Stefano Cosma and Elisabetta Gualandri. Italian banks between Scylla and Charybdis?

At the beginning of the great financial crisis, Italian banks were just emerging from a process of consolidation, and were enjoying gains in efficiency, positive performance, low risk levels, and adequate capitalisation. Several factors helped them to escape the subprime phase of the crisis comparatively unscathed, in particular their conservative attitude to financial innovation, their maintenance of a traditional business model, their strong local roots, and their well-balanced funding gap. In fact, no Italian banks had to be rescued or failed, and the extent of government intervention with public facilities (through the so-called Tremonti bonds in 2008–09) was the lowest of any Organisation for Economic Co-operation and Development (OECD) country: 0.3 per cent of GDP, against an average of 30 per cent for European Union states. However, the situation in the second phase of the crisis has been dramatically different, due to two main factors. The first is that Italy’s poor economic growth, a problem dating from the late 1990s, has deteriorated into a recession that is causing serious difficulties both for businesses, leading to stagnating investments and an increase in bad loans for banks, and for households, with a slump in consumer spending. It should be remembered that services to enterprises and households make up the core business of Italian banks. In view of this traditional business model, the outlook for bank profitability is decidedly negative. The second factor is the Italian sovereign debt crisis. Italian banks’ situation became more critical as this crisis worsened in the summer of 2011 since, as in the other affected countries, their creditworthiness was assimilated to that of the country itself, increasing the market’s perception of their risk level. The contagious effect of the doubts surrounding Italian sovereign debt has made it more difficult for the banks to access the wholesale financial markets and thus sources of funding, placing their capital adequacy under stress. It is not easy to predict possible future scenarios for Italian banks. To do this, we must first of all acquire some idea of the prospects for the economic and financial context within which they operate. As a second step, Italian banks’ financial stability must be assessed, both in relation to the market turmoil triggered by the crisis and with regard to the regulatory changes now under way in the areas of liquidity and capital adequacy. The final step is to assess the implications of these factors for the banks’ microeconomic equilibrium.