The Italian Banking System
Nicola Bilotta
Abstract: Italy’s economy is in deep trouble. Since the economic crisis hit the country, the government has been struggling to re-launch the economy. Among member countries, Italy’s banking system is one of the biggest challenges facing the EU. This paper presents a framework of the Italian banking system with details of its main characteristics and describes the critical problems that require fixing.
The Italian banking system was not deeply affected by the 2007-2008 financial crisis. Its traditional structure based on deposits and loans limited its exposure to a crisis grounded in short-term leverage. However, Italian banks were intensely damaged by the economic recessions and the national debt crisis. According to the minutes of its meeting, in July 2017, for the first time in its history, the US Federal Reserve formally discussed the Italian banking system. Federal Reserve Board members noticed European banks, specifically Italian banks, were facing financial instability due to the economic crisis, low profits and high exposure to credits risks.[1] Indeed, the Italian banking system is experiencing severe stress. According to the IMF’s estimations, in 2015 the NPLs of Italian banks represented 18% of total loans, for a value of more than 360 billion euro.[2] The massive amount of NPLs and the consequent need for enormous loan provisions are affecting banks’ earnings and liquidity.
The Italian banking system has three main characteristics driving the evolution of the sector: (i) Italy has many local small and middle-sized banks; (ii) Italy has one of the highest rates of private savings in the world. Families tend to not invest but to deposit their capital in banks; (iii) Italian banks have developed a close relationship with Italian enterprises. As Italy does not have an advanced stock market, companies rely on loans to establish and grow their businesses.
This paper provides a theoretical framework to contextualize the subsequent papers included in this issue of Moral Cents. It presents the main characteristics and the crucial challenges currently facing the Italian banking system.
1: The Italian Banking system
The Italian banking system is smaller than those of other European countries. According to the Central European Bank, in 2014 the Italian figure of MFIs’ (Monetary Financial Institutions) assets as a percentage of national GDP was 2.3 compared to 3.1, the average of European Union countries. The Italian financial sector also appears smaller compared to the biggest European economies: France recorded a figure of 3.8, Germany 2.8 and the Netherlands 3.3.[1]
[1] European Central Bank, Report on Financial Structures, October 2015, p. 55 https://www.ecb.europa.eu/pub/pdf/other/reportonfinancialstructures201510.en.pdf
[1] M. Udland, Here’s everything the FED is worried about right now, 17/007/2016, http://uk.businessinsider.com/fed-minutes-concerns-2016-8?r=US&IR=T
[2] IMF, Italy Country Report July 2016, p. 3-5 https://www.imf.org/external/pubs/ft/scr/2016/cr16223.pdf
