Economic surveys and country surveillance

Economic Survey of Italy 2009: Weathering the storm: the financial system in Italy

 

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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Italy published on 17 June 2009.

 

Contents

Credit tightened, despite the relatively sound financial system

As the authorities have asserted, Italian banks are less exposed to high-risk products than those of other large countries, certainly as originators but also as investors. This is partly due to their conservative behaviour and also to some regulatory and supervisory caution. No banks have closed or had to be bailed out. Nevertheless, the two largest banks made extensive acquisitions in certain eastern European countries which may be vulnerable to downturns in those economies. Despite their low exposure to the key risky assets, Italian banks suffered along with banks worldwide from the difficulties on the interbank market, fall in their share prices and diminished or vanishing profits as the economy slowed. While they may have operated a relatively cautious lending policy, they were not carrying excess capital reserves and many of them are well integrated into international capital markets. Hence, generally tighter international credit conditions were already obliging Italian banks to restrain their own lending in Italy – the European bank lending survey shows that credit standards have tightened in Italy to a very similar degree as elsewhere. Banks have used ECB liquidity facilities and are energetically selling bonds to the public.

An innovative response to problems on the interbank market...

In response to the difficulties on the (uncollateralised) interbank market, the Bank of Italy promoted a collateralised interbank lending clearing facility. The Bank acts as a market facilitator, monitoring the quality of collateral to give participating banks sufficient confidence to maintain liquidity in this anonymous market. Participating banks agree to guarantee the collateral vetted by the Bank, but there is a potential residual liability for the Bank of Italy (in the event of the default of a trader and the collateral issuer). Branches of foreign banks can participate only if their own central banks accept a share in this potential liability, a potential disadvantage for such banks. However, as a useful way to overcome the problems on the normal interbank market, the distortion to competition and implicit subsidy involved seem minimal, especially compared with other measures to support banks that have been taken elsewhere.

... and a scheme for bank recapitalisation

Banks have not so far needed crisis measures but are likely to need more capital as the recession deepens. There is no perfect solution to this problem. In a banking system that was until relatively recently dominated by publicly-owned institutions, there is reluctance to return to public sector stakes. The special facility set up in the February anti crisis measures was aimed at avoiding direct equity injections which might lead to effective public ownership, although some of the loan conditions amount to policy direction by the government anyway. Special facilities for lending to banks, or guarantees on their lending, should not be conditional on what use banks make of the funds; monitoring this in practice is a hopeless task and at best likely only to divert funds from one form of lending to another.

Medium term measures to promote an effective financial system

The authorities should be ready to act to maintain the functioning of the financial system if the downturn accentuates problems for banks. It will also be important to continue to strengthen information-sharing and coordination domestically and with foreign counterpart regulators, both to avoid regulatory arbitrage and to keep track of potential risk. In the longer term, policy should ensure strong competition for both deposits and lending business, within prudent regulatory standards, to promote strong long term growth. Revising capital requirements to make them less pro cyclical is a useful direction to consider, in conjunction with other European regulators.

 

How to obtain this publication

 

The complete edition of the Economic Survey of Italy is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.

 

Additional information

For further information please contact the Italy Desk at the OECD Economics Department at eco.survey@oecd.org

The OECD Secretariat's report was prepared by Paul O’Brien, Romina Boarini and Enrico Sette under the supervision of Patrick Lenain. Research assistance was provided by Annette Panzera.

 

 

 

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