The Bank of Italy published the latest edition of the Report on financial stability on Friday, which shows that in recent months the risks for businesses, households, banks and insurance companies have decreased.
However, Via Nazionale underlines that uncertainties about economic policies in the various areas still weigh. The very low volatility observed on the financial markets may be a sign of investors' excessive propensity for risk and the occurrence of negative events could therefore trigger significant changes in the prices of securities.
Here are the other highlights from the report.
EUROZONE
In the euro area, the recalibration of monetary policy tools has eased uncertainty. The resolution of the crisis situations of some intermediaries in Spain and Italy has dissipated most of the systemic risks. Risk premiums on government bonds have fallen significantly.
ITALIAN FAMILIES AND ENTERPRISES
In Italy, the financial vulnerability of households and businesses has decreased; will continue to decline as growth consolidates. A deterioration could materialize in the particularly unfavorable case of a sharp slowdown in the economy accompanied by a rise in interest rates.
BANKS
Risks in the banking sector are decreasing. The resolution of the crisis of some intermediaries during the summer was reflected in an increase in share prices and in the decrease in the cost of funding. With the continuation of the economic recovery, new non-performing loans are reduced; stocks are also in sharp decline. some non-performing loan sales operations were completed; other transactions for large amounts are being defined. The overall degree of capitalization started to increase again.
In the coming months, the most significant risks for banks remain linked above all to the prospects for the economy: a sharp slowdown in growth would have a negative impact on revenues and credit quality. Pressures on profitability, which is still very low, would make it more difficult to find risk capital on the markets. The cost of capital of the main intermediaries, while significantly decreasing in recent months, remains higher than the average of the other European banks.
INSURANCE
The solvency ratio of Italian insurance companies is on the rise. The companies are less exposed than those of the other main European countries to a rise in interest rates, due to the good alignment of the financial duration of assets and liabilities. However, the high weight of government bonds in the portfolio makes them vulnerable to a hypothetical re-emergence of tensions on sovereign bonds.
YIELDS
Any increase in market yields, if in line with the improvement in the economic situation, is largely sustainable by the Italian economy. The ability of households and businesses to repay debts would remain high even in the event of sustained increases in their cost. The analyzes carried out by the supervisory authorities indicate that Italian banks and insurance companies are little exposed to the risk of an increase in interest rates.
DEBT
A reduction in the public debt-to-product ratio also appears to be achievable in the hypothesis of a rise in yields, which would slowly be reflected in the average cost of debt. However, a high level of public debt is a factor of vulnerability: the credibility of the commitment to reduce it remains crucial.
RATING
The improvement in the conditions of Italian households, businesses and banks, together with the consolidation undertaken by public finances, led the rating agency Standard & Poor's to revise upwards the sovereign creditworthiness of the country and of some of the major banks and insurance companies.
Download the full report in Pdf – Bank of Italy, Financial Stability Report
