(Finance) – “The main budget indicators offer apositive image of the Italian banking system. Capital rose to 15.8 percent of assets at risk, in line with other European banks. Non-performing loans in relation to overall loans fell to 1.4 percent, completing the recovery process started almost a decade ago. The liquidity ratios far exceed the regulatory requirements.” He stated this Fabio Panetta, Governor of the Bank of Italyduring the annual congress of Assiom Forex, the association of financial market operators, underway in Genoa.
“Profitability has also improved: the return on capital is close to 13 percent, a value never recorded after the financial crisis – he explained – Part of this strengthening reflects the efficiency gains achieved on the cost front and in the management of credit risk , as well as the positive effects of regulatory reforms and incisive supervisory action factors of an exceptional nature. Banks have in fact benefited from the macroeconomic policies undertaken to combat the crisis and from unusual market conditions of the last two yearscharacterized by an ample supply of liquidity and rapidly rising interest rates”.
Panetta focused on the topic of liquidity and collection: “In a phase in which the Eurosystem is reabsorbing excess liquidity, the Bank collection plans must be defined realistically and executed in time. It is necessary to avoid running into the problem of the composition fallacy: it is unlikely that all intermediaries will be able to address the market at the same time and at low cost”.
Furthermore, “aggregate liquidity will gradually decline, but it cannot be ruled out that the ability to find liquid resources on the market may undergo discontinuous variations as the excess reserves held by banks diminish or in the presence of market turbulence”.
On the non-performing loans front, he highlighted that “past experience indicates that an increase in interest rates has positive effects on bank balance sheets in the short term, but that over extended horizons it often ends up having a negative impact on the financial conditions of families and businesses, with feedback effects on credit. According to our estimates, the loan quality would worsen over the next two years. The incidence of non-performing loans would remain well below the peaks reached after the sovereign debt crisis, but unforeseen events could lead to more unfavorable scenarios.”
“To the banks – he argued – it is prudence required in the classification of loans and a scrupulous application of international accounting standards, according to which it is necessary to recognize expected losses and make the related value adjustments even when the losses have not yet materialized. Where models are not able to fully capture the effects of new risk factors on the probability of insolvency, intermediaries are called upon to make specific adjustments. This type of intervention is used by some banks, but in a heterogeneous way. The Bank of Italy is conducting in-depth studies to disseminate best practices in this respect.”
However, the focus is not only on the banks, which in recent years have significantly cleared their balance sheets of NPLs. “The Bank of Italy is intensifying controls on subjects who operate in debt collection, the so-called master servicers – said Panetta – Organizational shortcomings have emerged which require strengthening controls and improving risk management and recovery strategies, especially where the latter are entrusted to third parties”.
“The most difficult challenge, and the one that is most significant for its effects on the real economy, remains the management of financing for customers in difficulty but with prospects of recovery – he added – In order to define effective debtor recovery plans, operators in this segment will have to strengthen their management, financial and consultancy capabilities”.