Fabio Panetta: Overview of economic and financial developments in
Italy
Address by Mr Fabio Panetta, Governor of the Bank of Italy, at the ordinary general
meeting of shareholders, Rome, 28 March 2024.
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Ladies and Gentlemen,
The global economy remains weak. Sluggish international trade and the uncertainty
raised by geopolitical tensions are weighing on economic activity.
The restrictive monetary policy of the European Central Bank (ECB) is dampening
demand and is contributing, together with falling energy prices, to a fast decline in
inflation. Risks to price stability have subsided and the conditions for starting monetary
easing are taking shape.
As I will explain shortly, the implementation of monetary policy aimed at price stability is
reflected in the Bank of Italy's 2023 Annual Accounts, which are submitted to you for
approval today, and will continue to affect profitability in the near future.
* * *
I would like to take this opportunity to thank my predecessor Ignazio Visco once again
for his service to the Bank of Italy, as we did at the symposium held recently to express
our appreciation and to celebrate his two mandates at the helm of the Bank.
I would also like to extend my warmest wishes to Piero Cipollone, former Deputy
Governor of the Bank of Italy, who was appointed to the ECB's Executive Board last
November. He has been replaced on the Bank of Italy's Governing Board by Chiara
Scotti, former Senior Vice President and Director of Research at the Federal Reserve
Bank of Dallas.
Monetary policy and its impact on the Bank's Annual Accounts
The Eurosystem central banks have purchased a large amount of securities in recent
years in order to ensure that inflation returns to 2 per cent over the medium term.
With the rise in inflation, the ECB Governing Council began to tighten its monetary
policy in July 2022. It stepped up these efforts in the first nine months of 2023, raising
its key interest rates by 200 basis points overall, to 4.5 per cent on the main refinancing
operations, 4.75 per cent on the marginal lending facility, and 4 per cent on the deposit
facility. The Governing Council has kept the policy rates unchanged since last October.
The reinvestment of securities held for monetary policy purposes under the asset
purchase programme (APP) was discontinued in July 2023. Maturing securities under
the pandemic emergency purchase programme (PEPP) will instead continue to be fully
reinvested through the first half of 2024. The ECB Governing Council intends to reduce
reinvestments by €7.5 billion per month over the second half of the year, before
discontinuing them from the end of 2024. Over the next few months, reinvestments will
continue to be made with the flexibility required to counter risks to the monetary policy
transmission mechanism.
The amount of funding granted to euro-area banks through Eurosystem refinancing
operations continued to fall significantly, from €1,324 billion at the end of 2022 to €410
billion at the end of 2023. The decline was mainly due to the repayments of maturing
third-series targeted longer-term refinancing operations (TLTRO III), combined with
voluntary early repayments driven by the change in funding conditions, which have
been less favourable to banks since November 2022.
The balance sheet
At the end of 2023, the Bank of Italy's balance sheet assets stood at €1,253 billion,
down by €223 billion from 2022. The balance sheet reduction is set to continue in the
current year as a result of maturing TLTRO III operations and of the ECB Governing
Council's decisions to discontinue the reinvestment of maturing securities.
On the asset side, just as for the other national central banks of the Eurosystem, the
decline was mainly due to refinancing operations, down from €356 billion to €150 billion.
Securities held for monetary policy purposes also declined, though to a lesser extent: at
the end of 2023, they amounted to €657 billion (€39 billion less than in the previous
financial year), with Italian government bonds accounting for around €600 billion.
On the liability side, there was a decline both in deposits held by banks, which fell by
€57 billion, and above all in the Bank's negative TARGET balance, down from €684
billion to €521 billion. The sizeable reduction in the latter was largely due to net
purchases of Italian securities - mostly public sector securities - by foreign investors,
and to an expansion in Italian banks' net funding on international markets. These
liquidity inflows were partly offset by Italian residents' investment in foreign securities.
The disbursement of the third and fourth tranches of Recovery and Resilience Facility
funds to the Italian State through the TARGET system contributed to the decrease in
the Bank's negative balance. The negative TARGET balance continued to edge down
in the first months of 2024, to around €500 billion on average in March.
Main drivers of the 2023 net profit and future prospects
The Eurosystem's monetary policy is designed and implemented to fulfil the statutory
mandate of price stability, even if this leads to a temporary worsening in central banks'
profit and loss accounts.
