Deputy Governor Fabio Panetta, gave testimony today in relation to a fact-finding inquiry on the Italian banking system within the European system of banking supervision before the sixth Committee of the Italian Senate (Finance and Treasury).
Panetta’s conclusion:
The financial crisis that erupted in 2008 necessitated unprecedented changes to the structure of the financial system, with the ultimate aim of preventing any possible future recurrence of such episodes. A thorough revision of banking regulations is now being brought to conclusion, designed to establish more robust safeguards for capital and liquidity. Equally important innovations have been made to the system of supervisory controls. In the euro area, the Single Supervisory Mechanism has been in operation since November; together with the Single Resolution Mechanism, it constitutes a key step towards Banking Union. The Bank of Italy works within these mechanisms to safeguard financial stability both in Italy and in the euro area.
Increasing banks’ level of capitalization was essential to rebuild the confidence lost as a result of the crisis. Past experience teaches that once it has been achieved, greater capitalization of the banking system has positive effects on the supply of credit to the real economy.
Nevertheless, the path by which greater capitalization is attained is not unimportant. During the transition a sudden increase in capital requirements can hamper the supply of lending, with adverse effects on the recovery. And while these adjustment costs are modest by comparison with the possible long-run benefits, they must be evaluated in the light of the cyclical phase, in order to keep supervisory action from inducing pro-cyclical behaviour by the banks. Progress must be made gradually, step-by-step, so as not to thwart the economic recovery. The Bank of Italy is working within all the relevant institutions to ensure that this objective is attained.
The creation of a Banking Union is crucial to guide the transition to the new regime of more strongly capitalized banks and stricter controls. In recent months the Single Supervisory Mechanism has effectively commenced supervision of the area’s largest banks and laid down common standards for the supervision of the other banks by the national authorities. Its supervisory action has reinforced the financial stability of the euro area. The credibility that it has already acquired enables the SSM to serve simultaneously the needs of economic growth and those of the stability of individual banks and of the system as a whole – needs, let me say, that are not in conflict with one another. A sudden tightening of capital requirements in the euro area would block the supply of credit and impede the economic recovery. Together with macroeconomic risks, this would increase the risks for single banks, producing the exact opposite of the intended result. Supervisory activity must take macroprudential needs into account, avoiding pro-cyclical policies.
In its brief period of activity, the SSM has accomplished important results. It has struck a good balance between central decision-making and operational decentralization, ensuring the efficacy of an admittedly complex system. There is room for improvement, so as to enable the Mechanism’s decision-making bodies to concentrate on the most important issues. I am convinced that the further strengthening of cooperation within the system will make it possible to fully exploit the experience of the national supervisory authorities and to reap the benefits of decentralization, enhancing the overall efficiency of the system and the effectiveness of banking controls.
