The Bank of Italy's In-house Credit Assessment System (ICAS-BI)Updated on September 18, 2024

Since 2013, the Bank of Italy has had its own In-house Credit Assessment System (ICAS-BI) to rate the creditworthiness of Italian non-financial corporations. ICAS ratings are used by banks to grant firms the loans that are used as collateral in Eurosystem monetary policy operations. Similar rating systems are managed by the national central banks (NCBs) of Austria, France, Germany, Greece, Portugal, Slovenia and Spain.

ICAS enables monetary policy counterparties that do not use other sources to assess credit quality (for instance, rating agencies and banks' internal systems) to increase their liquidity by pledging as collateral illiquid assets such as bank loans. Since 2013, a growing number of counterparties has used ICAS ratings and the value of the pledged collateral has also increased significantly. The framework has shown to be a valuable tool, allowing banks to widen the range of eligible collateral in times of financial stress.

The Bank of Italy's ICAS

In accordance with the Eurosystem's general principles on credit assessment, the Bank of Italy's ICAS (ICAS-BI) is based on a preliminary statistical assessment component (ICAS Stat), followed by a qualitative and quantitative assessment by financial analysts (Expert System). ICAS-BI utilizes a harmonized definition of default approved by the Eurosystem and consistent with the definition given in Regulation (EU) 575/2013 (CRR). The firms subject to expert assessment are a subset of those assessed by means of the statistical model.

On a monthly basis, the statistical component calculates the one-year probability of default of Italian non-financial corporations (Statistical PD), which is obtained by integrating the scores assigned by two sub-models that aim to capture (i) the current state and trends of exposures to the financial system, and (ii) the structural characteristics of the firm. The first sub-model, called PD CR, utilizes indicators based on individual data from the Central Credit Register (CR); the second sub-model, called PD Financial Statements, utilizes financial statement indicators. Statistical PDs are associated with homogeneous risk classes.

The statistical component takes into account non-financial corporations listed in the Central Credit Register with an overall exposure of €30,000 or more.

At the Expert System stage, the analysts determine a firm's full rating by reviewing the statistical PD and amending it, if necessary, based on qualitative and quantitative data such as the competitor ranking of the firm, an analysis of its business sector, corporate governance arrangements and group structure. From 2025 onwards, the Expert System assessment will also incorporate climate change risk (CCR). The inclusion of these risk factors into ICAS credit quality assessments was decided by the European Central Bank (ECB) as part of a comprehensive plan to integrate climate risk considerations into its monetary policy strategy.

Analysts may alter the risk class determined by the statistical PD, though specific restrictions hold for upward revisions. Each assessment has to be reviewed and approved by a second analyst; in prescribed cases, the assessment has to be scrutinized by a collegial rating committee.

Calculation, use and monitoring of ICAS ratings

Full ratings are used both for loans granted under the ordinary Eurosystem Credit Assessment Framework (ECAF) that is in place for monetary policy operations, and for loans accepted under the Additional Credit Claims (ACC) framework. The latter framework enables Eurosystem NCBs to accept as collateral loans that fulfil less stringent eligibility criteria than under the ordinary framework. The respective financial risks are borne by the individual NCBs. In the ECAF framework, financial risks are allocated among the NCBs according to their share in the ECB's capital.

Individual credit claims and portfolios of loans to limited companies can be pledged under the temporary ACC framework, if accompanied by a full rating or, where not available, by a Statistical PD alone. For ACC portfolios of bank loans to partnerships, typically lacking a full rating or a Statistical PD, it is sufficient to provide a PD calculated solely on data from the Central Credit Register.

The banking counterparties that have opted to use the Bank of Italy's In-house credit assessment system are notified on a monthly basis of the updated list of ICAS-rated firms listed in the CR. For each of these firms, the Bank of Italy reports the framework under which their loans can be used as collateral; the full rating and the statistical PD are not instead released.

Full ratings are normally reviewed on an annual basis. ICAS-BI is also equipped with a monitoring mechanism that can trigger a review of a firm's rating, thus making it possible to promptly exclude loans granted to the firm from the assets deemed eligible as collateral.

The organizational structure of ICAS

ICAS-BI is managed by the Financial Risk Management Directorate, within the Directorate General for Markets and Payment Systems. The system is subject to internal validation and its performance, in terms of predictive capacity, is analysed annually by the Eurosystem according to rules that are common to all the assessment systems in use by NCBs within the single monetary policy framework.

So as to draw on their knowledge of the local economies in which the rated firms operate, the analysts at the Bank of Italy's local branches are increasingly involved in ICAS-BI processes, following a practice that is common to several other NCBs. In 2022, to further enhance the efficiency and level of specialization of ICAS analyses, divisions mainly devoted to expert assessment operations were established at the Bank's branches in Bologna, Florence, Milan, Naples, Palermo, Turin and Venice.