Systemic Risk Buffer

Italian Banks well positioned to face the new requirement

A recent commentary published by DBRS Morningstar discusses the anticipated effects of introducing a systemic risk buffer (SyRB) on Italian banks, as planned by the Bank of Italy on March 8, 2024. The estimated cost of implementing the SyRB is around EUR 7.8 billion or 86 basis points of capital, a figure deemed manageable in light of existing capital buffers.

On March 8, 2024, the Bank of Italy announced its plan to introduce a capital mandate aimed at managing systemic risks (known as the systemic risk buffer or SyRB) applicable to all banks and banking groups operating in Italy. This new requirement dictates a 1% buffer of domestic credit and counterparty risk-weighted assets, set to be phased in gradually: an initial 0.5% by the close of 2024, followed by the remaining 0.5% by the end of June 2025.

This initiative seeks to bolster the Italian banking sector's ability to withstand unforeseen financial market disturbances that might jeopardize their capital positions and limit their ability to provide loans. The countercyclical capital buffer (CCyB), a regulatory measure activated during economic upswings to mitigate procyclical tendencies and forestall further economic downturns during challenging times, serves as a similar tool. Yet, as of now, Italy has not adopted either a CCyB or a SyRB.

According to the Bank of Italy, surplus bank capital beyond regulatory prerequisites stood at approximately EUR 47 billion as of September end 2023. Implementing the SyRB is expected to trim the available capital to about 3.2% of the banking system's total risk-weighted assets, down from 3.8%. This projection by the Bank of Italy weighs the advantages and potential drawbacks, including anticipated profit margins for 2024.

This evaluation suggests a limited number of financial institutions might need to enhance their capital or raise MREL-qualifying liabilities. The window for public commentary concludes on March 29, 2024, after which the Bank of Italy intends to release its definitive proposal.

DBRS believes that Italian banks are in a strong position to manage the effects of the SyRB's potential rollout, supported by the robust organic capital formation observed in 2023. This growth in capital reserves has occurred despite increased shareholder distributions, including dividends and share repurchase programs at certain banks (refer to Italian Banks: Strong 2023 Results Help Banks Navigate the Likely Less Benign Environment in 2024 for further information).

The analysis of a selected group of banks shows that the average ratios for Common Equity Tier 1 (CET1) and Total Capital stood at 16.3% and 19.3% respectively at the end of 2023, an increase from 14.3% and 16.8% at the end of 2019 (Exhibit 1).

DBRS projects that the SyRB's enactment could necessitate up to approximately EUR 7.8 billion or 86 basis points of capital, which is relatively modest compared to the average excess margins of around 770 basis points for CET1 and 640 basis points for Total Capital, based on the total risk-weighted assets as of the end of 2023. Nevertheless, the actual impact is anticipated to be less than 86 basis points since the regulation targets only domestic risk-weighted assets.

Relevant Links:

https://dbrs.morningstar.com/research/429181/italian-banks-well-positioned-to-absorb-impact-from-the-potential-implementation-of-a-systemic-risk-buffer

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