IMPACT OF BASLE 2 ON ITALIAN IMPACT OF BASLE 2 ON ITALIAN BANK LOANS: CAPITAL BANK LOANS: CAPITAL REQUIREMENTS ASSESSMENT, REQUIREMENTS ASSESSMENT, EFFECTS OF COLLATERALS AND EFFECTS OF COLLATERALS AND PRICING SIMULATIONSPRICING SIMULATIONS

R. De Lisa, F. Poli, F. Vallascas

Cagliari, 26 may 2007

Literature reviewLiterature review Basel Committee’s QISs (last QIS 5 – June 2006). Bocchi & Lusignani (2004): sample of loan portfolios of

15 medium size banks (loans to firms with annual turnover < 50 miln Euros).

Gai & Rossi (2003): sample of 41.000 Tuscanian firms. Fabi, Laviola, Marullo Reedtz (2003): Altman & Sabato (2005): sample of 20.000 italian SMEs. De Lisa, Marchesi, Vallascas (2006): estimation of

capital requiments for Italian bank loan portfolios (loans to firms), effects of collaterals and pricing implications.

Aims of the studyAims of the study Determine capital requirements

under Basle 2 (IRBF and Standardized) for bank loan portfolios disaggregated by type of borrower, type of loan and geographycal area

Estimate effects of personal guarantees and collaterals on capital requirements for …

Italian bank loan Italian bank loan portfolio’s mixportfolio’s mix

NORTH WEST NORTH EASTT

CENTRE

SOUTH ITALY

% LOANS TO FIRMS RETAIL 25,76 35,78 24,05 29,25 28,53 CORPORATE (SME) 10,40 12,43 10,39 8,99 10,69 CORPORATE 31,50 17,52 27,40 11,14 23,73

% LOANS TO FAMILY BUSINESS RETAIL 5,48 7,48 6,47 10,16 6,96 CORPORATE (SME) 0,21 0,26 0,21 0,18 0,22

% LOANS TO HOUSEHOLDS MORTGAGES 21,58 20,82 24,50 28,10 23,07 OTHER LOANS 5,06 5,72 6,99 12,18 6,80

Capital adequacy ratios Capital adequacy ratios (IRBF vs Standardized without guarantees and (IRBF vs Standardized without guarantees and collaterals)collaterals)

FIRMS AND FAMILY BUSINESS NORTH WEST NORTH EAST CENTRE SOUTH ITALY

RETAIL 4,62 4,28 5,01 5,30 4,79 CORPORATE 8,55 7,68 9,57 9,58 8,72 CAR 6,88 5,68 7,54 6,75 6,73

HOUSEHOLDS

NORTH WEST NORTH EAST CENTRE SOUTH ITALY MORTGAGES 4,84 4,21 5,68 6,59 5,15 OTHER LOANS 4,02 3,65 4,48 4,91 4,20 CAR 4,68 4,09 5,41 6,08 4,93

TOTAL CAR 6,29 5,26 6,87 6,48 6,20

FIRMS AND FAMILY BUSINESS NORTH WEST NORTH EAST CENTRE SOUTH ITALY

CAR 7,15 6,82 7,11 6,68 5,65

HOUSEHOLDS NORTH WEST NORTH EAST CENTRE SOUTH ITALY

CAR 3,41 3,49 3,51 3,77 3,53

TOTAL CAR 6,15 5,94 5,98 5,51 5,95

IRBF

STAND

Main findingsMain findings

Impact of collaterals and guarantees Impact of collaterals and guarantees on CARs for loans to firms on CARs for loans to firms (IRBF vs STAND)(IRBF vs STAND)

HYPOTHES ES % lonas with personal guarantees

20,25%

% loans with collaterlas 4,28% % loans without guarantees

75,48%

PD of guarantor 0,45%

FIRMS AND FAMILY BUSINESS NORTRH WEST NORTH EAST CENTRE SOUTH ITALY

CAR WITHOUT COLLATERALS

6,88 5,68 7,54 6,75 6,73

CAR WITH COLLATERALS

6,24 5,26 6,77 6,19 6,13

% CHANGE -9,50 -7,55 -10,56 -8,93 -9,24

FIRMS AND FAMILY BUSINESS NORTH WEST NORTH EAST CENTRE SOUTH ITALY

CAR WITHOUT COLLATERALS

7,15 6,82 7,11 6,68 6,99

CAR WITH COLLATERALS

6,20 5,96 6,18 5,85 6,08

% CHANGE -13,26 -12,64 -13,07 -12,43 -12,99

IRBF

STAND

Main findingsMain findings

Capital release and Capital release and volume of additional loans volume of additional loans to firmsto firms

Impact on loan rates Impact on loan rates (Estimation without collaterals and personal (Estimation without collaterals and personal guarantees)guarantees)

5,34%

5,17%

5,61%

5,95%

5,46%

5,10%

4,90%

5,39%

5,75%

5,23%

5,23%

5,08%

5,50%

5,85%

5,33%

5,16%

4,92%

5,48%

5,78%

5,25%

0,00% 1,00% 2,00% 3,00% 4,00% 5,00% 6,00%

NORTH WEST

NORTH EAST

CENTRE

SOUTH

ITALY

Loan rates

BASLE 1 FAMILY BUSINESS IRBF FAMILY BUSINESS BASLE 1 FIRMS IRBF FIRMS

Impact on loan rates for all firms - IRBF - Impact on loan rates for all firms - IRBF - (with and without collaterals and personal (with and without collaterals and personal guarantees)guarantees)

5,24%

5,77% 5,47%

4,92%

5,15%

5,00%

5,37%

4,75%

4,97%

5,16%

0,00%

1,00%

2,00%

3,00%

4,00%

5,00%

NORTH WEST

NORTH EAST

CENTRESOUTH

ITALY

IRBF WITHOUT COLLATERALS (Average rate) IRBF WITH COLLATERALS (Average rate)

Main findingsMain findings

Suggestion for further research

MethodologyMethodology