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Financial Stability Report Financial Stability Report 2 2014 November 2014 November Financial Stability Report Number 2 / 2014 November Other economic publications of the Bank of Italy: Annual Report Account of the main developments in the Italian and world economy during the year Economic Bulletin A quarterly report on developments in the Italian and world economy Economic developments in the Italian regions A series of reports on the regional economies Temi di discussione (Working Papers) A series of empirical and theoretical papers Questioni di economia e finanza (Occasional Papers) Miscellaneous studies of issues of special relevance to the Bank of Italy New research at the Bank of Italy A newsletter on recent research work and conferences Quaderni di Storia Economica (Economic History Working Papers) A series of papers on Italian economic history These publications are available online at www.bancaditalia.it and in hard copy from the Bank of Italy’s library (Biblioteca, Via Nazionale 91, 00184 Rome, Italy) and at the branches of the Bank. © Banca d’Italia, 2014 For the hard copy version: registration with the Court of Rome No. 209, 13 May 2010 For the electronic version: registration with the Court of Rome No. 212, 13 May 2010 Director Eugenio Gaiotti Editorial committee Giorgio Gobbi (coordinator), Giorgio Albareto, Martina Bignami, Paolo Bisio, Alessio De Vincenzo, Antonio Di Cesare, Giovanni di Iasio, Paolo Finaldi Russo, Roberta Fiori, Antonella Foglia, Andrea Generale, Igino Guida, Aviram Levy, Gaetano Marseglia, Giancarlo Mazzoni, Stefano Neri, Fausto Parente (Ivass), Marcello Pericoli, Matteo Piazza, Mario Pietrunti, Massimo Sbracia, Silvia Vori, Francesco Zollino Boxes Piergiorgio Alessandri, Emilia Bonaccorsi di Patti, Marianna Caccavaio, Laura Cerami, Alberto Coco, Giuseppe Della Corte, Alessio D’Ignazio, Marzia Gentili, Silvana Stefania Grande, Giovanni Guazzarotti, Eleonora Iachini, Sergio Longoni, Francesco Marino, Valentina Michelangeli, Giacinto Micucci, Valentina Nigro, Stefano Pasqualini (Ivass), Alessandro Picone, Luigi Russo Rita Anselmi, Valentina Memoli and Silvia Mussolin (editorial assistants for the Italian version) Giuseppe Casubolo and Roberto Marano (charts and figures) The English edition has been translated from the Italian by the Secretariat to the Governing Board. Address Via Nazionale 91, 00184 Rome - Italy Telephone +39 0647921 Website http://www.bancaditalia.it All rights reserved. Reproduction for scholarly and non-commercial use permitted, on condition that the source is cited. ISSN 2280-7616 (stampa) ISSN 2280-7624 (online) Based on data available on 31 October 2014, unless otherwise indicated. Printed by the Printing and Publishing Division of the Bank of Italy, Rome, November 2014. CONTENTS OVERVIEW 5 1 MACROECONOMIC RISKS AND INTERNATIONAL MARKETS 7 1.1 The macroeconomic and financial context 7 1.2 The main risks for financial stability 11 1.3 The real estate markets 14 2 THE FINANCIAL CONDITION OF HOUSEHOLDS AND FIRMS 17 2.1 Households 17 2.2 Firms 19 3 THE BANKING AND FINANCIAL SYSTEM 24 3.1 The ECB’s comprehensive assessment of the leading euro-area banks’ balance sheets 24 3.2 Credit 32 3.3 Refinancing risk and liquidity risk 37 3.4 Interest rate risk and market risk 39 3.5 Banks’ capital and profitability 41 3.6 Insurance companies 42 4 THE MARKETS AND EUROSYSTEM REFINANCING 46 4.1 The liquidity market 46 4.2 Eurosystem refinancing 48 4.3 The government securities market 52 BOXES The risks of low inflation for financial stability in the euro area 12 The effects of the stagnation of income on the vulnerability of indebted households 18 New issuers of bonds, 2002-13 21 Leverage and bad debts of firms 22 The valutation of real estate collateral in the AQR 28 The initial impact of the stress tests on banks’ shares and CDS spreads 31 Interest rate risk and net interest income in the comprehensive assessment 40 The new rules on lending to firms by non-bank intermediaries 44 Liquidity developments following the monetary policy decisions of June 2014 49 The measures to promote the use of bank loans as collateral for eurosystem credit operations 51 Developments in market making and the resilience of the MTS market 54 SYMBOLS AND CONVENTIONS Unless indicated otherwise, figures have been computed by the Bank of Italy. In the following tables: – the phenomenon in question does not occur .... the phenomenon occurs but its value is not known .. the value is known but is nil or less than half the final digit shown :: the value is not statistically significant () provisional OVERVIEW Increasing risks In the euro area the risks for Inflows of private In the first seven months of for financial stability financial stability that stem capital continue the year foreign investment stem from weak