Banca Italease expects losses of €500m on derivatives

Banca Italease is expected to report losses of around €500 million on its derivatives portfolio later today.

The bank has set aside €610 million to cover payments for closing out derivatives contracts early. Its portfolio of still-open contracts is worth €143 million mark-to-market.

Bank of Italy came up with this estimate after it performed an audit of Banca Italease over the first half of 2007. The audit also revealed a need for a restructuring of internal governance and an inadequate system of controls for the evaluation of risks and monitoring of the portfolio for derivatives sales. This caused an increase of the mark-to-market value of the derivativespositions, and an increase of the related counterparty risk.

The Bank of Italy has requested Banca Italease to review its organisational structure and system of internal controls. The regulatory authority has also ordered that until the restructuring plan is completely implemented the bank “may not effect any new derivatives transactions with customers, except for standard derivatives, or for those to hedge interest rate risk,” according to a statement released by Banca Italease.

Banca Italease is expected to release the final data tonight concerning losses related to derivatives exposures for the first half of 2007.