ACRI
Association of Italian Savings Banks
2023 World Savings Day
Address by the Governor of the Bank of Italy
Ignazio Visco

Saving, and its natural counterpart, investment, are key factors in a country's
balanced development. At individual level, saving makes it possible to transfer
resources over time, 'putting income aside' to meet future needs, such as purchasing
a house, children's education and joining a pension fund, to be less vulnerable
when times are hard and to look ahead with confidence.
The acquisition of adequate financial skills is a form of investment in human
capital that can increase the well-being of and the opportunities for people; it is all
the more important in light of the large and rapid changes in financial innovation
over the last 30 years, as well as the increasing digitalization of the markets. At the
same time, it is the first necessary line of defence for savers who are increasingly
required to make complex choices and sometimes to deal with high-risk products.
The Bank of Italy is aware of the importance of financial literacy and has invested
a great deal of resources in order to foster and disseminate it. I have often spoken
about this, including in the recent past.
Savings are also, however, and perhaps above all a public good that can
generate benefits for the community as a whole through the transfer of resources
'in space' from households to entrepreneurs and businesses. If they are used well,
they make a crucial contribution to a country's economic growth by financing
productive investment in physical, human and technological capital.
This creates the economic even more than the legal basis for its protection by
the public sector. This protection requires, first and foremost, adequate regulation
and supervision of the financial system as a whole, since it plays a key role in
bringing together the generation and use of savings and in transferring funds from
one place to another and from today to tomorrow, ensuring that they reach those
who should receive them by removing liquidity constraints.
Nevertheless, the protection of savings goes beyond regulation. Efforts must be
made to establish economic and financial conditions such that resources can be used
as efficiently as possible, thereby contributing to both the economic development
of the country and to the well-being of individual savers. Protecting savings aims
to increase the capital accumulated by fuelling a virtuous circle in which the
subsequent strengthening of economic activity leads to higher employment and
income that in turn makes further savings possible, as well as greater consumption.
The economic cycle and monetary policy
In the current economic climate, the trend in the household saving rate reflects
opposing pressures. On the one hand, it is curbed, via an income effect, by low
growth affected by the waning of the post-pandemic recovery in the services sector,
the legacies of the energy shock, and the monetary tightening in the main advanced
economies. Moreover, the substantial resources set aside during the pandemic allow
a larger share of current income to be used for consumption purposes, especially at
a time when purchasing power is being affected by high inflation.
On the other hand, households' propensity to save is now tending to rise
again as a precautionary response to uncertainty and to the downside risks for
growth. It is also stimulated by the gradual increase in real interest rates that, if
there are no liquidity constraints, reinforces what economists call the substitution
effect. Macroeconomic risks are, however, increasingly affected by geopolitical
tensions, exacerbated by the ongoing dramatic events in the Middle East, together
with the protracted and tragic conflict in Ukraine. There are also concerns about
the evolution and effects of the real estate crisis in China, the risk that inflation
will remain high for longer than currently expected, and the greater frequency of
extreme weather events, which could lead to further energy and food crises.
We are clearly talking about uncertainty and about risks that, since they are
'external' to individual euro-area countries and to the European Union in general,
cannot be countered by domestic-scale measures, but instead require wide-ranging,
shared and coordinated action. Economic policies in the euro area and at national
level aim as far as possible to mitigate their potential repercussions on demand and
on production activity and to ensure that inflation returns to the target levels fairly
quickly. A crucial contribution, though necessarily spread over time, to achieving
higher, more balanced and longer-lasting growth rates, as well as to keeping
inflation low, has to come from the timely implementation of thorough reforms
and decisive structural measures, made even more pressing today by the challenges
relating to climate change, the digital transition and demographic change.
In the euro area, the economic situation is clearly not satisfactory. The available
information suggests that economic growth in the summer months was practically
zero. Activity is slack in manufacturing and is weakening in services. The
European Commission's surveys point to a deterioration in consumer confidence,
with regard to the short-term outlook for both economic activity and their own
financial situation. The labour market continues to hold firm, but the first signs of
a slowdown in employment are emerging.
