Once upon a time there was a winemaker… Yes, you understood perfectly; once upon a time there was a craftsman who made flasks for wine. Ed he was a fine craftsman and the products were admirable. One day a visitor who was praising his artifacts had to ask if his overall economic activity was going accordingly.
“Certainly,” replied the winemaker proudly. You know, I lose a lira for each flask, but I sell many!” This little story, trivially paradoxical, is not so far from some real situations. Let us take, for example, the economic activity of Italian banks over the past twenty years. They have seen the advantage of a high spread of rates inexorably decrease, ie the difference between lending rates on loans and debit rates on deposits.
This gap not only ensured a lasting certainty of economic results for the period, but became a true panacea in times of change in the discount rate of the Italian central bank, especially in the event of a decrease. Passive rates were immediately reduced, while the decrease in active ones followed after some time, immediately widening the gap. It was also a quiet operation in terms of credit risk because, unlike the increases, there was not even the possibility of attracting customers of lesser standing.
A series of factors have progressively destroyed this "banking Eldorado", starting with the increased competition following the introduction of the Consolidated Banking Act in 1993, the process of convergence towards the euro (1996-1998), the euphoric drive towards loans early 2011s, up to the most recent massive and lasting monetary expansion of the European central banker (XNUMX-), aimed at countering the dreadful effects of the Great Recession, which brought the gap to historic lows.
Let us try to explain how the banks have tried to react to this irreversible trend. Without wishing to overcomplicate the reasoning, nor underestimate the effects of the crisis in the real economy of recent years on bankers' appetite for credit risk, the graph below provides us with interesting elements of analysis. Since 1998, operating costs (yellow line) have become higher than the interest margin, decreeing the chronic deficit of the main business of Italian banks.
It would have been desirable that, having become aware of this and perhaps with some decisive exogenous direction, the downsizing of the industrial machine had begun immediately to recover the lost equilibrium. Instead, the gap between intermediation revenues and structural costs has progressively increased, reaching its maximum in the years 2010/2011 (gap between the green line and the yellow line). Until then, in fact, the number of bank branches increased and the overall and very high number of bank employees first grew and then remained almost constant; in addition, imaginative mergers have been implemented, "little investments have been made and a lot spent" in technology, improbable managers have been remunerated excessively.
And loans have also grown a lot, especially those in the real estate sector (years 2003/2008). Therefore, while the system swelled due to intermediated volumes and structures, year after year its essential activity took on negative economic results, until the credit trend first slowed down and then became negative.
Above all, the system has tried to contain the effects of these trends by reducing the flow of resources destined to cover non-performing and substandard loans, as shown by the red line which, already at minimum levels, decreases until 2007. Started to increase in 2008, adjustments and provisions they only shot up in 2011/12, resulting in large operating losses for the first time in XNUMX years. The long-lasting underestimation of credit risk has therefore been a clear constant in the fiscal policies of Italian banks. Today those twenty percentage points which separate the Italian system in relation to the coverage rate of higher risk credit exposures from the rest of the banks in Europe, are the tangible effect of the support offered up to the end to a declining interest margin, going beyond normal criteria of prudence.
Now a radical trend reversal cannot be postponed which, by absorbing conspicuous resources, will prevent, for example, adequate investment in technological innovations, causing a further departure from the current trends in the European banking system. In fact, there seem to be no alternatives to a policy of reducing credit losses, still exiting with balance sheets in the red, until the substantial realignment with the averages of the other countries.
Bank of Italy, adhering to the rapidly developing framework of the Banking Union, is in fact pushing decisively in this direction, both with reminders and with targeted actions on individual intermediaries, through the tool of inspections and other supervisory corrective interventions. The stress generated by these signals on a large part of the system can be seen quite clearly. On the other hand, if the reading we propose here is correct, we must also ask ourselves why these late adjustments to the loan portfolio, which have now come to attention, are not the result of a previous excessive aggressiveness on the part of the Supervision itself.
For too many years, in the Supervisory Body's verification processes, non-performing loans, substandard loans and other categories of non-performing loans have often been valued without an adequate estimate of the implicit losses or even with a loss forecast equal to zero, almost giving rise to the conviction that there was more interested in the exact classification of anomalous items than in the effective measurement of the probability of recovery. While our banker / winemaker merrily advanced along this treacherous ridge, no one reminded him that only by reducing industrial costs in time, certainly not those for adjustments and credit provisions, he could have corrected dangerous trends.
But this was not the case, so after failing to reduce the unit production costs, i.e. the production cost of each fiasco, ours tried to contain the losses, decreasing the size of the overall business, i.e. the credits to the economy , focusing on fewer fiascos sold. We just have to hope that, while they were weaving the straw of the flask together, vigilantes and vigilantes didn't end up definitively cutting the branch on which they were both sitting.
PS The comment on the trend of revenues from services is missing from this representation. We would have read to you about the volatility of the markets with regard to securities trading, but we could also have focused on another type of cost: the cost/opportunity of not developing the payment instruments other than cash, which we are talking about elsewhere in this booklet, the only sector at European level not to have suffered the effects of the Great Recession. Unfortunately for Italian banks, the parable of the fiascaio would also apply to this sector. Try to find out for yourself!
