Financial Stability Report No. 1 - 2017

Global risks are diminishing but uncertainty is high

Global economic growth reduces the risks to financial stability, but economic policy uncertainty remains high. The timing and implementation of the announced fiscal expansion in the United States are not yet known. Risks could derive from a widespread adoption of measures restricting trade. An abrupt adjustment of China’s rapid credit expansion could affect growth and international financial markets.

Deflation risks diminish in the euro area

In the euro area, the strengthening of the economic recovery and the reduction in deflation risks are contributing to financial stability. Banks’ balance sheets are becoming sounder. Liquidity conditions on the Italian equity and government securities markets have improved after the tensions registered at the end of 2016. However, the resurfacing of uncertainty over the area’s cohesion led to a rise in sovereign spreads in various countries, which were reabsorbed in part towards the end of April.

Growth bolsters households’ and firms’ balance sheets

In Italy, with the economic recovery and low interest rates, households’ and firms’ ability to repay their debts has improved; insolvency rates have returned to the levels prevailing in the mid-2000s. The share of financially vulnerable households is still low, while that of firms is falling; for both sectors the impact of a rise in interest rates would be limited. The recovery in the real estate market is also gathering momentum, reducing the risks for the financial system.

Banks’ profits are affected by write-downs, but the outlook is improving …

Some banks recorded heavy losses in 2016 following the decision to increase write-downs on NPLs. The outlook is improving. Analysts have revised their earnings expectations upwards and since November Italian banks’ share prices have risen by about 20 per cent, as have those of other European banks. NPL stocks have continued to fall gradually; some banks are starting to sell off bad loans in large amounts.

... and their capital position is stable

In March UniCredit successfully carried out a sizeable capital increase, fully subscribed by private investors. The government support measures introduced last December could favour the recapitalization of some banks in difficulty.

Italy’s banking system is still exposed to the risk of slower growth

Despite signs of improvement, Italy’s banks are still exposed to significant risks. Profits remain low and vulnerable to a weakening of the economic recovery. Increased risk aversion on the part of investors in a global and European context marked by great uncertainty could make it more difficult and costly for banks to access capital markets.

Italian insurance companies are able to withstand particularly adverse scenarios

The capital position of the insurance industry continues to be sound. Profitability remains good. The EIOPA stress test has confirmed that Italian companies would be able to withstand very adverse scenarios, such as persistently low interest rates over a long period or sharp reductions in asset values and a widening of spreads.

The countercyclical capital buffer is kept at zero per cent

While improving, Italy’s macrofinancial conditions remain weak on the whole. In the absence of risks to financial stability stemming from credit growth, the Bank of Italy has kept the countercyclical capital buffer at zero per cent.

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