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Summary of the Italian Factoring Industry's Contribution to the CEBS Questionnaire on Large Exposures

Core Content

The document outlines the Italian factoring industry's perspective on the measurement and management of concentration risk, particularly in response to the CEBS questionnaire. It is prepared by Assifact, the Italian Factoring Association, and reflects the collective views of its financial intermediary members.

General Approach to Concentration Risk

• Financial intermediaries in the factoring sector follow national prudential regulations, which define large exposures as those equal to or exceeding 15% of regulatory capital.
• The overall limit for large exposures is set at eight times the regulatory capital, while the single name limit is 60% of regulatory capital.
• Supervisory authorities monitor these exposures through quarterly reporting.
• Internal risk measurement approaches are tailored to the specific nature of factoring activities, which involve the purchase of trade receivables from clients, typically in long-term contractual relationships.
• These approaches include diversification by geographic location, economic activity, type of goods, and customer size, as well as segmentation of receivables into homogeneous pools.

Nature of Concentration Risk

• Concentration risk arises from the high exposure relative to regulatory capital, especially with respect to individual clients or connected groups.
• Connections between clients can be either legal or economic, which may lead to single name exposure even with multiple debtors.
• The Italian factoring industry exhibits high concentration in terms of assignors, but fragmentation in terms of debtors, who are the main risk counterparties.
• Risk levels in factoring are generally lower than in traditional loan portfolios due to the nature of the receivables and the information available to factors.

Credit Risk Mitigation Techniques

• Insurance policies are increasingly used to mitigate credit risk, particularly in the form of:
  • Analytical insurance policies: These cover specific credit lines and are limited by the insurer's liability.
  • Excess loss insurance policies: These cover losses exceeding a predefined threshold, providing a buffer against unexpected losses.
• Analytical insurance policies are not equivalent to personal guarantees under the CRD Directive, but they are effective due to the prudential oversight of the financial intermediary.
• The execution time for analytical guarantees is typically in months, which is considered negligible compared to personal guarantees.
• Insurance policies may have overall limits that affect the effectiveness of single name coverage, but this is only significant if there is a high correlation in insolvency risks.

Monitoring and Management of Risk

• Financial intermediaries monitor concentration risk using both regulatory frameworks and internal tools.
• Periodic reports are prepared to identify large risk positions and sector concentrations, enabling timely risk control measures.
• Internal processes allow for the monitoring of exposure at both single position and segment levels, and the adjustment of asset composition based on trends.

Regulatory Environment

• Current regulations apply standard concentration limits to all financial intermediaries, regardless of their specific activities.
• The concentration index, based on the ratio of nominal exposure to regulatory capital, aggregates different types of exposures and does not reflect the specific nature of factoring operations.
• This generic approach may unfairly penalize specialized factoring activities and distort competition.
• It is argued that concentration risk regulations should be differentiated based on the type of activity and intermediary.
• For factoring, specific factors should be considered in setting concentration limits, including:
  • The nature of factoring as a high-concentration but low-risk activity.
  • The short duration of exposures, which allows for rapid adjustment.
  • The presence of a second counterparty (the transferor), which contributes to risk diversification.

Conclusion

The Italian factoring industry emphasizes the need for a more nuanced regulatory approach to concentration risk, one that accounts for the unique characteristics of factoring operations and the risk mitigation techniques employed. The current regulatory framework, while applicable, may not adequately reflect the operational and risk profile of factoring, potentially leading to unfair treatment and distortion of market practices.