Increasing risks for financial stability stem from weak growth and low inflation... In the euro area the risks for financial stability that stem from slackening growth and persistently low inflation are increasing. Continuing stagnation would have repercussions on the financial system and on the public finances. Excessively low inflation makes reducing the weight of public and private debt more difficult and implies a tightening of monetary conditions, with adverse effects on consumption and investment.
... and there have been increases in market volatility - The growth prospects for the euro area are rendered more uncertain by the fragility and unevenness of the world economic recovery. The financial markets appear to be exposed to spikes in volatility, like that in the middle of October due to the exacerbation of fears about the political and financial situation in Greece.
In Italy the property market remains weak, in line with economic conditions - The sharp rise in property prices in some European countries has led their macroprudential authorities to activate or announce measures to curb the potential risks for financial stability. In Italy the property market remains weak, in line with conditions in the economy as a whole.
The timetable for fiscal adjustment is revised - The cyclical deterioration and the need to avoid undercutting the modest recovery in domestic demand have led the Italian Government to make the adjustment of the public finances more gradual. The sustainability of the debt will be fostered by the performance of the main expenditure items, whose growth will continue to be modest. The speed of the reduction in the ratio of public debt to GDP will depend above all on the pace of nominal GDP growth.
Inflows of private capital continue - In the first seven months of the year foreign investment in Italian financial assets continued to be substantial. The Bank of Italy's debtor position in TARGET2 improved; it subsequently increased, in part for technical reasons, such as the issuance policy of the Treasury, which elected not to roll over all its maturing securities in view of its already ample liquidity.
The financial conditions of households are sound - With growth in incomes weak, the modest upturn in household consumption corresponded to a decline in saving. Households' financial wealth increased as a result of a rise in the prices of the securities held. Low interest rates helped to limit the vulnerability of indebted households. According to our estimates, the share of financially vulnerable households would increase only marginally even in the case of severe macroeconomic shocks and interest rate increases.
The heterogeneity of firms' financial conditions increases - The main risk factor for firms is a protraction of weak economic activity. A gradual financial restructuring is under way, with a reduction in debt and increased recourse to the bond and equity markets. Leverage is diminishing. In addition, signs of strengthening economic conditions have emerged among larger and more export-oriented firms. Small firms, which on average are less capitalized, remain more exposed to cyclical risks and problems in accessing credit.
The comprehensive assessment of banks' balance sheets finds capital shortfalls at Banca Monte dei Paschi di Siena and Banca Carige... The results of the comprehensive assessment of the balance sheets of the main euro-area banks were published on 26 October, in preparation for the launch of the Single Supervisory Mechanism. For Banca Monte dei Paschi di Siena and Banca Carige, the stress test found the need for additional capital amounting to €2.9 billion, equal to 0.2 per cent of Italy's GDP. The two banks have already announced capital increases and have submitted recapitalization plans to the supervisory authorities.
... but confirms the overall soundness of the Italian banking system - The results demonstrate the fundamental resilience of banks' balance sheets, not withstanding the severe strains of recent years.
Banks' liquidity strengthens - Over the summer, Italian banks' liquidity conditions strengthened further, bene fiting from the improvement in the financial markets and the growth in deposits. In the wholesale funding markets, net bond issues remained positive, including those of medium sized banks. The volume of immediately available eligible assets is increasing, despite the reduction in government guaranteed bank bonds. The Bank of Italy has adopted new measures extending the range of bank loans eligible as collateral with the Eurosystem.
Economic uncertainty still impedes the recovery in credit to firms - Lending has continued to diminish, if more slowly, reflecting the weakness of economic activity. According to our projections, lending to non financial corporations will continue to contract in 2015, although at a progressively decreasing rate, while the reduction in mortgage lending to households should come to a halt in the first quarter.
The deterioration in credit quality slows further... In the first half of 2014 the flow of new non performing loans in relation to performing loans declined again. The decrease also involved new bad debts, above all those of firms. According to preliminary data, in recent months the flow of new bad debts has been stable.
...and the coverage ratio on non-performing exposures improves
The coverage ratio on non performing exposures (loan loss provisions over gross non-performing exposures) has risen. This could help banks to dispose of these loans and eliminate bad debts from their balance sheets. Some of the major banking groups have begun operations that should lead to the liquidation of substantial amounts of non performing loans. The stock of these loans nevertheless remains large by international standards.
Risks for the insurance sector are limited - For Italian insurance companies, both risks engendered by the low level of interest rates and liquidity risk are modest. The leading insurance groups intend to diversify their portfolios further by increasing their investment in private sector securities. The ongoing decline in policy surrenders, particularly of traditional life insurance products, has led insurers to reduce the most liquid asset components.
Italian markets remain liquid despite volatility - Liquidity conditions on the Italian financial markets have remained good, notwithstanding the spike in the volatility of the stock market and, to a lesser extent, the government securities market in the second half of October. Trading volumes have stayed high; the systemic indicator of liquidity risk remains low. The introduction of negative interest rates on Eurosystem deposits has not affected the orderly functioning of the money markets.
