Internal Credit Risk Models applied to Bank Mergers - A practical case of Incorporation

The banking sector has always played a crucial role in the economy - and society as a whole, although in recent years, due to the succession of ever closer crisis periods, it has been requested to face new emerging challenges. Among the major consequences, banks mergers - and especially mergers by incorporation as examined in the present document - represent an important solution to problems deriving from the increasing necessity for digitalisation expenditures, low interest rates and enhanced constraints on regulation. In particular, the resulting benefits include possibility of pooling resources, increasing the market share and decreasing the operating costs. The objective of the following work is to illustrate the investigation carried out by Deloitte as a support to the incorporation of two Italian banks, with the aim of fostering the proper implementation of credit portfolio management systems. In this context, the research encompasses a theoretical examination of a merger’s underlying regulations and the study of the components influencing credit risk. The analyses on a specific case of incorporation are then presented, including the assessment of the credit risk models adopted by the two institutions and of the expected impacts on the different credit portfolios in the post-acquisition scenario, through the employment of statistical models. The results of the evaluation contribute to defining the changes to the original portfolio of the incorporating bank as “non-substantial”, thus establishing the compliance of the acquired portfolios with the imposed European Regulation. The future developments of this project will entail the transposition of the new information into the unified IT systems, thus leading to the formalisation of the incorporation.