Analysis of Solvency in Italian Local Governments: The Impact of Basel II

26 Pages Posted: 5 May 2011

See all articles by Francesca Manes Rossi

Francesca Manes Rossi

Università Degli Studi di Salerno - Department of Management Research

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2011

Abstract

This paper proposes a classification model of the Financial Reporting of Italian Local Governments (ILGs) and a grid of indicators supporting financial analysts in their solvency ratings. Due to their increased financial autonomy, ILGs increasingly need to resort to various forms of borrowing. However, the Basel II agreement requires financial institutions to carry out a thorough assessment of the creditworthiness of all potential borrowers, including ILGs. After reviewing the main criteria adopted by rating agencies for their analyses, this paper focuses on the assessment of the financial situation and debt position of ILGs. Such entities use a “financial” accounting system based on commitment and ascertainment, to which the cash flow analysis model provided by IPSAS cannot be applied. The proposed classification model and the relevant grid of indicators were applied to the local ILGs, differing in size but located in the same area, in order to test whether these tools could provide a thorough assessment of the financial situation of any LG. Finally, the study proposes an equation to define the maximum degree of indebtedness for an LG, in compliance with the limits set by the current regulations in Italy.

Keywords: local government, annual reporting, rating, credit risk, Basel II

JEL Classification: H72, H74, M41

Suggested Citation

Manes Rossi, Francesca, Analysis of Solvency in Italian Local Governments: The Impact of Basel II (May 3, 2011). Available at SSRN: https://ssrn.com/abstract=1830520 or http://dx.doi.org/10.2139/ssrn.1830520

Francesca Manes Rossi (Contact Author)

Università Degli Studi di Salerno - Department of Management Research ( email )

Via Giovanni Paolo II, 132
Fisciano, Salerno 84084
Italy

HOME PAGE: http://www.distra.unisa.it/Economia_Aziendale/ManesRossi/manesrossi.php

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