16
The Bank of Italy is taking measures to implement the new Basle Capital Accord.136 In
accordance with the EU’s Capital Adequacy Directives 2006/48 and 2006/49 on the taking up
and pursuit of the business of credit institutions and the capital adequacy of investment firms
and credit institutions respectively, the so-called Basle II capital-adequacy principles will take
effect as from January 1st 2007. The exception will be for financial institutions adopting more
sophisticated methods of risk calculation, who will be allowed to adopt the principles on
January 1st 2008. Although the EU will apply Basle rules to all banks and investment firms,
and not just to those that are internationally active as required by the Basle Accord, a number
of adjustments have been made to incorporate EU specifications and to make life easier for
smaller firms. There are areas where national discretion may be exercised. There will be
lower capital requirements in the EU rules for banks venture-capital business in order not to
put excessive dampers on finance for start-ups, given that these are regarded as crucial for the
future growth and competitiveness of the EU. This directive will introduce a common
regulatory approach to securitisation across the EU for the first time. The Bank of Italy was
still consulting with Italian financial institutions as of end-July 2006 on details relating to the
Italian legislation for the purposes of transposing EU directives into national legislation.
In the area of credit risk, low- and medium-risk investment firms will be able to continue
using the existing expenditure-based rules for credit risk, though they will have to divide their
exposures into a larger number of classes. This will be known as the standardised approach.
The more sophisticated approach for other financial institutions uses the internal ratings-
based (IRB) method based on the Basel agreement, but will comprise foundation and
advanced approaches. Less complex institutions will be able to mix the less and more
sophisticated methodologies.
There will be similar flexibility in addressing operational risk, consisting of three levels:
the basic indicator approach, the standardised approach, and the advanced
measurement approach (AMA)137. These levels reflect the increasing levels of risk
sensitivity. The standard definition of operational risk as agreed to by the Risk Management
Group of the Basel Committee and industry representatives is “ the risk of loss resulting from
inadequate or failed internal processes, people and systems or from external events.”138 This
definition includes legal risk and excludes strategic and reputational risk and depends on the
classification of operational risks according to the underlying causes139. Other important
operational risk issues currently encountered by banks include business-continuity planning,
the role of internal and external audits, the outsourcing of business functions and electronic
banking.140 Since 2001, the Basel Committee's Risk Management Group has been carrying
out surveys of banks' operational loss data with the aim of obtaining information on the
sector's operational risk experience and also with a view to refining the capital framework.141
136
137
138
139
140
141
Ibid
The basic approach is founded on a fixed percentage of gross income, the standardised approach extends the
basic approach by breaking down banks' activities into components' and the advanced measurement approach
is based on the adoption of banks' internal models. See M Moscadelli, 'The Modelling of Operational Risk:
Experience with the Analysis of Data collected by the Basel Committee' (July 2004) Banca D'Italia Temi di
Discussione del Servizio Studi Bank of Italy, Banking Supervision Department Number 517/2004
ibid p 10
ibid
D Quiroz Rendon, 'The Formal Regulatory Approach to Banking Regulation' Badell and Grau Legal
Consultants ; also see <http://www.badeUgrau.com/legalbanking.html> (last visited 10 June 2007)
See M Moscadelli, 'The Modelling of Operational Risk: Experience with the Analysis of Data collected by
the Basel Committee' (July 2004) Banca D'Italia Temi di Discussione del Servizio Studi Bank of Italy,
Banking Supervision Department Number 517/2004 p 10