No. 158 - Italian mutual banks and the challenge of Basel III

After a decade of deep transformation, which influenced both lending policies and risk management, Italy's mutual banks are faced with the upcoming Basel III reform. Economic trends continue to exert pressure on the traditional bank business model. The entry into force of Basel III provides an opportunity to assess the changes under way, and identify potential problems. A simulation exercise conducted on June 2012 data evaluates the position of both mutual banks and central institutions relative to the new rules on capital and liquidity. The exercise paints a picture of broad compliance with the prudential targets, although some elements warrant greater attention. On the one hand, although the banks' capital endowment is of better quality and higher than the future minimum regulatory requirements, persistent low profitability and the increasing credit risk in the balance sheets might pose a problem in the future; on the other hand, a more efficient allocation of liquidity present in the system seems necessary, including via the introduction of new coordination measures.