Bank of Italy defends change on capital accounting

The Bank of Italy has defended its decision on May 18 to permit Italian banks to ignore changes in the value of government bonds when calculating their capital ratios. Previously, Italian banks would have had to take account of falling market prices and add more capital accordingly, while a rise in the price would only be partially included – the same treatment accorded to equities. Under the new rule, unrealised gains and losses on European government bonds will be ignored unless the bonds become permanently impaired - other bonds would continue to be treated as before.

"The measure is not unconventional," a bank spokesman said, pointing out that France, Germany and the UK already apply the same rule, which is one of two options permitted by the Committee of European Bank Supervisors. "Far from introducing a competitive advantage for Italian banks, the regulation restores the level playing field on the prudential treatment of government bonds in a context of higher market volatility," the spokesman added.

€185 billion in Italian government securities is held by Italian banks as of the end of March, according to the most recent figures from the Bank of Italy (they also hold another €6.7 billion of non-Italian European government debt).

Of this, Unicredit reportedly holds €50 billion and Intesa SanPaolo €55 billion, though it's not clear how much of this would be held as 'available for trading' and therefore qualify for the new treatment. Unicredit has a €928 billion balance sheet as of the end of 2009, of which €134 billion is held for trading. Its €58 billion in regulatory capital gives it a total capital adequacy ratio of 12.88%. Intesa SanPaolo reports regulatory capital of €43 billion and a capital ratio of 11.9%. Of its €150 billion balance sheet at the end of March 2010, €39 billion was held for trading. Neither bank responded to requests for comment.

If the move was intended to bolster Italian government bonds by making Italian banks more likely to hold them, it has had little visible impact: five-year Italian debt traded at 101.612 late on May 20, up slightly from 101.572, where it closed on May 17, before the measure was announced. Five-year CDSs on Italian sovereign debt stood at 142.915 basis points, down slightly from 143.5bp on May 17. Analysts estimate the rule change has prevented a €600 million reduction in regulatory capital across the sector, equivalent to a reduction of 6bp in core Tier 1 capital ratios.