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This analysis asks whether regulatory capital requirements capture differences in systematic risk for large firms and micro-, small- and medium-sized enterprises (MSMEs). The authors explore whether bank capital regulations intended to support SMEs’ access to borrowing are effective. The purpose of this paper is to find out whether the regulatory design (particularly the estimate of asset correlations) positively affects the lending process to small and medium enterprises, compared to large corporates.

The authors investigate the appropriateness of bank capital requirements considering default risk of loans to MSMEs and distortions in capital charges between MSMEs and large firms under the Basel III framework. The authors compiled firm-level data to capture the proportions of MSMEs and large firms in Italy during 2000–2014. The data set is drawn from financial reports of 708,041 firms over 15 years. Unlike most empirical studies that correlate assets and defaults, this study assesses a firm’s creditworthiness not by agency ratings or by sampling banks but by a specific model to estimate one-year probabilities of default.

The authors found that asset correlations increase with firms’ size and that large firms face considerably greater systematic risk than MSMEs. However, the empirical values are much lower than regulatory values. Moreover, when the authors focused on the MSME segment, systematic risk is rather stable and varies significantly with turnover. This analysis showed that the regulatory supporting factor represents a valuable attempt to treat MSME loans more fairly with respect to banks’ capital requirements. Basel III-internal ratings-based approach results show that when the supporting factor is applied, the Risk-Weighted-Assets (RWA) differences between MSMEs and large firms increase.

The implications of this research is that banking regulators to make MSMEs support more effective should review asset correlation estimation criteria, refining the fitting with empirical evidence.

The asset correlation parameter stipulated by the Basel framework is invariant with economic cycles, decreases with borrowers’ probability of default and increases with borrowers’ assets. The authors found that those relations do not hold. This way, asset correlations fall below parameters defined by regulatory formula, and SMEs’ credit risk could be overstated, resulting in a capital crunch.

The original contribution of this paper is to demonstrate that the gap between empirical and regulatory capital charge remains high. When the authors examined the Basel III-IRBA, results showed that when the supporting factor is applied, the RWA differences between MSMEs and large firms increase. This is particularly strong for loans to small- and medium-sized companies. Correctly calibrating asset correlations associated with the supporting factor eliminates regulatory distortions, reducing the gap in capital charges between loans to large corporate and MSMEs.

Stresses that recent changes in financial markets have involved the payment system and the banking processes directly devoted to short term forecasting. Proposes that financial flows control systems must be adopted that can measure performance and liquidity risks consistent with the models often used for credit and market risks.

The purpose of this paper is to find out how effectively implemented are measuring approaches to compliance and whether there is a correlation between the measures implementation, financial specialisation and international activity. The authors evaluate if the regulatory framework implies a measure cost asymmetry, depending both on the proportionality principle and on the existence of different supervisors with an heterogeneous set of enforcement rules.

The analysis is based on a survey involving 84 financial firms (banks, investment companies and insurance companies). Two criteria have been used to interpret the results: the prevailing workability within international and domestic intermediaries; the intermediary typology, creating a distinction between banks other financial intermediaries (FIs) and insurance companies.

Italian financial firms are sensitive to minimise sanctions, but the reputational impact is becoming more important. International firms are more sophisticated than domestic ones for their ability to measure both the probability of non‐compliance events and their severity. Banks show the highest attitude to adopt insurance or financial contracts to minimise the negative impact of non‐compliant behaviours. Small FIs are late in measuring the exposure and losses due to non‐compliance actions.

Four years after the Basel Document on compliance, a large percentage of firms is still managing the process within a function with different purposes; nevertheless, reputational impact has become more important. Small intermediaries show a lower attitude to implement a risk management approach, with a capital management sensitivity. This finding addresses the question about the existence of size effect which could reduce the compliance attitude.

The paper is aimed at modelling time varying betas via a state space representation in order to decompose the marginal contribution to risk of downside and upside deviations of asset returns in portfolio optimisation.

The approach enables to take into account the relationship between risk and excess returns in up‐side and down‐side markets and to arrange a flexible asset allocation model which directly incorporates the investor risk tolerance to positive or negative expected market moves. The model volatility through state space models and the Kalman filter, widely used to recursively and optimally estimate time varying betas.

The study shows that the application of an asset allocation model which splits beta in two parts, one related to Bear and the other to Bull markets, and reconciles them with a non negative risk aversion parameter may produce interesting financial results if compared with typical passive portfolios. The proposed model was tested by conducting extensive empirical evaluations on a set securities belonging to eight different markets. The outcomes show that active strategies can be developed and can lead to better performances.

The research affects optimisation models in particular considering the volatility indicators usually estimated not only by researchers but also by practitioners.

In financial literature we find empirical evidence that the constant beta model may be inaccurate and hazardous to use in asset allocation decisions and many statistical techniques have been developed to estimate time dependent betas. Rolling regression procedures allow to capture beta dynamics but require the definition of the estimation period. The paper provides an empirical analysis referred both to European and American market data which let us to allocate assets avoiding the usual limits of standard volatility indicators.

The purpose of this paper is to focus on changes in the compliance function within major European banks and other financial intermediaries and on the effects of Markets in Financial Instruments Directive (MiFID) implementation.

The four areas of research seek to answer the following questions: Is the positioning of the compliance function “at the top” of the organizational structure? Are the roles attributed to the compliance function, their knowledge and their instruments consistent with their responsibilities? Do the methodologies applied follow a qualitative and/or a quantitative approach? Is the interaction between the compliance function inside and outside the structure appropriate to the goals of compliance? In total, 31 top international groups based in Europe were invited to take part in the research, 16 of them accepted.

The authors observed a resolute adjustment to the regulations in terms of macrostructure and high levels of compliance function competences in investment services and business knowledge, with a low variation. The encouraging news coming out of the results of the research is the confirmation of the presence of a connection between the compliance function and both the system of values and of incentives.

The paper's international sample offers a unique opportunity to highlight the critical areas of the compliance function within international groups, with growing operational complexity in a framework of principle‐based regulation.