Price growth, which to a large extent still reflects external supply factors, is
falling sharply. In September, consumer price inflation fell to 4.3 per cent, which
is less than half of the peak observed one year ago (10.6 per cent). The recent and
more moderate decline in the core component net of food and energy products,
which fell to 4.5 per cent in September, confirms that inflationary pressures are
gradually subsiding. While wage growth is robust and uneven across countries,
it remains in line overall with expectations for the euro area as a whole. These
are positive signals, although inflation is still at high levels and changes in all the
factors driving inflation need to be carefully monitored.
At the same time, the tightening of financing conditions is continuing. Faced
with the gradual increase in the cost of loans, which has responded more quickly
and more strongly than in the past to monetary tightening, the growth in both loans
to firms and loans to households for house purchase was practically zero in the euro
area and negative in Italy in September. Moreover, there has recently been a sharp
rise in medium- and long-term real interest rates, mainly reflecting an increase in
the term premium, coming from the United States in particular. The causes of this
rise are still uncertain, but if this external effect is long-lasting, it will contribute to
further limiting aggregate demand.
With all of this in mind, last Thursday, the ECB Governing Council decided to
keep its key interest rates unchanged, having brought them into restrictive territory,
with an increase of 4.5 percentage points since July 2022. The ongoing fall in
inflation is in line with expectations; concerns about wage-price spirals and a
deanchoring of inflation expectations have diminished markedly, as have the possible
effects of an increase in demand in excess of the euro area's production capacity.
At the same time, given the lags in the transmission of monetary policy measures, a
further reduction in demand can be expected in the coming months, with production
remaining subdued and a continuation of the downward trend in inflation.
I believe that the Council's inclination to keep the reference rates at their
present levels for a sufficiently long period - i.e. regulating the persistence of our
action rather than its intensity - is a wise decision. If there are no new significant
shocks on the supply side, this approach strikes the right balance between the risk
of doing too much and the risk of not doing enough, at the same time reducing
the possible repercussions on the already weak economic activity and the risks to
financial stability. In any case, prudence will certainly be required in the coming
months, after such a sharp and rapid increase in the key interest rates.
The intensity of these interventions can certainly be debated, also given the time
it usually takes before their effects are felt in full. Yet there are some who believe
that this intensity is due to a possible delay in monetary policy's countering of
inflationary factors already in place since the early months of 2021 when, including
and above all thanks to the start of the vaccination campaign, the profound fears
associated with the outbreak of the pandemic had already dissipated. Specifically,
it is suggested that it was the errors in predicting inflation growth, which were not
confined to central bank level, that caused this delay, and that if monetary policy
action had been brought forward, the excessive increase in prices over the last two
years and the sharp deceleration in economic activity recorded this year would
both have been limited.
This is not the place to hold this debate, especially given our role; however, I
have already said that, up until autumn 2021 and unlike elsewhere, the conditions
in the euro area were not suitable for announcing a normalization of monetary
conditions, although they were seen as being broadly accommodative. Inflation
was still struggling to make a stable return to the 2 per cent target over the medium
term, and most of the subsequent forecasting errors were not due to demand
factors but to the exceptional growth in energy prices, which was exacerbated by
the dramatic events in Ukraine. In light of these observations, I believe that the
Council's reaction to the acceleration in prices, though unprecedently intense, has
been in line with the gradual evolution of the situation and that, given a supply
shock of this size, it rightly intended to counter the propagation of inflation through
successive adjustments of prices, wages and inflation expectations.
From this point of view, monetary policy is certainly bearing fruit. The great
uncertainty over global economic and geopolitical conditions and the risk of further
negative impulses on the terms of trade side have led to confirmation of the intention
to pay particular attention to incoming information as it becomes available, but this
does not mean that a path has not yet been laid out. The reduction of inflation within
the established time frame must be guaranteed; however, at the same time, we must
avoid excessive restrictions on money and credit that could generate inappropriate
recessionary effects, thereby also helping to fuel uncertainty over the economy and
price stability. These two conditions are also crucial for making decisions and for
the scope for saving.
Savings and finance in Italy
Italy's GDP continued to stagnate in the summer as well. Our surveys and
qualitative indicators still signal widespread weakness in manufacturing; despite
the good performance of the tourism sector, the strong recovery registered in
services after the most acute phase of the pandemic appears to have come to an
end.
