Bank of Italy Extends Loan Portfolio Review on Eight of 20 Banks

Italy’s central bank extended asset quality inspections started last year on eight of 20 banks to examine their entire portfolio after lenders increased provisions for bad loans.

“The Bank of Italy will closely follow the implementation of additional corrective measures that the banking groups inspected were invited to adopt,” the bank said in an e-mailed statement today. “For eight of the 20 groups examined the checks were extended to the entire loan portfolio, in some cases turning the inspection into a full-scope examination of the entire operational activity of the group.” The central bank didn’t identify the lenders.

The Bank of Italy is urging banks to boost capital by selling non-strategic assets and further curbing operating costs, dividends and executives’ and directors compensation. In the fourth quarter the regulator required banks to set aside additional provisions after coverage ratios declined compared to recent years.

The banks had set aside provisions amounting to 43.5 percent of their non-performing loans at the end of December, compared with 31 percent at the end of September, the BOI said. Banks are struggling to improve credit quality as the longest recession in more than 20 years makes it harder for firms and households to repay their debts.

Asset Quality

Monitoring of banks’ asset quality and provisioning levels is continuing and has been extended to other lenders through ordinary inspections, the central bank said, adding that its action will be co-ordinated with similar exercises that will be carried out on an international level.

The Basel Committee on Banking Supervision, which represents global central banks and regulators and sets capital standards worldwide, will require lenders to have common equity equal to at least 7 percent of risk-weighted assets by 2019. Under Basel proposals designed to reduce leverage, banks would have to hold equity equal to 3 percent of total assets by 2018.

The European Central Bank, which will take over supervision of the banking system next year, will conduct an “asset quality review” that may lead to further writedowns and capital raising.

To contact the reporter on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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