulatory notes: - NSFR was introduced for Italian LSIs in 2021. - BdI exercises options and discretions available in the CRR and DA, aligned with the ECB SSM approach. ### E. Liquidity and Funding Risk — governance, monitoring, and practices - Regulation and governance: - Circular 285 requires LSIs to have policies and systems for liquidity risk governance, stress tests, contingency plans, monitoring limits, and reporting to corporate bodies. - Circular 285 updated in 2020 to incorporate certain EBA requirements on stress testing. - Ongoing monitoring: - BdI conducts weekly liquidity monitoring using a domestic template, collecting extensive weekly data from 72 LSIs; LSIs can submit data daily during systemic stress. - LSIs required to report weekly counterbalancing capacity with three-month inflow/outflow projections and fortnightly additional liquidity sources data. - ILAAP and SREP: - LSIs submit ILAAP reports annually since 2018. - BdI uses ILAAPs and liquidity stress tests within the SREP Risk Appetite Statement to identify banks more exposed to liquidity risk. - SREP liquidity and funding risk assessments are communicated through formal SREP letters or prudential meetings. ### E. TLTRO-III repayment and funding adjustments - Supervisory actions: - BdI conducted a horizontal off-site review covering 70 LSIs and thematic on-site inspections at three LSIs focused on short-term funding, specialized business models, and operational safeguards. - Outcomes: - LSIs successfully repaid TLTRO-III. - Some LSIs used excess liquidity to repay; the majority increased market access (mainly through unsecured debt issuance) or raised deposits from retail and corporate clients. - Following repayment, the amount of unencumbered assets increased, usable as collateral in repo and other markets. ### E. Online Deposit Platforms (ODPs) — risks and supervisory response (Box 1) - Key risks identified: - Potential volatility of ODP deposits influenced by online banking and social media-driven depositor behavior. - Business model risks for specialized banks heavily reliant on ODP funding. - Operational risks in governance, compliance, information security, and AML/CFT linked to digital platforms. - Supervisory response: - LSIs must submit detailed liquidity plans addressing ODP-specific characteristics and maturity mismatches prior to allowing ODP deposit collection. - Required thorough risk assessments covering risk management, compliance, and AML/CFT functions. - BdI evaluates submissions and mandates corrective actions before operations commence if deficiencies are found. - Regular quantitative data on ODP funding collected through targeted reports integrated into LSIs’ liquidity reporting, supplemented by periodic detailed surveys. - AML/CFT risks assessed via on-site inspections; BdI contributes to EBA and ECB SSM work on the topic. - Recommendation: - Further address digitalization-related challenges affecting LSIs’ liquidity and funding risks, particularly focusing on funding from ODPs and hypothetical scenarios of sudden shifts in depositor behavior (e.g., social media-driven mobilization). - Suggested measures include rapid outflow stress scenarios reflecting social-media dynamics, or contingency funding playbooks for LSIs with high reliance on ODP. ### F. Operational risk and operational resilience - Regulatory implementation: - Since January 2025, all LSIs calculate operational risk capital requirements using the standardized approach (Pillar 1), following CRR 3 implementation. - Circular 285 updated in August 2025 to implement the revision of CRR 3, including Chapter 8 on Operational Risk. - Circular 285 includes detailed requirements for ICT and security risk management, under review according to applicable DORA. - Supervisory assessments: - Off-site and on-site supervision and SREP assessments place particular focus on IT risks, business continuity, and disaster recovery. - On-site inspections of LSIs and their main IT service providers revealed over 100 findings primarily related to outsourcing management and oversight, security processes, governance and IT risk management, and business continuity tests and disaster recovery plans. - ITRQ used within annual IT Risk assessment under SREP to gather ICT exposure and control environment data; main points of attention include over-reliance on IT providers and need to strengthen controls on IT providers and ICT risk control functions. - Outsourcing and IT provider landscape: - As of December 2024, 72 percent of LSIs (excluding the Raiffeisen banks belonging to the Raiffeisen IPS) have adopted IT models relying fully or extensively on outsourcers. - On average, the main IT provider accounts for more than 75 percent of third-party IT services; two of the six main IT providers serve more than half of LSIs. - Supervisory actions taken: - BdI conducted five on-site inspections of IT providers (plus indirect inspections during bank inspections) and issued 43 letters in 2024 reminding LSIs of ultimate responsibility on outsourced functions. - Follow-up inspections at