Robust global economic growth is lessening the risks to financial stability. The stock and bond markets, however, seem very exposed to unexpected economic and geopolitical events, which could trigger potentially large fluctuations in securities prices like those recently experienced.
The Eurozone banking sector continues to strengthen despite large differences between individual institutions. The risks attached to the United Kingdom's exit from the European Union have abated since the understanding on the transition period was reached, although ratification of a full agreement is still a source of uncertainty, as are the future arrangements for access to the financial infrastructure and markets.
In Italy the impact of a possible rise in interest rates on the average cost of government securities would be mitigated by the latter's high average residual maturity. Nevertheless, Italy's large public debt makes the economy vulnerable to severe tensions on the financial markets and to any downward revisions of projected growth.
Italian households are financially sound. Their debt is low, and rising disposable income and low interest rates are helping to ensure its sustainability. Their financial vulnerability would remain limited even with an unfavourable trend in income and a sharp rise in interest rates. The economic recovery is supporting corporate profitability and making businesses less vulnerable. Nevertheless, fragilities persist among small firms and in the construction sector, which has a high level of debt and a persistently low level of activity.
The quality of bank credit is steadily improving. Flows of new non-performing loans are back to pre-crisis levels. The proportion of NPLs in banks' balance sheets is falling sharply, especially among the banks that have made large-scale disposals, though it is still substantial for many institutions. The completion of several capital increases has narrowed the gap in capital strength with respect to the average for the other European countries.
Bank profitability is improving, but it is still very poor for many small and medium-sized banks. The need to increase revenue and reduce running costs has become more pressing in view of the upcoming introduction of the MREL, which could significantly raise funding costs.
The solvency ratios for Italian insurance companies have increased. The phase of low interest rates had less impact on them than on insurers in other countries. They are proceeding with the diversification of their financial investments, but are still susceptible to the risks associated with a potential worsening of tensions on the sovereign debt markets.
The steady growth in assets under management entails limited risk for financial stability: the asset and liability liquidity matching of investment funds is good and the highly leveraged funds tend to be small in size.