October 23, 2013 – Magni Asset Management LLC, the international equity manager, announced today, they have downgraded Italy in their model portfolio. Magni points to two specific areas where Italy has failed to make sufficient progress: banking supervision and insurance supervision. Citing a September 2013 assessment by the International Monetary Fund (“IMF”) Italy has made progress in addressing the recommendations of the 2006 Financial Sector Assessment Program (FSAP), but “nevertheless, there are areas requiring attention so that Italy can meet the highest standards of supervisory effectiveness.” Magni’s Director of Research, Matthew Zimmer, stated “the necessary reforms have been talked about since 2006 without effective implementation. These delays have the potential to increase risks in Italy’s financial sector.” The IMF’s assessment was conducted as a part of their FSAP mission, which visited Italy twice earlier this year.
Magni’s decision to downgrade Italy follows careful analysis from multiple sources. Magni still rates the country in its top quartile, and notes that the banking and insurance systems are underpinned by generally sound policies. However, in a client note, Magni offers “the lack of implementations may be the beginning of institutional apathy we have witnessed in other countries once the threat of a crisis passes.” Specifically, Magni offers the following observations:
Banking Supervision – Even though the Bank of Italy has a robust supervisory process, there has not been enough progress made in implementing the recommendations made by the IMF since their last visit. Items cited by the IMF include” the procedure for covering legal costs of supervisors, the lack of power to remove members of the board and senior officials of banks, and the power to remove external auditors of banks.” Further changes are expected for banking supervision in Italy and the rest of the European Union as the banking supervision responsibility is expected to be transferred to the European Central Bank. This should be completed by year end 2013.
Banking failures have been at the center of many financial crises long before the most recent collapse. However, following the financial crisis of 2008, it is now widely recognized that weaknesses in the supervision of the banking sector played a critical role in the downfall of the financial markets. As banking crises have affected many countries, the monitoring of banking systems becomes both more critical and more challenging for supervisors. Developed and emerging countries need to ensure that their banking sectors are well supervised in order to minimize the risk of contagion and reduce the risk of future collapses.
Insurance Supervision – The regulation and supervision of the insurance industry in Italy was just transferred this year to the newly established Institution for the Supervision of Insurance (IVASS). The replacement of the previous agency responsible for supervision represents a significant change in the governance and structure of the new agency. The IMF asserts that these new supervisory controls need immediate attention.
The insurance sector is an important element of the world economy. Sound regulation and supervision of the insurance market secure efficient functioning of the insurance sector, thus contributing to overall financial stability. Insurance regulation and supervision have become even more important recently with the increasingly global nature of insurance activities that requires adequate regulatory frameworks in each jurisdiction. Moreover, emergence of complex financial products, increased number of financial conglomerates, and consolidation of financial institutions present new challenges for regulators and require new approaches to supervision. The traditional focus of insurance supervision on policyholders’ protection has been gradually shifting towards identifying and assessing risks faced by a company, which are critical to the financial viability of the institution.