In the euro area and in Italy the recovery in economic activity and monetary policy measures are helping to limit the risks to financial stability. Inflation remains unusually low, however, and the Chinese economic slowdown has made the global scenario more uncertain. In Italy the financial condition of households is improving, and with a slight widening of profit margins the number of financially vulnerable firms has declined. Firms are still exposed to the risk of an unfavourable turn in macroeconomic conditions.
After the tensions that arose during the summer, liquidity conditions in the financial markets have eased again. The gradual improvement in economic activity has been reflected in banks’ balance sheets, with earnings and capital both strengthening, while their exposure to interest rate risk has diminished. The flow of new non-performing loans is shrinking but the stock is still expanding, in part because the secondary market in these impaired assets has yet to develop. Italian insurance companies are strongly capitalized and can cope with even a prolonged period of low interest rates. No significant risks to financial stability are posed by the rapid expansion of the asset management industry.