While bearing in mind that in the current challenging environment, point
estimates are merely indicative, according to the baseline scenario presented in the
Bank of Italy's Economic Bulletin published in mid-October, GDP is set to grow
by 0.7 per cent this year, 0.8 per cent in 2024 and 1.0 per cent in 2025. The risks
surrounding these estimates, as well as the estimates for the global economy and
the other main euro-area countries, are skewed to the downside, especially because
of heightened geopolitical tensions and tighter financing conditions.
GDP growth, inflation and rising interest rates are in turn affecting Italian
households' propensity to save, yet the recent developments in savings should be
looked at from a broader perspective. Since the mid-1990s, when it exceeded 20
per cent, the ratio of households' savings to disposable income, which had been
historically high by international standards, has decreased considerably, coming
down to 10 per cent in 2019, which is below the euro-area average (Figure 1).
This decline reflects long-lasting trends, including demographic dynamics and the
development of the financial sector, which have increased households' ability to
borrow and to redistribute lifetime consumption, as well as the protracted period
of low interest rates, which has made loans less expensive.
In 2020, with the dramatic spread of the COVID-19 pandemic and the ensuing
social distancing measures both in Italy and internationally, household savings
increased exceptionally, by well over 20 per cent in the second quarter of that year.
Although the drop in production was broadly mitigated by the household support
measures introduced by the Government, consumption expenditure fell sharply.
While consumption activity bounced back thanks to the economic recovery, in
2021 households also continued to set aside more resources than they would have
done had there not been a public health emergency: after peaking in spring 2022,
according to the Bank of Italy's estimates, total savings accumulated still accounted
for 2 per cent of households' total net financial assets in mid-2023.
Since the second half of 2021, as energy costs progressively rose and then soared
with Russia's invasion of Ukraine, inflation started to chip away at households'
purchasing power and at the real value of their savings. Although households still
hold substantial excess savings, their financial wealth in real terms is currently
slightly below pre-pandemic levels, in line with what has been observed in the
euro area on average (Figure 2). Over the same time span, the propensity to save
gradually fell again, to below pre-pandemic levels as early as the second half of
2022 and down to 8.5 per cent in the first six months of 2023 on average.
Furthermore, with regard to the private sector as a whole, the savings available
to the national economy (i.e. including the undistributed profits of non-financial
corporations), albeit declining in a long-term perspective, still account for 20 per
cent of disposable income (Figure 3).
The current composition of households' financial wealth, which today amounts
to around €5,300 billion (four times the disposable income), continues overall to
reflect the prolonged period of very accommodative financing conditions, which
came to a halt last year. The share of asset management products in total financial
assets has been increasing, partly in connection with the broader range of products
offered by financial intermediaries, standing at 30 per cent last June. The gap
with respect to the euro-area average (around 35 per cent) essentially reflects the
underdevelopment of the pension funds sector. Financial wealth is flanked, with a
similar amount, by real estate wealth, which has returned to growth following the
prolonged weakness under way since the early 2010s.
In an environment of high inflation and rising rates, households have recently
moved away from sight deposits, which grew substantially in the post-pandemic
period, towards more profitable financial instruments. Specifically, in the first half
of this year, net purchases of public debt securities exceeded €70 billion, which
is very high by historical standards. The share of these securities held directly by
households in their total financial assets reached 4.2 per cent, the highest since
2014; that of deposits stood at 26.0 per cent, the lowest since 2008 (Figure 4). If
we also consider the public debt securities held indirectly by households through
investment funds, their share is estimated to rise to approximately 7 per cent, more
than 16 per cent of total outstanding public debt securities.
The reallocation of savings has been influenced by the very limited pass-through
of the increases in key interest rates to the return on sight deposits, in Italy as in
the other euro-area countries. In August, the return on the current accounts held by
households, which at the beginning of the monetary policy normalization process
was virtually nil in all the main euro-area countries, was 0.3 per cent (against 0.5
per cent in Germany and 0.1 per cent in France and Spain). Conversely, the
passthrough to time deposit rates was substantial, mirroring the increase in key interest
rates and going from levels close to zero to 3.4 per cent (compared with 3.1 per
cent in Germany, 3.6 per cent in France and 2.3 per cent in Spain).