the two main IT providers in 2024 verified remediation. - Recommendations: - Continue prioritizing on-site inspections of IT and cyber risk, including inspections of firms to which LSIs have outsourced their IT systems and services. - Further proactively conduct supervisory work to strengthen LSIs' operational resilience, focusing on effectiveness of ICT risk management (governance and control system) and third-party risks. ### ICT risk supervision capacity and initiatives - Organizational enhancements: - In 2022, a new Outsourcers and Third-party Supervision Unit dedicated to LSIs was established to foster a holistic approach to third-party risk and identify IT service providers for closer monitoring. - Other IT expertise distributed across Banking Supervision Directorate 2, Regulation and Macroprudential Analysis Directorate, and the Statistical and ICT Support Division. - Capacity-building measures: - BdI promoted external and internal synergies (e.g., participation in SSM ICT risk networks; agreement with the IT Department for resource exchange). - Specialized new hires and focused training programs implemented to enhance skills. - Ongoing priorities: - BdI plans to focus more on ICT risk management (governance and control system) and third-party risks; some LSIs may be required to carry out TLPT according to DORA depending on analysis results. - Recommendation: - Continue increasing supervisory capacity for IT and cyber risks, with particular focus on ensuring a capable and timely response in the rapidly evolving digital landscape. *Italicized source: IMF staff summary of the cited PDF chapter.* ### 111. The regulatory framework for LSIs to assess and manage IRRBB is based on ### The regulatory framework for LSIs to assess and manage IRRBB is based on ### Regulatory framework and methodologies - The framework for LSIs is based on comprehensive European legislation, with certain adjustments to meet national needs. - BdI’s Circular 285 contains requirements for LSIs that are aligned with the EU CRR2/CRDV and EBA Guidelines; directly applicable EU legislation is also applied by LSIs. - Requirements include adequate systems to identify, measure, evaluate, monitor, report, and control or mitigate IRRBB. - The framework also covers Credit Spread Risk in the Banking Book (CSRBB) in line with the EBA Guidelines on IRRBB and CSRBB. - In June 2024, BdI updated Italy-specific simplified methodologies for LSIs to calculate IRRBB exposure from both economic value of equity (EVE) and net interest income (NII) perspectives, aimed at reducing the compliance burden related to behavioral models and to integrate new provisions from CRDV. - These methodologies were updated through a technical dialogue between BdI and industry representatives and are used by LSIs on a voluntary basis. - BdI has the power to require the use of the standardized methodology if a LSI’s internal IRRBB systems are unsatisfactory; this power has not yet been exercised. ### Supervision, monitoring, and supervisory tools - BdI supervisors assess LSIs’ IRRBB exposure and governance/control arrangements during off-site and on-site supervision and within the SREP exercise. - BdI continuously monitors IRRBB by comparing LSIs’ internal metrics with the outcomes of the BdI regulatory metric, computed regularly for all LSIs (quarterly and semi-annually) based on EVE and NII. - Additional regularly collected and reviewed inputs in SREP: - ICAAP quantification (annually). - Outcome of the Supervisory Outlier Test (quarterly). - BdI micro-prudential solvency stress test for LSIs includes stress projections on operating income, stressing out the net interest margin, aligned with the EBA EU-wide ST methodology. - The outcome of the stress test, combined with supervisory proxies, is used for capital add-ons related to IRRBB. - Around 50 percent of Pillar 2 capital add-ons relate to IRRBB. - BdI’s full-scope on-site inspections comprehensively assess the IRRBB component, focusing on strategy, policies, and processes for managing IRRBB/CSRBB. - For 2026, BdI is planning thematic on-site inspections focused on IRRBB. ### Horizontal analyses of behavioral models and supervisory outcomes - BdI carried out horizontal off-site analyses on internal behavioral models used by LSIs: - 2024: first assessment on a sample of LSIs, focusing on behavioral models for non-maturity deposits. - 2025: analysis expanded to all LSIs using internal models for non-maturity deposits and loan prepayment risk. - Analyses focused on three areas: - Governance and internal controls (e.g., IRRBB policy, internal audit, validation activities). - Behavioral models (e.g., segmentation of deposits by counterparty and account characteristics, key parameters of loan prepayment rates, historical databases used for estimates). - Model risk assessment (e.g., sensitivity and stress tests on key parameters and the use of results to support internal capital allocation decisions). - Outcomes and identified shortcomings: - Contributed to the IRRBB SREP score and the capital decision. - Findings