World growth remains moderate - The growth of the world economy is still moderate and regionally uneven. The emerging economies are weighed down by financial conditions that are less favourable than in the past, and in some cases by macroeconomic imbalances that built up during the period of rapid growth. Uncertainty about the future stance of budgetary policy in some major advanced countries persists.
In Europe the risks to financial stability diminish but are still significant - In the euro area, where the signs point to cyclical recovery, the main risk remains that of a new downward spiral between economic fragility, sovereign debt crises and the vulnerability of banks. The segmentation of financial markets persists. Banks' access to wholesale funding markets has improved but is still intermittent. Credit quality is worsening, not only in the countries hardest hit by the crisis.
In Italy there are qualitative signals of an economic improvement - Italian business surveys indicate that the contraction of industrial activity has come to a halt, but the dispersion of opinions is broad and the outlook remains uncertain. The improvement of the external account is proceeding, thanks in part to the continuing moderate growth of exports. The number of real-estate transactions has stabilized, but house prices are still declining, albeit at a slower pace. The liquidity of the Italian government securities market has improved and yields have declined. Non-residents have continued to make net purchases. The fiscal adjustment must be implemented in order to curb risk premiums on Italian government paper and ensure credit conditions that can foster the economic recovery.
Households' financial conditions remain sound - Despite a decline in disposable income, indebted households' financial conditions are still sound overall. Low interest rates and measures in favour of borrowers help to limit the burden of debt service. The proportion of financially vulnerable households has not increased and should remain stable next year as well.
Firms' profitability diminishes further - The profitability of businesses is declining, owing to the protracted recession. The proportion of financially fragile firms (those with high ratios of interest expense to gross operating profit) has risen. The considerable uncertainty concerning the strength and timing of the recovery, together with the difficult terms of access to credit (especially for small and medium-sized enterprises) are still significant sources of risk.
Credit continues to contract - Lending continues to con-tract, owing both to weak demand and to the banks' restrictive stance on supply, which stems above all from the increasing riskiness of firms. With the cyclical upturn the decline in credit is expected to moderate in the course of 2014. Large corporations have increased their recourse to the bond market.
Work on the first stage of the European Banking Union has begun - The comprehensive assessment of the state of the main euro-area banks in the framework of the European Single Supervisory Mechanism is getting under way. The exercise, which will cover 15 large and medium-sized banks in Italy, can bring significant benefits to the country's banking system. It will make banks' balance sheets more transparent and internationally comparable, thus helping to attenuate the fragmentation of financial markets and improve funding conditions.
Credit quality is affected by the recession... Italian banks' chief problem is the rapid increase in
non-performing loans, principally to businesses, as a result of the protracted recession. According to preliminary data, the new bad debt ratio stopped rising in the third quarter of this year; next year, while remaining high, it is expected to fall gradually. In the future it will be necessary to reduce the volume of non-performing loans. The comprehensive assessment, by dispelling the uncertainty about the quality of bank balance sheets, should foster the revival of the loan securitization market.
...and cuts into banks' profitability; coverage ratios are stable - Banks' operating profits are largely absorbed by loan losses; for the system as a whole, they should be sufficient to cover loan losses both this year and next. Coverage ratios (measured by the ratio of loan loss provisions to non-performing loans) have held stable. The Bank of Italy's checks on the adequacy of banks' provisioning continue.
The banks reduce their exposure to government securities in the third quarter - Italian banks' purchases of domestic general government securities accelerated from late 2011 onwards; one contributing factor was the widening differential between the risk-adjusted yields on government securities and loans. In the third quarter of 2013 there were net disposals of securities, in conjunction with the signs of economic recovery and the easing of strains in the wholesale funding markets.
Bank funding diminishes; the funding gap reaches a low level - Banks' funding has been contracting since the spring, reflecting the gradual repayment of Euro-system refinancing and, more recently, a slight decrease in retail funding, in part as a result of the banks' marketing policies. Net funding on wholesale markets has also remained negative, but there has been an upturn in bond placements, facilitated by the fall in the risk premium on Italian government securities. The funding gap has narrowed to historically low levels.
The banks continue to strengthen their capital base - The strengthening of the banks' capital base has proceeded without recourse to public funds. Since the onset of the crisis government support to the banks - granted exclusively in the form of loans - has been very limited in Italy, both in absolute terms and relative to other countries. The assessments conducted by the Bank of Italy and the IMF have confirmed that overall the Italian banking system does not need substantial recapitalization, even assuming conditions of stress. Financial leverage is low by comparison with other European banks.
The insurance industry is sound - The capital position of Italian insurance companies remains solid. Premium income has continued to rise and liquidity risk to diminish. Profitability is satisfactory. Given their large portfolios of government securities, the companies remain sensitive to the possible resurgence of sovereign debt tensions.
The summer's money market tensions have subsided - The liquidity conditions of the Italian financial markets have come back into line with those prevailing prior to the crisis. The tensions on very-short-term interest rates observed in June and July had subsided by the beginning of August.
