The number of potential covered bond issuers in Italy could rise from 35 to 55 under Bank of Italy proposals released last Friday (4 April) that include a halving of a minimum nominal capital requirement, and DBRS yesterday noted that the involvement of smaller institutions might warrant increased supervision.

The rating agency said that the main change proposed by the Italian central bank would halve the regulatory capital requirement for obbligazioni bancarie garantite (OBG) issuers from Eu500m to Eu250m. The rating agency said that, according to the Bank of Italy, this will increase the number of entities that fulfil the new requirements from 35 to 55. It noted that a required minimum total capital ratio remains unchanged at 9.

Under the proposed changes, covered bond issuers would not be required to undergo a specific approval process, nor would the asset monitor be required to report to the Bank of Italy, maintaining the status quo.

DBRS said that under the existing framework, with the Eu500m requirement, it made sense that the Bank of Italy did not vet individual issuers, as it was safe to assume that an issuer of that size would have the operational ability and controls in place to maintain an OBG programme. However, DBRS noted that despite the reduction in the capital requirement oversight has not changed.

“With the proposed amendments removing this hurdle so that smaller and potentially less sophisticated entities can now take part in an OBG programme, the Bank of Italy might consider vetting each entity on an individual basis and rolling the reporting obligations of the asset monitor directly into its own hands,” said DBRS.

The rating agency said that limits on the pledging of assets to OBG programmes will be tightened with the Bank of Italy adopting CRD IV definitions.

“The aim is to restrict the amount of eligible assets for less-capitalised banks,” said DBRS.

The Bank of Italy is planning to exchange limits based on a Total Capital Ratio (TC) and Tier 1 Ratio (T1) for limits on T1 and a Common Equity Tier 1 Ratio (CET1). The rating agency said that the T1 requirements are generally being increased and are more stringent than the bare minimum CRD IV requirements.

“There are no limits for the amount of eligible assets that can be pledged for an entity with a 9.5% T1 and 8% CET1, potentially allowing more-capitalised banks to encumber all of their high quality assets for OBG,” said DBRS. “However, for less-capitalised banks, the asset encumbrance for OBG is limited to 25% of the eligible assets.”

The rating agency said the proposals would result in a proportionate reduction of eligible assets that a bank could pledge, despite a potential increase of covered bond issuers.

Source: Bank of Italy, DBRS