Global economic growth reduces the risks to financial stability, but uncertainty about economic policies remains high. The timing and modalities of the announced fiscal expansion in the United States are not yet known. Risks could arise from the adoption and dissemination of trade restriction measures. An abrupt correction to China's rapid credit expansion could affect growth and global financial markets. This is what emerges from the latest report on financial stability produced by the Bank of Italy.
DEFLATION RISKS ARE REDUCING IN THE EURO AREA
In the euro area, the consolidation of the recovery and the reduction of deflation risks contribute to financial stability. The balance sheets of the banks are strengthened. Liquidity conditions on the Italian equity and government bond markets improved after the tensions recorded at the end of 2016. However, the re-emergence of uncertainties about the area's cohesion led to an increase in spreads on government bonds in several countries , partially returned in the last ten days of April.
GROWTH STRENGTHENS THE FINANCIAL STATEMENTS OF ITALIAN HOUSEHOLDS AND COMPANIES
In Italy, with the economic recovery and low interest rates, the ability of households and businesses to repay debts is improving; default rates have returned to the levels prevailing in the middle of the last decade. The share of financially vulnerable households remains contained, that of businesses is declining; for both sectors the impact of a rise in interest rates would be limited. The recovery of the real estate market is also consolidating, reducing the risks for the financial system.
BANKS' PROFITABILITY HAS BEEN AFFECTED BY VALUE ADJUSTMENTS, BUT THE OUTLOOK IS IMPROVING…
The income statements of the banks in 2016 closed with heavy losses for some intermediaries, due to the decision to increase value adjustments on non-performing loans. The outlook is improving; analysts have revised their earnings expectations upwards and since November the share prices of Italian banks have increased by around 20 per cent, as for other European intermediaries. The reduction in the amount of non-performing loans continues; transfers of non-performing loans for large amounts are in progress.
…AND THE ASSET POSITION IS STABLE
In March, a large capital increase was successfully completed by UniCredit, fully subscribed by private investors. The public support measures introduced last December could favor the capital strengthening of some intermediaries in difficulty.
THE ITALIAN BANKING SYSTEM REMAINS EXPOSED TO THE RISK OF A SLOWDOWN IN GROWTH
Despite the signs of improvement, Italian banks are still exposed to significant risks. Profitability remains very low and vulnerable to a weakening of the economic recovery. An increase in investors' risk aversion, in a global and European context of high uncertainty, could make access to the capital market more difficult and onerous.
ITALIAN INSURANCE INSURANCE ARE ABLE TO FACE PARTICULARLY ADVERSE SCENARIOS
The balance sheet situation of the Italian insurance industry remains solid. Profitability remains at good levels. The EIOPA stress test confirms that Italian companies would be able to face very adverse scenarios, characterized by the persistence of low interest rates for a long time or by strong reductions in the value of assets and by increases in spreads.
THE COUNTER-CYCLIC CAPITAL BUFFER REMAINS AT ZERO PERCENT
Italy's macro-financial condition, while improving, remains weak overall. In the absence of risks to financial stability deriving from credit growth, the Bank of Italy has kept the coefficient of the countercyclical capital buffer at zero per cent.
Source: Bank of Italy
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