Banking Industry: Risk Management and Accounting Standards on Expected Credit Losses. Case study: Veneto Banca

Abstract

In the latest years, the different approaches that banks have been using to cope with credit risk were one of the main issues studied both by the academic word and by the business industry. The principal solution the authority came up with, in order to safeguard the credit market and avoid any possible liquidity crisis that could impact heavily the real economy, is the capital provision requirement. The loan loss provision instrument changed deeply throughout the last decade, having the regulation evolving from the first Basel agreement to the third one. Emphasis was especially placed on the quality of the capital hold in the deposit by the bank, considering that many provision amount have been shrank down by adjustment operated by the authority (e.g. Banca Italia in Italy). The improvement applied on the agreements played their role on the enhancement of a provision strategy for the banking industry aiming to protect banks from unexpected losses. Another relevant source of innovation that concern the credit risk perception can be founded in the accounting standards. This is mostly due to the undeniable importance that transparency and comparability have on banks’ capital provisions and on balance sheet disclosure. This growing interest showed by the accounting experts on credit risk fair computation find its outcome in the accounting principles IAS 39 and IFRS 13 and the adoption of the fair value methodology on all the financial securities owned by the bank. The purpose of this thesis is to highlight the importance of a well-structured credit risk management environment, and, in order to do so, the topic is been divided in four different chapters. First is it briefly analysed what credit risk is and which are the components of it. An overlook on how banks should be dealing with credit risk (according to the authority, to the compliance framework and the internationally recognised best practice standards) is then presented. In the third chapter are introduced accounting standards for credit losses, in fact, the application of the fair value for assets and liabilities it is been one of the biggest, yet underestimated, transformation for what it concerns the assessment of a possible loss and the most useful tool to correctly define the amount of provisions needed. The case study find its place in the last chapter; this paper offers an analytic and qualitative description of Veneto Banca Group methodologies to mitigate credit risk and to assess its exposure with counterparties, is it also displayed the Group willingness and efforts to comply with the authority directives. Moreover it will be provided an analysis on the struggle the Group is facing to get listed on the market and how the management of the bank is dealing with the amount of worthless credit exposure the Group acquired in the past years.