Between 2020 and 2022, capital adequacy increased for both Italian and Single Supervisory Mechanism (SSM) banks, albeit to different degrees. Unlike what was observed for SSM banks, for Italian intermediaries the improvement depended solely on the decline in risk-weighted assets (RWAs). An analysis of the trend in RWAs for credit risk, which is the most significant component, shows that the reduction in the average weighting of portfolios for Italian banks more than offset the increase, albeit significant, in overall exposure, due exclusively to the performance of the sovereign government and central bank portfolio (net of this component, the overall prudential exposure would have decreased, especially to corporates). This portfolio reflects both the higher exposures to central bank and the effects of the prudential reclassification of those loans to the non‑financial private sector that, as a result of the COVID-19 pandemic, benefited from government guarantees. The general improvement in the quality of credit assets also contributed to the decline in RWAs, due to the combined effect of more stringent lending and credit monitoring policies.
For SSM banks as a whole, whose capital improvement was fully due to the increase in CET1 capital, the increase in overall exposure was more significant than the decrease in average risk weighting, leading to growth in RWAs. Net of the effects of prudential 'reclassification' between portfolios, the stock of loans to non-financial corporations for SSM banks as a whole increased non-negligibly over the three-year period under consideration, while it remained essentially stable for Italian banks.