were communicated to banks through formal SREP letters or ad hoc communications, requesting remedial actions in the subsequent ICAAP. - BdI plans to continue monitoring implementation of behavioral model-related requirements and adjust as necessary. ### Current exposure levels and risk profile of LSIs - BdI monitoring indicates Italian LSIs’ exposure to IRRBB has remained generally limited over the past few years, measured from both EVE and NII perspectives. - Since September 2024, LSIs submit new quarterly IRRBB reports based on EBA ITS reporting, enabling increased monitoring compliance with the Supervisory Outlier Test IRRBB thresholds. - Average exposure levels: - EVE: below 15 percent of Tier 1 capital. - NII: under 5 percent of Tier 1 capital. - Balance-sheet characteristics and sensitivity: - LSIs collectively exhibit a positive duration gap (assets typically have longer durations than liabilities). - Assets: primarily loans to customers and securities. - Liabilities: predominantly deposits. - Resulting sensitivities: - From the EVE standpoint: mostly sensitive to upward shifts in interest rates. - From the NII perspective: more exposed to downward shifts in interest rates. ### Monitoring unrealized losses on amortized cost assets - Since December 2022, BdI has been monitoring Italian LSIs’ unrealized losses on amortized cost assets on a semi-annual basis. - Scope covers financial instruments held-to-maturity (HTC) at amortized cost. Exposure to unrealized losses is calculated using non-harmonized reporting data based on the fair value of the HTC financial assets. - The thematic review was launched after an increase in Italian credit spreads during the COVID-19 pandemic; importance rose after the 2023 banking turmoil. - Between December 2022 and December 2024: - The potential impact of unrealized losses on the CET1 ratio for the Italian banking system decreased from 200 bp to an average 61 bp. - The decline reflects (i) moderation of unrealized securities losses as long-term yields eased in 2024, and (ii) intensified supervisory follow-up on IRRBB management and balance-sheet resilience. - Starting with the 2026 SREP cycle, BdI plans to integrate the quantitative assessment of unrealized losses into the SREP IRRBB&CSRBB methodology for LSIs, aligning with the ECB SSM approach. - At the ECB SSM level, no capital add-ons were envisaged for unrealized losses until now. - From the 2026 SREP cycle onwards, the quantitative assessment of unrealized losses (ULs) and unrealized gains (UGs) will be included in the IRRBB & CSRBB SREP methodology for LSIs. - Supervisory assessment of UL/UG will be based on: i) the current value and evolution of UL/UG over time, and ii) the ability of IRRBB metrics produced in the past to anticipate the current/observed level of UL. - Risk note: If assets need to be sold or market conditions deteriorate, unrealized losses can quickly become realized, impacting regulatory capital ratios. ### Policy recommendation - Continue carefully monitoring unrealized losses from held-to-maturity portfolios at amortized costs. *Source: IMF staff report text as provided in the supplied content.* ### Appendix III. Overview of the SSM Supervisory Review Process ### Appendix III. Overview of the SSM Supervisory Review Process ### SREP methodology: approach and inputs - The SREP methodology relies on quantitative and qualitative assessments, overlaid with supervisors’ expert judgement, to derive SREP decisions that are tailored to a bank’s specific risk profile. - Source: ECB. ### Four core elements of the methodology - Business model assessment - Includes an assessment of business model viability and sustainability. - Internal governance and risk management assessment - Assesses group structure, internal governance framework, risk management framework, internal control environment and risk infrastructure. - Capital assessment - Includes a risk-by-risk assessment of risks to capital i.e., credit risk, market risk, operational risk and IRRBB. - Includes an ICAAP outcome encompassing ICAAP governance, capital planning, scenario design and stress testing, internal controls, independent reviews and ICAAP documentation, data and infrastructure, risk capture, management and aggregation. - Liquidity assessment - Includes a risk-by-risk assessment of risks to liquidity and funding, i.e., short-term liquidity, long-term funding sustainability and ILAAP reliability assessment. - Encompasses ILAAP governance, funding strategy and liquidity planning, scenario design, stress testing and contingency funding plan, internal controls, independent reviews and ILAAP documentation, data and infrastructure, risk capture, management and aggregation. ### Consideration of sectoral and macro developments - Consideration is also given to developments in the sector and the wider economic environment that may have an impact on the longer-term risk profiles of the banks. - This is achieved through quarterly risk analysis packs (analytical reports of supervision), financial stability reviews, quarterly bulletins, internal ‘policy bites’ information sessions, SSM priorities, and SSM horizontal assessments. - Frequency of engagement with each LSI is based on the risk profile of the bank, business model changes, and the nature, scale, and complexity of the institution. ### Appendix IV: Overview of BdI’s SupTech Tools and Digitalization Initiatives (included in source) - BdI has developed several SupTech tools and is finalizing other digitalization initiatives. - Findings Automation - NOR.R.IS (NORmativa Rilievi ISpettivi): provides a single access point for national and international regulations with advanced search and exploration features; enables full-text searches of regulatory standards; integrates external alerting services to notify users of new regulations; processes regulations into elemental provisions; classifies them under predefined categories; stores them in a dedicated database. - S.O.FI.A (System for Onsite Findings Automation): uses machine learning to assist drafting by suggesting similar findings, applicable regulations, and classifications; helps inspectors by suggesting similar past findings and retrieving relevant regulatory standards via NOR.R.IS. - Corporate Governance analysis (CGOV project) - Developed an AI-powered tool to empirically assess relationships among board members and their functions, the board’s actual functioning and autonomy, and member behaviors including the type and frequency of their interventions, depth of discussion, and topics addressed. - Aims to extract structured information automatically from minutes about who interacts, how, and on what topics and to facilitate easy comparison based on the analyzed data. - Fit and Proper Automation - Supports the annual fit and proper assessment process for approximately 3,000 candidates appointed to positions within supervised entities. - Covers reputation, experience, time commitment, collective suitability, independence of mind, and conflicts of interest. - Platform enables analysts to enter candidate names and trigger an extensive automated workflow; integrates internal data sources (Italian Companies Register, sanctions archives, Central Credit Register, supervisory reports) and external databases (Factiva, Worldcheck, European Fit and Proper System). - The AI-powered Factiva integration scans thousands of sources to flag any news affecting a candidate's reputation, including judicial proceedings. - The system applies business rules aligned with regulatory frameworks to generate alerts, providing analysts with structured, risk-focused support while leaving final judgments to them. - Ownership Structures mapping (VIG project) - Tool uses a Knowledge Graph and Automated Reasoning to reconstruct ownership structures of supervised intermediaries such as banks and other financial institutions. - Integrates and visualizes data from multiple sources and generates new insights beyond the original data scope. - IT modernization and data platform - From September 2024, the Directorate General for Financial Supervision and Regulation, working with the IT Department, is implementing a multi-year program to modernize the IT architecture for banking and financial supervision. - Approved by the Bank of Italy Board in 2024, the initiative aims to build an integrated IT platform to support core supervisory processes and ensure good governance over supervisory data using advanced technologies. - The first phase, “Data Management and Analytics,” is under feasibility study and will establish the architecture and target IT solutions to support the SREP for LSIs and non-banking financial institutions. - Productivity tools - BdI has introduced Microsoft Copilot to boost individual productivity, including among supervisory staff. - Current use is restricted to handling non-confidential data; ongoing evaluations are exploring extending its application to sensitive information and further understanding its capabilities. *Source: Appendix III and Appendix IV as provided in the supplied document.* ### Appendix V. Implementation Status of Key Recommendations in ### Appendix V. Implementation Status of Key Recommendations in the 2020 Italy FSAP ### Powers, Independence and Resources - 2020 recommendation: Amend the banking law to shift the power of putting banks under compulsory administrative liquidation from the MEF to the supervisory authorities, with a proper consultation process with the MEF. - Status: Not addressed. - Actions taken / context: - Reviewed by a 2026 FSAP workstream (Financial Safety Net and Crisis Management). - Italy’s MEF indicated the 2020 FSAP recommendation about transferring the compulsory administrative liquidation and resolution MEF’s powers to the Bank of Italy is not reiterated. - Both procedures can be activated only upon a BdI proposal. - MEF involvement has not affected BdI’s operational role or timeliness in practice; MEF has never rejected BdI proposals. - EU legislation (notably the SRMR) envisages involvement of the European Commission and the EU Council as part of the resolution commencement process. ### Supervisory