The Bank of Italy's In-house Credit Assessment System (ICAS)

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In July 2013 the Governing Council of the ECB definitively approved the Bank of Italy’s In-house Credit Assessment System (ICAS), whose purpose is to assess the credit risk of loans used as collateral in Eurosystem monetary policy operations.

ICAS extended the number of sources that could be drawn on for assessing the credit risk of non-marketable assets held by Italian counterparties. Similar assessment systems are also managed by the national central banks of seven other Monetary Union countries (Austria, Belgium, France, Germany, Slovenia, Spain and Portugal).

The main goals of ICAS are to limit the financial risk of the Eurosystem’s monetary policy operations and to enable counterparties that do not have access to alternative assessment systems to post a greater quantity of collateral.

In accordance with the Eurosystem’s general principles on credit assessment, ICAS envisages a preliminary statistical assessment (ICAS Stat) followed by a qualitative and quantitative assessment by financial analysts (Expert System). The system’s definition of default complies with Eurosystem standards, which in turn are consistent with the definition given by the Basel Committee.

The statistical component (ICAS Stat) is built on discriminant analysis and logistic regression models. It uses current performance indicators retrieved from the Central Credit Register and balance-sheet indicators to determine monthly ratings of Italian non-financial companies. The statistical model can handle every non-financial company covered by the Central Credit Register with a total exposure of at least €30,000.

During the Expert System phase, the analysts review the automatic rating of the companies whose loans can be pledged as collateral with the Eurosystem. They can also make adjustments on the basis of additional qualitative and/or quantitative information not directly captured by the statistical model, so as to determine a final rating. The supplementary information considered in this phase includes financial statement analysis; assessments of the financial flexibility and self-financing capability of the company; peer group and consolidated financial statement analysis; sectoral studies and assessments of the specific risks related to the business; data on the company’s management and corporate governance; and any other relevant information/news items.

The probabilities of default generated by the ICAS system are used within the ordinary Eurosystem monetary policy framework and in the temporary additional credit claims (ACC) framework, enabling the national central banks in the Eurosystem to accept other types of credit claims that satisfy additional specific criteria, assuming in full the financial risks of the operations.

As is the practice at most of the other NCBs, analysts at the Bank of Italy’s branches are involved in the assessments to take advantage of their first-hand knowledge of their local economies. Analysts are required to take a series of precautions to ensure the confidentiality and security of the information assessed. 

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 internal audit procedures and its parameters and performance are monitored annually, according to the Eurosystem common framework. The final probability of default calculated by the system is sent to the ABACO Collateral Management system.