Europe has averted scenarios of extreme instability ... - In recent months the interventions of the European Central Bank and the measures decided at both European and national level have allayed fears of a devastating crisis in the euro area. Along with some signs that demand in the United States and in the emerging economies is picking up, this has improved conditions in the financial markets.
... but significant risks for financial stability persist - The greatest risk for financial stability in Europe remains the spiral between slow economic growth, the sovereign debt crisis and the state of banking systems. Another threat comes from the segmentation of euro-area banking and financial markets along national lines, primarily as a result of the emergence of fears regarding the reversibility of monetary union. To counter these risks, the Governing Council of the ECB has launched a programme of outright monetary transactions (OMTs) for the purchase of government bonds to restore the proper functioning of the monetary policy transmission mechanism. The full efficacy of these interventions is conditional on further progress in European integration and in the structural reforms under way in several countries.
The Italian economy benefits from the easing of pressures on government securities - Italy has witnessed a decline in the sovereign spread and the return of foreign investors to the government securities market. The weakness of domestic demand is fostering a significant improvement in the external accounts. Notwithstanding the worsening economic picture, budgetary policy remains oriented towards fiscal discipline. Fears about the progress of reform, linked to the uncertainty surrounding future political developments, pose a risk for the cost of the public debt.
The contraction in output and the uncertain prospects for recovery are reflected in property prices - The housing market is weak. Since the end of last year the decline in the number of sales has been accompanied by a moderate fall in prices, due to the contraction in households' disposable income and strained credit supply conditions. There is no evidence of an overvaluation of houses. The fall in prices is expected to continue in the coming months, and it could extend beyond that if the timing of the economic recovery were pushed further back. Possible effects on the quality of bank credit should be modest.
The household sector's financial situation remains balanced ... - The financial situation of households remains balanced overall, thanks to their relatively modest debt and large proportion of financial wealth held in the form of low-risk assets. In the current phase debt service is being kept down principally by low interest rates. The main risk consists in the sluggishness of income.
... but the recession weighs on firms ... - The recession continues to affect the profitability and self-financing capacity of firms, whose financial situation shows signs of strain. Expectations for the coming months have become less pessimistic. The chief risk factors have to do with the performance of the economy and persistent difficulties in accessing credit.
... thereby contributing to the contraction in credit ... - The recession continues to affect the profitability and self-financing capacity of firms, whose financial situation shows signs of strain. Expectations for the coming months have become less pessimistic. The chief risk factors have to do with the performance of the economy and persistent difficulties in accessing credit. The fall in bank lending reflects the weakness of demand. The attenuation of the strains on bank liquidity can be discerned in a gradual improvement in credit supply conditions, which nevertheless remain more restrictive than in the first half of 2011.
... and to the deterioration in the quality of bank loans - The fall in bank lending reflects the weakness of demand. The attenuation of the strains on bank liquidity can be discerned in a gradual improvement in credit supply conditions, which nevertheless remain more restrictive than in the first half of 2011. Credit quality continues to show the repercussions of the recession. Non-performing loans to firms have increased again in all sectors of economic activity, most markedly in construction. By contrast, the impairment rate on loans to households remains low, reflecting their solid financial position, traditionally prudent lending standards and a legislative and regulatory framework that encourages limiting loan-to-value ratios and requires the borrower to repay his debt, regardless of any change in the value of the property.
The Bank of Italy intensifies its assessment of the adequacy of loss provisions - Banks have increased their provisions for credit risk, which have nevertheless declined as a ratio to the total amount of impaired loans. The Bank of Italy is intensifying its assessment of the adequacy of provisions, taking into account both aggregate variables (average system-wide values, the economic outlook) and individual variables. Banks with inadequate coverage ratios are required to take prompt corrective measures.
Retail funding grows, the liquidity position improves and capital strengthening continues ... - Banks' retail funding continues to grow; the funding gap (the difference between lending and retail funding) has narrowed to 16 per cent and to 13 per cent excluding foreign banks' subsidiaries. Banks' liquidity position has improved markedly since July, with the easing of sovereign debt risk. Several banking groups have resumed issues on the wholesale markets; recourse to Eurosystem refinancing has levelled off. Italian banks hold the necessary liquid resources to cover liabilities falling due and to finance the economy; collateral also remains ample. The core tier 1 ratio of the main Italian groups has risen further, to 10.2 per cent. Capital strengthening is a response to the deterioration in the economy. The financial leverage of Italian banks remains low by comparison with the main European banking groups.
... but the earnings outlook remains uncertain - Banks' profitability continues to be dampened by the deteriorating quality of credit. Banks must continue, and intensify, their cost-cutting policies.
The financial situation of insurance companies is sound - The main Italian insurance companies recorded an increase in profits, due mainly to the positive results on financial activity. The solvency indicators for life and non-life insurance are well above the regulatory requirements. Overall, the greatest risks to the sector come from the protracted economic downturn, which is depressing growth in premiums and increasing policy surrenders, and from the conditions of uncertainty on financial markets, given insurers' substantial government securities portfolio.
Money market activity remains concentrated in the collateralized segments - Trading on the Italian interbank market remains concentrated in the collateralized segments. The liquidity position is gradually improving; cost conditions are in line with those in markets abroad.
The government securities market shows signs of improvement - Trading on the Italian interbank market remains concentrated in the collateralized segments. The liquidity position is gradually improving; cost conditions are in line with those in markets abroad. Government securities issuance has proceeded regularly, even at the times of greatest tension. The resumption of purchases by foreign investors in recent months has followed the considerable decline in rates on new issues. The average residual life of the public debt is still long compared with the main sovereign issuers in the euro area. The liquidity of the secondary market in government securities has improved further. The amount of medium and long-term securities maturing in 2013 will be less than in 2012 and will be distributed more evenly throughout the year.
