The Bank of Italy's In-house Credit Assessment System (ICAS)Updated on November 30, 2022

Since 2013, the Bank of Italy has had its own In-house Credit Assessment System (ICAS) that rates the creditworthiness of Italian non-financial corporations; this system enables banks to use the loans granted to these firms as collateral in Eurosystem monetary policy operations.

Thanks to ICAS, the Bank of Italy has increased the number of sources available to Italian monetary policy counterparties for assessing the credit risk of non-marketable assets; ICAS is part of a broader system that includes rating agencies and banks' internal systems. Similar systems are managed by the national central banks of six other Eurosystem countries (Austria, France, Germany, Portugal, Slovenia and Spain).

For banks with no internal assessment system, ICAS constitutes an important tool for expanding the sources of liquidity available, especially during a crisis; it enables instruments that constitute a large share of banks' assets but are not traded on the markets and have no rating to be used as collateral. The important role played by ICAS in periods of financial turbulence has been confirmed by the considerable increase in 2020 in the value of the collateral provided using ratings generated by this system. This increase is attributable to the measures extending the eligibility criteria for collateral adopted by the Eurosystem in response to the crisis triggered by the COVID-19 pandemic.

In accordance with the Eurosystem's general principles on credit assessment, the Bank of Italy's ICAS (ICAS-BI) envisages a preliminary statistical assessment (ICAS Stat) followed by a qualitative and quantitative assessment by financial analysts (Expert System). The definition of default used by ICAS was approved by the Eurosystem and is consistent with the definition given in Regulation EU No 575/2013.

The statistical component calculates - automatically and on a monthly basis - a probability of default (Statistical PD) for Italian non-financial corporations; the calculations are based on logistic models, which incorporate scores obtained from:

• a model based on indicators that take account of trends in the use of bank funding by the rated entity, calculated monthly and drawing on data from the Central Credit Register (PD CR);
• financial statement indicators (PD Financial Statement) taken from the firms' annual financial reports.

The statistical model considers non-financial corporations whose data are collected by the Central Credit Register with a total exposure of €30,000 or more.

At the Expert System stage, the analysts assign an ICAS rating by reviewing the Statistical PD of the firms and making corrections, if necessary, on the basis of additional qualitative and quantitative data that were not fully incorporated in the statistical model. The supplementary information considered during this phase includes: the financial statements, through in-depth analysis of the main indicators; the financial flexibility and self-financing capability of the firm; the characteristics of the group to which the firm belongs and its consolidated financial results; the business sector in which the firm operates and related business-specific risks; data on the company's directors and corporate governance; and any other relevant information. In order to ensure greater objectivity and accuracy, two analysts working independently examine these aspects. They may also adjust the Statistical PD, moving it up or down the assessment scale; for prudential reasons, upward revisions are only possible within certain limits. In some circumstances, for instance in the event of discrepancy between the assessments expressed by the two analysts or in case of specific risks, the responsibility for assigning the final score is entrusted to a collegial body (Rating Committee), which makes its own independent review and, if necessary, consults the analysts involved.

ICAS-BI is also equipped with a monitoring mechanism that can trigger a revision in the final rating even outside the deadlines set and, should a company show signs of financial deterioration, promptly exclude loans granted to the firm from the assets deemed eligible as collateral.

Since 2015, in order to take advantage of the first-hand knowledge of the local economies in which the rated firms operate, and as is common practice at many of the other NCBs, analysts at the Bank of Italy's branches have become increasingly involved in the assessment process. In 2022, ICAS divisions dedicated mainly to expert assessment were established at seven branches of the Bank (Bologna, Florence, Milan, Naples, Palermo, Turin and Venice).

The Bank of Italy's ICAS is run by the Financial Risk Management Directorate within the Directorate General for Markets and Payment Systems. It is subject to quarterly internal audits and monitoring; the Eurosystem also analyses its predictive capacity (performance) annually, according to rules common to all the assessment systems in use within the framework of the single monetary policy. The Rating and Statistical PD produced by ICAS-BI are transmitted to the Collateral Management System of the Bank of Italy.

The final assessments generated by ICAS-BI and transmitted to the Collateral Management System (ABACO) are used both within the ordinary Eurosystem monetary policy framework and within the temporary additional credit claims (ACC) framework. The latter, which was expanded considerably, albeit temporarily, in the first half of 2020 in response to the crisis sparked by the pandemic, enables the Eurosystem national central banks to accept as collateral other types of credit claims that fulfil additional criteria, less stringent than those applicable under the ordinary framework, whilst fully assuming the financial risks involved.

Individual credit claims and portfolios of loans to limited companies can be used as collateral under the temporary ACC framework if accompanied by an ICAS rating or, where not available, by a Statistical PD alone. For bank claims towards partnerships that do not usually have an ICAS rating or a Statistical PD, in order to use credit portfolios as collateral under the ACC framework it is sufficient to provide a PD calculated solely based on data drawn from the Central Credit Register.

The banking counterparties that use the ICAS-BI are notified on a monthly basis of the updated list of ICAS-rated firms to which they lend and are given an indication of the framework under which the corresponding credit claims are eligible. The system does not provide information on the estimated Rating or PD, but only on whether counterparties can or cannot use loans as collateral in monetary policy operations.