IMF: Italy's financial system stabilised, still vulnerable

27 September 2013

Italy's financial system has so far managed to overcome the financial crisis, but a weak economy and the link between Italian banks and government finances are a strain on banks.

Main risks

Banks have strengthened their capital position in the last years, but remain vulnerable to several key risks, in particular:

• The lacklustre economic outlook and the large exposure to the highly-leveraged Italian corporate sector that keep credit risk rising and put pressure on bank profits. The ratio of non-performing loans (including past due, restructured, doubtful, and defaulted loans) to total loans has almost tripled since 2007 to 13.4 per cent.
• The weak governance in some categories of banks—notably cooperatives and banks under significant influence of banking foundations— that fare noticeably worse in the stress tests.
• The large holdings of government bonds that leave banks exposed to losses and higher funding costs if yields on government bonds surge again. The yields on Italian government bonds have declined substantially from their peaks in 2011 but the crisis in Europe has not ended.

Key reforms

In its assessment, the IMF recommended the government enact a series of reforms, including the following:

• Implement targeted financial sector actions to increase provisions, strengthen capital and funding plans where needed, and encourage a market for distressed assets. The Bank of Italy has initiated many of these steps, and this should continue in preparation for the forthcoming asset quality review and stress tests by the European Central Bank.
• Enhance governance in certain categories of banks. Foundations that are bank shareholders should be subject to minimum standards of transparency, governance, and asset diversification, and the largest cooperatives, especially those with an international presence, should be transformed into joint stock companies.
• Rehabilitate the systemic bank, Banca Monte dei Paschi di Siena. Successful implementation of the current ambitious restructuring plan is critical not only for the bank itself but also for the financial system as a whole.
• Strengthen financial supervision by enhancing the fit-and-proper rules for bank shareholders and directors and allowing the supervisor to dismiss individual managers. The authorities should also ensure that the recent reorganisation of the insurance supervisor does not create supervisory gaps during the transition period.
• Strengthen the crisis management framework, broadly in line with the draft European Union Bank Recovery and Resolution Directive. In particular, the resolution regime should prevent shareholders blocking recapitalisations and include depositor preference, bridge bank, and bail-in powers.

Press release

Financial System Stability Assessment

© International Monetary Fund