In comparison with the return on time deposits or bonds, the very low rates
on current accounts reflect, at least in part, their greater liquidity and consequently
the fact that they are generally used for transactions rather than as a way to invest
savings. Greater returns could be obtained by allocating part of the funds available
in the current accounts to deposits with an agreed maturity, which are covered by
the same guarantee as the current accounts.
Around 60 per cent of households' financial assets in Italy are invested directly
in instruments issued or managed by banks and other financial intermediaries. The
soundness and integrity of financial intermediaries therefore help to protect savings
while keeping public confidence in the financial system high, without which the
stability of the system cannot be ensured.
Prudential supervision and regulation are designed to make sure that the risks
taken by financial intermediaries are adequately monitored, irrespective of the type
of intermediary that has to address and manage them. Similar risks must be matched
by similar safeguards, without underestimating the interconnections between the
different segments of the system.
This is why we sometimes apply stricter requirements than in other
jurisdictions, availing of the discretion recognized by EU legislation. Specifically,
Italian legislation requires mutual funds that invest more than one fifth of their
managed assets in illiquid instruments (such as real estate) to be closed-end;
furthermore, financial corporations that provide credit are subject to the same
prudential requirements as banks, in order to avoid episodes of contagion. To keep
the secondary market for non-performing loans efficient - a key element in the
overall stability of the system - we have stepped up our supervision of servicers
responsible for the recovery of securitized loans.
The stability of the financial system also relies on supervisory authorities
scrutinizing the sustainability of the business models of financial intermediaries,
their efficiency and the quality of their ownership structures. These tasks have
been supplemented in recent years by targeted in-depth analyses aimed at enabling
operators to better cope with the cyclical and structural challenges that lie ahead.
In the short term, the risks to the financial sector mainly stem from the economic
slowdown and the rapidly growing returns on assets, which expose banks to higher
credit, interest rate and liquidity risks. Though they should not be underestimated,
these risks can still be addressed, given that the starting conditions are satisfactory
on the whole.
Last June, the CET1 ratio reached 15.6 per cent, the highest level since
this capital requirement was introduced. The quality of bank loans, which was
perceived as one of the main vulnerabilities of our system for much of the last
decade, remains good for now. The flows of new non-performing loans are broadly
stable at historically low levels (1.1 per cent), as is their ratio to total loans (1.4 per
cent, net of loss provisions). Although liquidity indicators have declined as a result
of the repayment of funds borrowed through targeted longer-term refinancing
operations, they remain well above the minimum reserve requirements. Central
bank-eligible assets are widely available. Finally, in the first half of this year the
return on equity stood at exceptionally high levels, partly on account of loan loss
provisions still being low.
However, future developments in credit quality should continue to be closely
monitored, as this is expected to deteriorate towards the end of 2023 according to
our projections, which are consistent with the latest macroeconomic scenarios,
although the ratio of the stock of non-performing loans to total loans is expected
to remain much lower than in the past. Liquidity conditions will also continue to
require close monitoring by banks, as the pass-through of monetary policy impulses
to yields on bank liabilities remains partial and a considerable amount of the funds
borrowed through the targeted longer-term refinancing operations will mature by
mid-2024. Banks will therefore have to update their funding plans very frequently,
based on the changing market conditions, and to monitor their interest rate risk
exposure, while keeping a balanced maturity structure of assets and liabilities.
Open-end investment funds also show sound conditions overall and have
weathered the rise in yields on financial assets smoothly. In the first six months
of the year, net funding was slightly positive; the main indicators of vulnerability
to liquidity risk remained low, as did those relating to leverage. Specifically, the
systemic importance of alternative investment funds, whose recourse to debt is
considerably greater than that of traditional funds, is limited although they have
doubled their assets under management over the last decade.
