The Italian Banking System: Have The New Reforms Worked?

In recent years, the Italian banking system has been subject to numerous reforms. The main ones are the reform of cooperative credit banks, the reform of popular banks, and the founding of bank foundations. In addition, the Guarantee on Securitization Securities (GACS) mechanism and a system for speeding up the recovery of claims have been introduced. These measures have strengthened and renewed the Italian banking system.

Government Intervention

The government has intervened in this discipline with three objectives: consolidating the banking system, reducing credit recovery times and setting new funding channels for banks. For the development of this latter goal, IVASS and the Bank of Italy have issued rules that allow new players to enter the credit market. Lastly, no deposit withholding is required on medium to long-term loans to all investors located in the European Union.

According to the analysis of the Ministry of Economy and Finance, the Italian banking system is solid and has been able to adapt to changes and withstand the spread of the financial crisis as it is unfurled in both the real estate sector and derivative financial instruments markets in other countries. In other words, it has demonstrated good resilience.

Bad Debt and Fragmentation

Despite this, the prolonged and profound financial crisis has worsened the amount of bad debt on bank balance sheets. This is the main problem facing Italian banks. However, it must be borne in mind that the coverage rates guaranteed by debtors are much higher than other EU countries.

Another problem is the excessive fragmentation and a high number of small banking entities. The reforms introduced to consolidate the banking system aim to facilitate the aggregation of small banking entities, so they are stronger and more transparent when supporting families and businesses.

To reduce the recovery time of claims, the telematic civil procedure and the business courts have been implemented to help bankruptcy reforms. All these interventions also favoured the re-valuation of impaired loans and their sale on the market.

What Next for the Italian Banking System?

In 2017, the total of the amount of bad debt is estimated to reach the pre-crisis level according to the Abi-Cerved outlook that was published in May 2016. One of the factors that are favouring this process is the economic recovery.

In the fourth quarter of 2015, gross impaired loans declined by €2bn for the first time since 2008, according to Bank of Italy estimates. At present, they amount to €360bn, whereas bad loans amount to €200bn, while the remaining €160bn corresponds to exposures where the counterparty is able to repay.

Also, most banks have already made the write-downs and allocations required in the financial statements. Guarantees and hedges of €122bn were provided for net debt of €122bn.

The reforms are therefore contributing to the improvement of the index that measures the profitability of the Italian system, in fact, this increased from 33.2 in 2014 to 47.8 in 2017. This analysis was carried out by the Italian Association of Foreign Banks and Censis on a panel composed of managers of multinational companies, law firms, qualified foreign press members and institutional investors.

Matteo Spiller