31 May 2013

Bank of Italy/Visco: Overview of economic and financial developments in Italy

The European Central Bank, the national central banks and the national supervisory  authorities are working to create the single supervisory mechanism. This far-reaching  institutional innovation will require an organisational adaptation as significant as, and even  more complex than, the one leading to the single monetary policy. The project must  capitalise on the best national practices; it must aim to achieve a common system of  supervisory rules and practices ensuring pursuit of high and strict standards. We attach special importance to aspects that are a fundamental part of our tradition, such as the central role of inspections, methodologically robust analysis, and continuous discussion and dialogue with banks’ boards of directors and top management.

The single supervisory mechanism will be based on the close integration of European and  national structures in the case of the largest banks, and on the direct responsibility of national authorities – within the framework of common guidelines – for the rest; the tasks of customer protection, combating money laundering and supervision of non-bank intermediaries will continue to be conducted at national level. The delicate launch phase will require substantial investment in human and technical resources. The workload will not diminish, either for us or for the supervisory authorities of the other countries, as we strive to combine frameworks that differ in many respects.

Concerning the events involving Monte dei Paschi di Siena, a detailed account of the supervisory initiatives and the measures adopted was made available on the Bank of Italy’s website at the end of January and has since been updated. Supervision of Monte dei Paschi has been continuous and increasingly stringent in recent years; the judicial authorities will assess whether this activity was obstructed by former directors and managers. From 2010 to 2012 we demanded that steps be taken to restore a balanced liquidity position, thereby staving off serious threats; we requested a marked strengthening of capital and of the internal control system; we prompted a radical change of management. We are working closely with the judiciary, to the benefit of our respective institutional objectives: safeguarding stability and suppressing illegal actions. The contribution of the Financial Intelligence Unit is fundamental. We have operated properly and with diligence and care, within the scope of the law; we welcome constructive comments.

In 2012 the Bank of Italy considerably increased the volume of its assets, participating in exceptional single monetary policy interventions, particularly the expansion of bank refinancing operations. This has resulted in larger profits, but also in the need for greater precautionary allocations to risk provisions. The Treasury will receive a payment of €1.5 billion, on the basis of the Statute and subject to approval of the financial statements.

The taxes owed by the Bank on its income and productive activities for the 2012 financial year amount to almost €2 billion.

Italy needs conditions that are conducive to enterprise and to the reallocation of productive  factors. The lag we have accumulated is accentuated by a redundant regulatory framework,  by complex and costly administrative obligations that must be drastically reduced, law that must be rendered more certain, widespread corruption that must be stamped out, and insufficient protection from crime. Immediate, visible progress in removing these serious obstacles can stimulate productive investment, including from abroad, in all the country’s regions, especially in the South, where what is most critical is the environment for business activity, on which the balanced development of our economy ultimately depends.

The programme of reforms launched in the last two years stems from these considerations. But in many instances, after the enactment of reform laws, the implementing measures have been slow to follow; in some cases they are still lacking and administrative practices remain unchanged. This is a recurrent feature of our country’s history: the chief difficulties reside not so much in the substance of the laws as in their effective application. The pace of reform has slackened in the past year, owing in part to the progressive deterioration of the political climate. In resuming the path of reform with determination – as the European Commission too urges in the recommendations accompanying the closure of the excessive deficit procedure – it is vital to adopt a comprehensive approach that fixes medium-term objectives from the outset. Structural reforms take time; they can be implemented in succession, provided that they are designed as part of a bigger picture that immediately clarifies their goals, implications and benefits. A credible programme can have an impact on expectations at once, dispelling uncertainties, fostering investor confidence and favouring the prospects of employment and income, above all for the young, who today find it difficult to imagine any future in our country.

The consolidation of the public finances was also postponed for too long; in the face of demographic pressure on important expenditure items, the priorities for the allocation of resources were not clearly set. In 2007 public expenditure excluding interest payments was 43 per cent of GDP, two percentage points more than in 1997; the primary surplus had contracted by more than three points. In the same period in Germany primary expenditure decreased by more than four percentage points of GDP to just under 41 per cent.

The difficulties in the financing of firms necessarily invite reflection on the overall structure of Italy’s financial system, the underdevelopment of the bond and equity markets and the consequent excessive dependence of firms on bank loans. As we have underscored on other occasions, this structure partly reflects Italian firms’ reluctance to go to the market, although the banks have not pressed them sufficiently to do so.

The current situation demands that both sides overcome these hesitations. For solid businesses with good growth prospects, the difficult conditions of the market for bank credit are a powerful stimulus to tap the capital markets. On the banks’ side, an advanced financial system would enable them to diversify their sources of revenue, maintain a balanced loan-to-deposit ratio and share the risks of financing customers with the markets. While paying due attention to conflicts of interest, banks can encourage firms’ recourse to the market by exploiting the advantage in assessing creditworthiness that derives from their long-term relationships.

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