At the beginning of April, the US administration's announcement of new tariffs triggered a phase of heightened uncertainty and tensions in global financial markets, which was followed by a downward shift in expectations for global economic growth. Long-term Treasury bonds in the United States, which initially benefited from an increase in demand, as typically occurs in times of turmoil, subsequently experienced a sharp sell-off. Although the strains have eased in the weeks following the announcement, the risks to financial stability have increased.
The effects of these developments were also felt in Italy, along with the other major European countries. Tensions on the Italian financial markets intensified in the first few days of April, especially owing to the increase in the volatility of equity and corporate bond prices, which experienced steep declines.
In the government bond market, the yield spread between ten-year Italian and German government securities has fallen since last autumn despite an increase in volatility. Liquidity conditions remain good, although trading decreased in April.
Against a background that remains stable overall, Italy continued to benefit from a strong labour market, low inflation and from the positive net international investment position. These are some of the factors that contributed to the recent upgrade of the country's creditworthiness by one rating agency.
House prices continued to rise in the second half of 2024, while commercial property prices remained unchanged. Overall, the risk to financial stability posed by the real estate sector is not high.
Risks for households remain limited, thanks in part to an increase in their financial wealth in 2024 and to the further reduction in their debt as a share of disposable income. Looking ahead, however, their financial situation could be affected by a weakening economy.
After having already declined in 2024, the profitability of firms, especially those in the sectors most exposed to the possible repercussions of trade tensions, could fall further. Despite the decline in interest rates and indebtedness, firms' ability to service their debt is showing some signs of deterioration, especially in the construction sector and, to a lesser extent, in the industrial sector.
Conditions in the Italian banking system remain stable. Profitability and capitalization stayed at high levels in the second half of 2024. The liquidity situation remains balanced even after the TLTRO III repayments. A sharp increase in trade restrictions between countries could lead to a deterioration in credit quality, which the system will nonetheless be able to address from a stronger position than in the past, owing to its solid capitalization and thanks in part to the systemic risk buffer introduced by Banca d'Italia last year. Exposure to cyber and operational risks continues to require close monitoring.
In the insurance sector, the recovery in life premium income has helped to improve liquidity. Profitability has been stable. Capitalization is still high. A European-wide stress test exercise has confirmed the sector's resilience to adverse shocks.
Although net subscriptions to Italian investment funds were positive in the first quarter of the year, total assets fell due to the sharp drop in prices on financial markets. In the first few days of April, immediately after the US announced new tariffs, moderate outflows were observed. The risks stemming from the asset management sector remain limited overall.
Five special-focus boxes are included in this Report. The first describes trends in the crypto-asset market, explaining its features, risks and regulatory developments in Europe and the United States. The second provides an overview of the uptake in Italy and in the main euro-area countries of certificates, which are complex to assess and may expose holders to heavy losses in adverse scenarios. The third box discusses Italian less significant banks' use of government guarantees to support lending to firms, as well as the measures taken by Banca d'Italia to address some weaknesses in the related management and control systems. The fourth describes the results of an initial analysis of the exposure of Italian and euro-area banks to the economic sectors likely most vulnerable to trade tensions. The final box analyses the introduction of the requirement for Italian firms to take out insurance contracts to cover damage directly caused by natural disasters and catastrophes.
