The Italian Factoring Industry Daniela Muschella Bank of Italy Warsaw - 23 rd and 24 th October 2003
The Italian Factoring Industry Some history The Italian factoring industry today The regulation framework The supervision of the Bank of Italy
Some history: genesis and development of the Italian factoring industry 1963 The first Italian factoring company is established early ’80s The market starts to develop.
2 possible reasons for this uneven development: 1.the product regulation 2.the evolution of trade credit in Italy Some history: genesis and development of the Italian factoring industry
Some history: the product regulation ’60s Total absence of any specific product regulation A regional law introduces factoring as a contract and provides its first legal definition The law on the transfer of trade credit is published
Some history: the product regulation Some positive aspects of the 1991 law : future credits, as well as outstanding credits, can be sold to the factor; the simple payment for the transferred credits automatically implies their property by the factor, and this fact is legally binding towards all third parties; some guarantees are introduced in case of bankruptcy of the creditor or the debtor.
Some history: the evolution of trade credit The phenomenon of trade credit among enterprises is very relevant today in Italy......also in comparison to other countries Some data…..
Some history: the evolution of trade credit at the end of the ’90s, the total stock of trade credits was approximately equivalent to the total of short term bank loans in 2002, the weighted average of the “trade credits to turnover ratio”, among medium-large enterprises (i.e. having a workforce of at least 50 employees), was approximately 23% the average contractual maturity of these credits was 87 days, but… … 31% of them were paid with an average delay of 42 days
Some history: the evolution of trade credit The research highlighted that: some events can have an effect on the terms and the relative importance of trade credit a redistribution of credits and debts among companies, as well as their relative costs, has been experienced through time
Some history: the evolution of trade credit Relative importance and contract terms Whenever borrowing conditions are tightened, the trade credit to short term banking credits ratio increases Trade credit terms tend to be counter-cyclical This is exactly what has been observed in the early ’80s and during the recession of
Some history: the evolution of trade credit The distribution of trade credits During the ’80s and the ’90s there has been a redistribution of costs related to the financing of working capital from medium/large size firms to small firms
Some history: the evolution of trade credit From the early ’80s, small firms have experienced an increase of 25 days in the terms of their trade credits, while large and medium size firms have experienced an increase of 30 days in the terms of their trade debts.
Some history: how the factoring industry reacted Number of factoring companies operating in Italy from 1963 to 1987 (Data from “Il Factoring” – a cura di A. Rossi. Ed Il Sole 24 ore)
Some history: how the factoring industry reacted Credit turnover in Italy from 1963 to 1987 (data in mln of € ) (Data from “Il Factoring” – a cura di A. Rossi. Ed Il Sole 24 ore)
Some history: how the factoring industry reacted An important reason for this steady development is related to the phenomenon of captive factoring intermediaries, established by medium and large companies that also had large outstanding trade debts. Market shares by credit turnover in 1988 (Data from “Il Factoring” – a cura di A. Rossi. Ed Il Sole 24 ore)
The Italian factoring industry today Market share of Italian factors in Europe Market share of Italian factors in the world Italy (Source: Assifact/Factors Chain International) – data as of 31/12/2002
the intermediaries 84 supervised intermediaries offering factoring services 33 banks 51 financial companies (which cannot currently raise funds directly from the public) 37 specialised The Italian factoring industry today:
In addition, the first seven intermediaries have a 60.5% market share: they are all specialised financial companies The Italian factoring industry today The banks’ market share remains below 10%.
Focus on the specialised financial companies 37 intermediaries 19 have been established by banks The majority of the remaining 18 have been established by industrial companies The Italian factoring industry today
The Italian factoring industry today: the volumes* € 36 bln Outstanding An average of 67% of the outstanding of credits are advanced by the factors Credit turnover: € 124 bln *Data as of December 2002
The Italian factoring industry today: recourse & non-recourse
The Italian factoring industry today: recourse & non-recourse Non captive factorsCaptive factors Average from 1997 to 2002
The Italian factoring industry today: the advanced liquidation Non captive factorsCaptive factors Average from 1997 to 2002
The Italian factoring industry today: the funding sources 77% of debts towards banks are on demand or short term
The regulation framework The Banking Law of 1993 established the principle of a gradual implementation of the supervision on financial companies, including factoring intermediaries. General principles Prudential framework applicable only to relevant intermediaries supervised by the Bank of Italy applicable to all financial intermediaries and mainly aimed towards maintaining their integrity
The regulation framework The prudential framework (applicable only to relevant intermediaries supervised by the Bank of Italy) credit concentration limits limits on exchange risks and derivative risks exposure sound organisation principles currently no minimum solvency ratio requirements
The supervision of the Bank of Italy main goals of supervision main differences compared to banking supervision increasing importance of organisational aspects
The supervision of the Bank of Italy: the approach Increasing focus on: New products increasing service contents… and increasing reliance on IT technology Operational risks (incl. legal risks) Strategical risks Reputational risks Credit risks
Conclusions Daniela Muschella Bank of Italy Financial Supervision Department #