Approach, Processes and Cooperation - 2020 recommendation: Further oversee supervisory activities of BdI’s branches to ensure harmonization across BdI locations. - Status: Addressed. - Actions taken: - In 2022, a Coordination Unit was established within the Banking Supervision Directorate 2 to enhance supervisory coordination of decentralized LSIs. - Initiatives: periodic meetings between headquarters and branch supervisors; benchmarking activities on LSIs regarding SREP scores and capital add-ons; temporary staff exchanges. - On-site inspections centralized with mixed teams from headquarters and branches. - Ongoing reform to consolidate BdI branches will reduce branches responsible for prudential tasks from 11 hubs to 8 branches. - 2020 recommendation: Perform more frequent deep dives and thematic/targeted inspections on LSI weaknesses (governance, credit risk, business models). - Status: Partially addressed. - Actions taken: - Full-scope on-site inspections remain primary supervisory tool; BdI conducts 22–26 such inspections annually. - Thematic, targeted, and follow-up inspections are limited but increasing; recent targeted and follow-up inspections addressed governance, business models, credit risk, and liquidity risks related to TLTRO. - The 2026 draft plan includes six thematic inspection topics. - Off-site supervision of LSIs expanded with horizontal reviews on business models, credit risk, board functioning, IT and ESG risks, state-guaranteed loans, and recovery plans; reviews generally lead to follow-up actions or further on-site assessments. - 2020 recommendation: Enhance interaction with CONSOB on bank-specific issues and external auditor oversight. - Status: Addressed. - Actions taken: - Reorganized Joint Committees at strategic and technical levels; several MOUs and bilateral working groups established (issuer supervision, MiCAR implementation). - Bank of Italy started mandatory meetings with auditors since 2023: 29 meetings in 2023 and 44 in 2024. - Since 2007, Bank of Italy, CONSOB, and IVASS coordinated on IAS/IFRS application via a formal agreement; 2021 amendment to the Banking Law empowers Bank of Italy to directly remove bank auditors in cases of serious reporting breaches. ### Corrective Action and Sanctioning - 2020 recommendation: Consider timelier escalation of corrective measures for banks with unsustainable business models or persistent deterioration. - Status: Addressed. - Actions taken / outcomes: - BdI increased use of early intervention measures and decisive actions facilitating LSI sector consolidation. - 10 M&As were related to problem bank cases. - Restructuring and transformation affected 30 percent of LSIs. - Supervisory escalations and sanctions included seven cases where banks were placed under temporary administration (Article 70 of TUB); in two cases BdI appointed temporary administrators (Article 75 of TUB); and one case where BdI directly initiated the compulsory liquidation procedure. ### Capital Adequacy - 2020 recommendation: Review banks’ pillar 2 process and capital requirements to ensure consistency and horizontal benchmarking in applying P2R across all LSIs. - Status: Addressed. - Actions taken: - Bank-specific SREP assessments are complemented by a structured horizontal analysis (“benchmarking”) for SREP scores and supervisory capital add-ons. - A dedicated task force conducts this benchmarking annually to ensure proportionality, consistency across LSIs with similar characteristics, and correct application of methodologies. - Activity detected heterogeneity and strengthened SREP scoring and P2R/P2G determinations. ### Credit Risk - 2020 recommendation: Align BdI NPL guidelines with EBA guidelines on management of non-performing and forborne exposures. - Status: Addressed. - Actions taken: - In April 2022, Bank of Italy attained full compliance with EBA Guidelines (EBA/GL/2018/06), replacing national guidelines; no material changes for LSIs due to high similarity. - 2020 recommendation: Grant BdI power to require banks to adjust asset classification and increase provisioning levels. - Status: Not addressed. - Actions taken / constraints: - BdI lacks explicit power to mandate adjustments of classifications of individual exposures or impose provisioning levels for specific exposures for prudential purposes. - BdI can require application of specific provisioning methodology but not impose higher provisions on specific/individual exposures. - Supervisors typically use moral suasion; if non-compliant, BdI may impose a Pillar 2 capital add-on (P2R). - Currently 30 percent of Italian LSIs have a specific P2R add-on for potential under-provisioning. - Use of P2R add-ons has limitations; insufficient provisioning coverage may also lead to poorer credit scores and weaker SREP scores. - 2020 recommendation: Continue monitoring implementation of banks’ NPL plans and scrutinize for reliability and ambitiousness. - Status: Addressed. - Actions taken: - Credit risk remains primary supervisory focus; BdI increased horizontal off-site reviews post-COVID-19 and