United Kingdom: Bank of Italy presents Financial Stability Report at the City
The Bank of Italy delegation in London, in collaboration with the Embassy of Italy, organised a presentation of the Financial Stability Report(FSR) at the City to an audience of more than 100 asset managers, sovereign fund executives, financial analysts, hedge funds, chief economists of major world banking groups, central bank representatives, traders, journalists and sector specialists. The document is important in view of the completion of the first major step toward a banking union: the Single Supervisory Mechanism and, as a consequence, the Asset Quality Review and the Balance Sheet Assessment. The report highlights Italian banks’ non-performing loan (NPL) problems, i.e. the debt exposure at the level of businesses (family indebtedness was minimal, on the other hand).
Banking system profitability resumed growth in 2012, in a manner still modest but sufficient to absorb reserves against credit risk. Nevertheless, International Monetary Fund analyses of Italy show that, even in the face of extreme credit deterioration, the level of buffers available to Italian banks would be enough to ensure coverage and avert the risk of default. Special emphasis was placed on the Italian system’s definition of NPLs, which – were it to adopt the less stringent classification criteria of other regimens, particularly in the calculation of collaterals – would be reduced by one-third their present level. Predictable help in mitigating NPLs will also come from the recovery of the securitisation market, aided in turn by reduced fragmentation of the European financial system (through consolidation of the single supervisory system) and fiscal forecasts, contained in the Stability Law, more favourable in terms of “loan losses”.
The report also focuses attention on the massive purchase of Italian State bonds by national banks. With a normalisation in market conditions expected, credit institutions have begun to issue bonds and a parallel interest has been seen in their acquisition by non-national investors. Regarding liquidity, the Italian system is still largely dependent on support from the European Central Bank. It has, however, regained capital collection capacity, despite the persistent risk prospects deriving from eventual further ratings agency downgrades. Encouraging is the assessment, moreover shared by international financial analysts and other institutions, on the basis of financial leverage and on the adequate capitalisation of Italian institutions, amplified by the consideration that the use of State funds to confront the crisis has been limited to two relatively modest interventions. On the capital requirements that should emerge from future scenarios, the Bank of Italy report refers to the already cited FMI estimates that, even in the severest of possible scenarios, would lead to the conclusion that even if additional capitalisation were necessary, it would be limited to the small/medium-sized local banks, already amply supervised and adequately capitalised.
To summarise, the report underscores the capacity of the banking system to weather the financial crisis, the possibility of a gradual re-emergence from current pressures, the assessment that the single European supervisory mechanisms and consequent Asset Quality Review are a solution to and not a part of the problem. The definitive end to the sovereign debt crisis necessitates consolidated economic growth in the eurozone as a precondition for reducing the stock of non-performing loans and recovering Italian banks’ profitability. For this to happen it remains essential that recovery be sustained through the maintenance of current low interest rates by the European Central Bank for the duration necessary, and pursuance of efforts at national level to consolidate public finances and enact economic reforms remains crucial.
(infoMercatiEsteri)
