1. In Europe, credit is largely disbursed by banks, which over the last few years have been asked to continue to improve capital solidity in order to make the financial system as a whole safer. And so they did.
2. Between capital increases, the sale of non-strategic assets and reduction of risk on the balance sheet (Risk Weighted Assets), the banks have been forced to sip credit (if not reduce it) just now that most countries need it to support weak growth.
3. Between the bleak economic outlook and very low interest rates, banks have very few cards to play to improve their accounts, other than to continue to reduce costs. The sector is in a profitability crisis: there are several banks (left side of the graph) that are unable to create value for shareholders. According to research by Ernst & Young[1], European banks need a cost reduction of 21%, and at the same time a revenue growth of 15% to match the average cost of capital of 9,4%. Not exactly a walk.
4. Furthermore, the bulkiness of non-performing loans (NPLs) makes the job even more difficult: their disposal requires banks to accept additional balance sheet losses.
5. European bank valuations are currently at historic lows, but as we have repeatedly said, they are for good reason.
6. Banks play an important role in the economy and this is why several states have spent a lot of public money (directly or indirectly) to support the financial sector during the crisis.
Italy has not exploited the flexibility of the regulations properly and today it finds itself having to face the same problems in a context of more stringent rules: the new directive on the resolution of the banking system is stricter on the issue of state aid. The combination of low profitability, balance sheet fragility and uncertainty about the future penalizes the Italian banking system in a particular way.