geopolitical shocks. - Letters to LSIs raised board awareness on credit risk management and informed prioritization for supervising problem banks. - BdI continues reviewing NPL strategies submitted by several high-NPL LSIs (NPLs >5 percent). ### Other Risk Areas - 2020 recommendation: Introduce aggregate prudential limit for all related party exposures at least as strict as the single large exposure limit. - Status: Partially addressed. - Actions taken / timeline: - BdI is finalizing an update to the regulatory framework for related-party transactions to cover elements of the revised 2024 BCP (CP20), including definitions, limits/mitigants, reporting on aggregate exposures, and public disclosure using prudential definitions. - BdI postponed updating while awaiting the revised 2024 BCP and EU-level developments; no EU-wide framework currently exists. - Update expected to be finalized in 2026 and will introduce an aggregate prudential limit and related reporting obligation to BdI. - 2020 recommendation: Increase BdI supervisory capacity on IT and cyber risk. - Status: Addressed. - Actions taken: - In 2022, BdI established an Outsourcers and Third-party Supervision Unit dedicated to LSIs. - Additional IT experts placed in Banking Supervision Directorate 2, Regulation and Macroprudential Analysis divisions; Statistical and ICT Support Division performs horizontal ICT/cyber analyses. - Initiatives: external and internal synergies (e.g., SSM ICT risk networks), hiring specialized staff, focused training programs. - 2020 recommendation: Perform inspections over IT outsourcing firms to ensure minimum IT security requirements. - Status: Addressed. - Actions taken: - Since the 2020 FSAP, BdI conducted seven on-site inspections of IT providers used by LSIs. - Shortcomings found: management of core IT and security processes, IT risk assessments, incomplete inventories of IT services, gaps in business continuity and disaster recovery testing. - BdI shared reports, requested and monitored remedial plans, informed LSIs via 43 letters sent in 2024; follow-up inspections carried out at the two main IT providers in 2024 to verify remediation. - 2020 recommendation: Revisit AML/CFT inspections approach over banks’ branches to reallocate resources to targeted AML/CFT reviews or prudential inspections. - Status: Addressed. - Actions taken: - AML/CFT inspections on banks’ branches conducted until 2021. - Creation of a separate AML/CFT Unit led to reallocation of on-site inspection resources to full-scope, targeted, and thematic AML/CFT inspections consistent with a risk-based approach. ### Bank Corporate Governance - 2020 recommendation: Quickly issue draft decree on fitness and propriety of banks’ corporate officers and revise decree on suitability of major shareholders. - Status: Partially addressed. - Actions taken: - Draft Decree on the fitness and propriety of banks’ corporate officers issued in 2020 (Ministerial Decree no. 169/2020). - MEF Ministerial Decree (144/1998) on suitability of major shareholders has not been updated; draft underwent public consultation in 2022 and MEF is awaiting revision of the Criminal Code. - 2020 recommendation: Grant supervisory authorities power to issue fit and proper requirements for shareholders and corporate officers. - Status: Not addressed. - Context: - Requirements impact individual rights; under the Banking Law the MEF issues provisions and is required to obtain prior advice of the Bank of Italy and the Council of State. - Bank of Italy is formally involved and in 2021 issued a Regulation on the procedure for assessing the suitability of banks’ board members. - 2020 recommendation: Complete reform of large popolari banks (> Euro 8 billion) and address smaller popolari banks. - Status: Addressed. - Actions taken / outcomes: - 2015 legislation required popolari banks with total assets exceeding €8 billion to convert into JSCs; ten popolari banks completed conversion with reform finalized at the beginning of 2022. - In 2024, the asset threshold was raised to €16 billion. - Financing shares were first issued in 2025 to enhance capital access; in May 2025 the EBA assessed the first issuance project as compliant with CET1 eligibility requirements. - Bank corporate governance remains a BdI supervisory priority with several horizontal off-site reviews. - 2020 recommendation: Closely supervise new CBGs during initial years to ensure reform challenges are overcome. - Status: Addressed. - Actions taken: - Two Italian CBGs classified as Significant Institutions (SIs) and directly supervised by the ECB SSM, covering parent companies and all 179 affiliated BCCs. - Subject to intense off-site and on-site scrutiny; early warning systems have been reviewed and upgraded. - Focus on IT integration, convergence toward common processes and standards, and centralization of risk management and internal control systems. *Source: Appendix V. Implementation Status of Key Recommendations in the 2020 Italy FSAP (extracted content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1itaea2026008.pdf_