In the longer term, savings decisions over the coming years will need to factor
in the major structural changes under way. As I have pointed out on many occasions,
the digitalization of the economy and finance brings opportunities and risks for
both intermediaries and savers. On the one hand, new technologies could reduce
the costs of financial intermediation, simplify access to financial services and
expand the potential customer base. On the other hand, they increase vulnerability
to cyber-attacks, with the consequent risk of sensitive data exposure; they make
malfunctions more likely, which may lead to disruptions in the provision of
services; and they may result in the improper and discriminatory use of information
provided by customers to financial intermediaries.
The Bank of Italy's action on this front is twofold. Efforts to spur financial
intermediaries to use new technologies are accompanied by risk management
measures. In particular, we are stepping up our action to encourage financial
intermediaries to improve their protection against cyber-attacks, to mitigate
the risks arising from the outsourcing of some functions to a limited number of
operators, and to carefully assess any unwanted consequences of the uptake of
artificial intelligence.
Finally, informed savings choices may play a key role in achieving the climate
transition objectives by helping to reduce carbon emissions. Some signs pointing
in this direction come from the growth in open-end mutual funds investing in
instruments aimed at financing socially and environmentally sustainable business
activities, whose assets under management in Italy have reached almost €500
billion. However, there is a need for reliable data on the carbon footprint of the
financed business activities and on the transition plans of non-financial corporations,
which must be disclosed properly to the public to boost savers' confidence in the
real usefulness of these instruments, thus increasing their contribution to a greener
economy. This brings me to another risk that needs to be addressed: greenwashing.
This requires a detailed and shared definition of global and European standards,
which we are focusing on and working towards.
Public debt
As I mentioned earlier, Italian households entrust a not insignificant share of
their wealth to the State by buying public debt securities. Like any good debtor,
a sovereign issuer also has a duty to make good use of this money and to return
it as and when agreed. However, unlike private borrowers, a Government must
not only repay its loans. The protection and efficient use of consumer savings
require economic policies that ensure balanced financial conditions, smooth out
cyclical fluctuations in the economy and improve its growth potential. For highly
indebted countries, reducing the debt-to-GDP ratio is a priority: excessive debt
relative to growth potential reduces the scope for countercyclical policies, exposes
the economy to market stress and raises costs for the government, and ultimately
for households and firms.
In 2022, the debt-to-GDP ratio in Italy was 141.7 per cent, the highest in the
European Union after Greece, although we cannot overlook the significant reduction
following a sharp increase during the pandemic: almost 15 of the more than 20
points of increase recorded in 2020 - over half of which due to the mechanical
effect of the denominator - will have been absorbed by the end of 2023.
However, the Government only expects a marginal decline over the next three
years, with debt projected to amount to just under 140 per cent of GDP in 2026.
Subsequently, if no action is taken, the ratio risks increasing. Looking ahead, the
average cost of debt is set to return to higher levels than the economy's nominal
growth rate and the impact of population ageing on social spending will become
more significant.
In the 20 years preceding the pandemic, the gap between the average cost
of debt and the growth rate was constantly unfavourable, averaging almost two
percentage points. The deep recession that hit Italy in 2020 led to it reaching a value
close to ten points. On the other hand, the subsequent two years saw exceptionally
favourable values for this indicator, as a result of the post-pandemic recovery and,
in part, of the strong growth in the GDP deflator: nominal GDP growth was on
average more than five percentage points higher than the average cost of debt per
year.
According to the Update to the Economic and Financial Document published
at the end of September, the differential is expected to remain favourable in the
current year and in the following two years. However, due to the combined effect
of a normalization in the growth rate and the gradual pass-through of higher interest
rates, it is expected to narrow over time and to become unfavourable again in 2026,
albeit by very little. In the years to come, as the Government acknowledges, further
efforts will have to be made both on the fiscal policy front and in terms of measures
to raise the economy's growth potential. Achieving and maintaining adequate
primary surpluses is necessary, but fiscal consolidation should not, as it did in the
past, undermine the quality of public spending and its ability to support growth.
Spending cuts require decisions to be made based on well-defined priorities, with
a multi-annual revision of procedures, actions and specific spending programmes.
At the same time, revenue increases, which must be credible and are needed to
avoid deficit spending, can be phased out as the economy gradually returns to
faster growth.