growth from slackening growth and in Italian financial assets and low inflation … persistently low inflation continued to be substantial. The Bank of Italy’s are increasing. Continuing debtor position in TARGET2 improved; it stagnation would have repercussions on the subsequently increased, in part for technical financial system and on the public finances. reasons, such as the issuance policy of the Treasury, Excessively low inflation makes reducing the which elected not to roll over all its maturing weight of public and private debt more difficult securities in view of its already ample liquidity. and implies a tightening of monetary conditions, with adverse effects on consumption and The financial conditions With growth in incomes investment. of households weak, the modest upturn in are sound household consumption … and there have The growth prospects for corresponded to a decline been increases the euro area are rendered in saving. Households’ financial wealth increased in market volatility more uncertain by the as a result of a rise in the prices of the securities fragility and unevenness of held. Low interest rates helped to limit the the world economic recovery. The financial vulnerability of indebted households. According markets appear to be exposed to spikes in volatility, to our estimates, the share of financially vulnerable like that in the middle of October due to the households would increase only marginally even exacerbation of fears about the political and in the case of severe macroeconomic shocks and financial situation in Greece. interest rate increases. In Italy the property The sharp rise in property The heterogeneity The main risk factor for market remains weak, prices in some European of firms’ financial firms is a protraction of in line with economic countries has led their conditions increases weak economic activity. conditions macroprudential autho- A gradual financial restruc- rities to activate or an- turing is under way, with a reduction in debt and nounce measures to curb the potential risks for increased recourse to the bond and equity markets. financial stability. In Italy the property market Leverage is diminishing. In addition, signs of remains weak, in line with conditions in the strengthening economic conditions have emerged economy as a whole. among larger and more export-oriented firms. Small firms, which on average are less capitalized, The timetable for fiscal The cyclical deterioration remain more exposed to cyclical risks and adjustment is revised and the need to avoid problems in accessing credit. undercutting the modest recovery in domestic demand have led the Italian The comprehensive The results of the compre- Government to make the adjustment of the assessment of banks’ hensive assessment of the public finances more gradual. The sustainability balance sheets finds balance sheets of the main capital shortfalls of the debt will be fostered by the performance of euro-area banks were pub- at Banca Monte dei the main expenditure items, whose growth will Paschi di Siena lished on 26 October, in continue to be modest. The speed of the reduction and Banca Carige … preparation for the launch in the ratio of public debt to GDP will depend of the Single Supervisory above all on the pace of nominal GDP growth. Mechanism. For Banca BANCA D’ITALIA Financial Stability Report No. 2 / 2014 5 Monte dei Paschi di Siena and Banca Carige, the declined again. The decrease also involved new stress test found the need for additional capital bad debts, above all those of firms. According to amounting to €2.9 billion, equal to 0.2 per cent of preliminary data, in recent months the flow of Italy’s GDP. The two banks have already announced new bad debts has been stable. capital increases and have submitted recapitalization plans to the supervisory authorities. …and the coverage The coverage ratio on non- ratio on non-performing performing exposures (loan … but confirms The results demonstrate the exposures improves loss provisions over gross the overall soundness fundamental resilience of non-performing exposures) of the Italian banking banks’ balance sheets, not- has risen. This could help banks to dispose of system withstanding the severe these loans and eliminate bad debts from their strains of recent years. balance sheets. Some of the major banking groups have begun operations that should lead to the Banks’ liquidity Over the summer, Italian liquidation of substantial amounts of non- strengthens banks’ liquidity conditions performing loans. The stock of these loans strengthened further, bene- nevertheless remains large by international fiting from the improvement in the financial standards. markets and the growth in deposits. In the wholesale funding markets, net bond issues Risks for the insurance For
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