Inflation, energy and food crisis, slowdown of the Chinese economy. Are these the four risk factors which are causing the slowdown of the world economy, increasing the risks for global financial stability, but also for Italy. In this context, the central banks have reacted by raising interest rates in order to counter inflationary pressures, while the financial markets - after the deterioration recorded during the spring-summer - are showing signs of improvement, albeit accompanied by strong volatility and a deterioration in liquidity. This is the general analysis contained in the last “Financial Stability Report” presented by Bank of Italy, which, however, reassures: "The risks deriving from the household sector remain contained" and "the condition of the banks is solid overall".
The risks that threaten financial stability
“Inflation, monetary policy, energy and food supply difficulties, slowdown in growth in China, strengthening of the dollar, tightening of financial conditions, market uncertainty and volatility”. I am thisthe risk factors for the economy indicated by the Bank of Italy, which underlines how inflationary pressures remain high both in the United States and in Europe, “but inflation expectations have remained close to the central banks' medium-term objectives. Long-term rates have continued to rise”, continues via Nazionale. Also pay attention to energy prices which continue to cause difficulties, prompting many states to intervene to prevent liquidity crises from turning into solvency crises. “The exposures of Italian counterparties on the commodity derivatives market are limited”, reassures the report.
As far as our country is concerned, the risks to financial stability have increased in recent months and the indicator of financial conditions has risen in 2022 in connection with the strong volatility of the markets. According to the Bank of Italy it will therefore be essential to consolidate the trend towards reduction of net borrowing and public debt and achieve a significant and stable increase in growth potential in a context of prudent fiscal policies, also by leveraging theimplementation of the PNRR.
What is happening on the markets
Since the end of April it spread between Italian and German government bonds it gradually increased, reaching around 250 basis points during the summer, a level close to that reached at the beginning of the pandemic. From mid-October, the differential began to fall again, falling in recent days below the psychological threshold of 190 basis points. “Liquidity on the secondary government bond market weakened, continuing the trend that began at the end of last year; however, it remained at more relaxed levels than those recorded in other previous episodes of high tension”, explains the report, which highlights the increase in funding costs on the bond markets, but also the volatility reduction (high until September) on shares.
Families and businesses
In the first six months of 2022 the financial situation of families it was supported by the growth in disposable income and by the high accumulated liquidity, while the impact of the increases in energy and food prices on purchasing power was mitigated by the Government's support measures. "In the second half of the year, the prospects for the general economic situation worsened, reflecting the heightened macroeconomic uncertainty and the continuation of the conflict in Ukraine", points out via Nazionale, according to whom the growth of credit in general and of mortgages in particular is continuing and the average cost of loans is increasing (since the beginning of the year by around 90 basis points for mortgages and 120 basis points for consumer credit). “The risks to financial stability deriving from the sector they are circumscribed”, states the report.
More difficult instead for businesses, whose financial situation "is affected by the slowdown in economic activity, the increase in interest rates and energy price increases". Although the recovery in profitability has slowed down, expected profits for next year remain higher than those of 2022. “Debt increased in the summer months and credit supply conditions are becoming more restrictive. The repayment capacity remains good”, analyzes the Bank of Italy, emphasizing that in the future “the vulnerability of the sector would remain limited, barring a much greater deterioration in economic conditions than expected”.
Rising risks, but more solid banks than in the past
The quality of bank assets remains stable, while the loan non-performing rate decreased slightly compared to the end of 2021, remaining at low levels, and the stock of non-performing loans continued to decrease.
“However, the economic slowdown, the macroeconomic consequences of the conflict in Ukraine, the rise in interest rates and tensions on the energy goods markets are weighing on the prospective evolution of the quality of bank assets. Our projections indicate that the deterioration rate for businesses it would rise gradually in 2023 and more pronounced in 2024. A similar dynamic would also be observed for households”.
As regards the economic parameters, in the first six months of this year the profitability of Italian banks increased slightly compared to the same period last year: ROE rose from 8,8 to 9 per cent and the interest margin grew due to higher interest received on the bonds in the portfolio. According to estimates, over the next two years value adjustments will increase to more than double this year's values, while trading revenues will decrease due to the increase in interest rates and operating costs will increase due to inflation. In any case, overall profitability will remain positive, benefiting from the increase in the interest margin.
“Il level of capitalization of the system overall would be able to cope with an adverse macroeconomic scenario (defined in line with the most recent projections released by the Bank of Italy) which envisages, among other things, a complete interruption of Russian gas flows to Europe and a significant increase in the prices of raw materials”, stresses the Bank of Italy.
“As for the other countries of the euro area, the increase in risks for financial stability recorded in Italy is mainly determined by the persistent geopolitical instability, by the increases in the prices of energy raw materials, by inflationary pressures and by the worsening of the growth prospects , revised downwards for 2023. Households, businesses and the banking system are more solid compared to past episodes of turbulence, but the higher burden of debt could affect the ability of households and businesses to repay loans, with potential repercussions on credit quality”, observes the Bank of Italy. “Upward pressures on banks' cost of funding may also emerge related to the need to replace funds acquired through TLTRO3 operations and to issue instruments capable of meeting the minimum requirement for own funds and liabilities subject to bail-in (MREL)” concludes via Nazionale.