The available resources must be directed primarily towards those investments
that could not be made by the private sector because of their excessively long time
horizon, high risk and inability to absorb their social or environmental impact. This
kind of investment, including in human capital, tends to pay off in the long run and
ultimately has no adverse impact on the sustainability of public finances.
John Maynard Keynes is still quoted, perhaps more than in previous
decades, and rightly so, to point out the multiplication effects of deficit spending.
Nevertheless, two fundamental aspects are neglected. The first one concerns
shortterm conditions. According to Keynes, public resources should be used to smooth
out the effects of cyclical fluctuations in the economy in the event of insufficient
and unresponsive private demand. In this context, I often recall the words of
Lawrence Klein, a Keynesian economist who made the greatest contribution to the
use of econometric models for analysing economic fluctuations and stabilization
policies: 'there is nothing in the Keynesian prescriptions to support highly
unbalanced policies or excessive reliance on monetary policy to provide economic
stabilization'. The second one has a longer-term perspective, whereby, in Keynes'
words, 'the important thing for Government is not to do things which individuals
are doing already, and to do them a little better or a little worse, but to do those
things which at present are not done at all'.
The spread between Italian and German ten-year government bond yields has
recently widened again, to around 200 basis points, following a marked narrowing
last spring. Moreover, it remains notably higher than in other similar European
countries, including Spain and Portugal.
The higher spread undoubtedly also reflects global, non-country specific
factors: monetary policy has raised key interest rates quickly and significantly,
and the international geopolitical balances have been disrupted by the conflict
in Ukraine and tensions in the Middle East. However, the impact of heightened
uncertainty on government bond yields has been greater in Italy than in the other
euro-area countries, probably because investors are concerned about Italy's growth
potential and perceive that, for this reason too, the Government budget is still
unbalanced.
Conclusions
With regard to these concerns, we should start by pointing out that the Italian
economy has sound fundamentals overall. The availability of private sector savings
is high and private debt is low by international standards. Household debt amounts
to about 60 per cent of disposable income (40 per cent of GDP), compared with an
average of more than 90 per cent in the euro area; corporate debt stands at around
65 per cent of GDP, compared with an average of 100 per cent for the eurozone.
Although lagging behind and inefficient in some respects, our production system
is vibrant and able to compete on global markets; this is confirmed by Italy's net
international investment position, which turned positive as early as the second half
of 2020 and now stands at around 5 per cent of GDP.
Rapidly reducing the deficit, while preserving - as I pointed out earlier - the
quality of spending, would reinforce the long-term sustainability of our public
debt. This is the key contribution that fiscal policy can and must make to protecting
Italian households' savings, and not only those directly invested in government
bonds, but the main challenge for Italy is still to make reforms and investments that
can lift its growth potential.
The problems of our economy are due to structural weaknesses neglected for
too long and which cannot be offset by monetary stabilization or fiscal expansion
policies. To ensure sustained higher growth, it is essential to remove any obstacles
to development, to foster innovation and knowledge, to help firms expand and to
modernize our production system.
There is ample room for improvement: the employment rates for women and
young people are well below the European averages; competition is insufficient
in some service sectors; the quality of public services is poor, and low overall,
and the effectiveness of public administration is extremely uneven across the
country; structural delays in development persist in some areas. Signalling a firm
commitment to closing these gaps (including through a good use of European
funds) would help to boost investor confidence; this would reduce the yields on
public debt.
Implementing the projects contained in the National Recovery and Resilience
Plan (NRRP) and the reforms that are part of it, which focus on these delays
and on jump-starting the green and digital transition of our economy, offer an
unprecedented opportunity. Simple, targeted amendments to the NRRP to make
it more effective remain possible, though it is essential to proceed with no undue
delays. The potential of reforms and the availability of large and innovative
investments in Italy's tangible and intangible infrastructure go beyond their direct
effect on aggregate demand; they must and they can provide long-lasting stimulus
for private investment by Italian and foreign companies, which is necessary to
boost Italy's potential for economic development.
Above all, we must avoid repeating the mistakes we made in the past when
our production system was unprepared for the major changes brought about
by globalization and the technological revolution. For this reason, investing is
essential, not only to close past gaps, but also to be ready to seize the opportunities
of the coming climate and digital 'revolutions'. This is the on