Last year, we anticipated that the Bank of Italy would post a sizeable gross loss for
2023, before the release of the general risk provision, largely due to the sharp
contraction in net interest income. This has also occurred at the other Eurosystem
central banks, some of which recorded a gross loss as early as 2022. The rise in the
ECB policy rates led to an increase in the cost of balance sheet liabilities, mainly bank
deposits, with no corresponding increase in the yield on monetary policy assets. These
assets are actually less sensitive to changes in interest rates, as they consist mainly of
fixed-rate securities with medium to long-term maturities.
Confirming what had been anticipated last year, the financial result for 2023 before tax
and before the release of the general risk provision was €-7.1 billion, against €5.9 billion
in 2022. In addition to the €11.4 billion deterioration in net interest income, the reduction
in the financial result was explained by the net result of pooling of monetary income,
down by €3.5 billion, which was also attributable to the impact of monetary tightening
over the last two years.
The Bank of Italy is able to absorb these losses thanks to its past capital strengthening
policies, based on the principle of prudence. The financial buffers built up over the
years to weather the potential materialization of risks are more than sufficient to cover
both the loss for 2023 and that estimated for 2024. Based on current monetary policy
decisions and the expectations regarding interest rate developments, we expect 2025
to mark a return to profit.
As a result, €5.6 billion is released from the general risk provision in the 2023 Annual
Accounts. Along with the positive contribution of €2.3 billion from the carryforward of the
tax loss - which will enable us to pay lower taxes in the future - releasing this amount
means that the Bank can close the year with a net profit of €0.8 billion.
We believe that the level of risk coverage remains adequate from a medium-term
perspective. In 2023, the risks did, indeed, decrease and they will decrease further in
the future as a result of the reduction in the size of the balance sheet.
The Bank of Italy - an institution constantly evolving to serve the
public
When I took office, in a message addressed to the Bank's staff, I called on them to be
open to change and innovation, while never losing sight of the values that have
underpinned the authority and prestige of the Bank over time. A combination of
continuity and innovation must drive organizational planning, working methods and
operating procedures. We must seize the opportunities offered by digitalization.
We need to carry on with and complete the rationalization of the Bank's offices and
processes, keeping the organizational structure aligned with changes in institutional
activities and the quest for greater efficiency. We must take special care to use financial
resources wisely, to control costs and to maintain a strong balance sheet.
I would like to mention two examples that illustrate these principles. To be able to
contribute effectively to the Eurosystem's digital euro project - an innovative, secure
means of payment, freely available to everyone - we are in the process of adopting an
organizational model that brings together all the expertise needed to carry out the
required activities in an agile and flexible way.
Furthermore, leveraging the experience we have gained with the hybrid work model -
which means less need for office space - we have drawn up a plan for reallocating
space that will deliver significant savings on building costs.
We must then respond to the expectations formed in recent years concerning the size
and the activities of the branch network. The Bank's widespread presence throughout
Italy is an asset that reflects its historical origins and that strengthens its bonds with civil
society, but we must bear in mind that many of the functions traditionally performed
locally have been superseded.
We are currently evaluating a project to ensure the continued provision of the Bank's
services across the country through greater integration with the central offices, making
adjustments that do not significantly alter the branch network. The activities that benefit
from being conducted locally will be maintained and strengthened further: from relations
with local communities to consumer protection, from anti-money laundering to economic
analysis and financial education. The local availability of currency circulation services
will not be affected.
This project and other issues regarding the modernization of our management systems
and the improvement of working conditions will certainly form part of future discussions
with the trade unions. These talks, when characterized by open, good-faith and
constructive debate, are a fundamental prerequisite for the smooth functioning of the
Bank.
Proposal for the allocation of the net profit
Dear shareholders,
Pursuant to Article 38 of the Statute, acting on a proposal of the Governing Board and
after hearing the opinion of the Board of Auditors, I present for your approval the Board
of Directors' proposal for the allocation of the net profit. Under the current dividend
policy, the amount paid to the shareholders is kept within a range of €340 million to
€380 million, provided that the net profit is sufficient and without prejudice to the Bank's
capital adequacy. Amounts outside this range are possible, should the Bank's
profitability undergo large shifts, such as occurred in 2023 with the recognition of a
gross loss and the consequent need to draw on the general risk provision.
Accordingly, from the net profit of €815 million, we propose allocating €200 million as a
dividend to the shareholders, €140 million less than that allocated last year. The profit
for the State amounts to €615 million, down by €1,061 million.
The amount of €140 million is released from the special item for stabilizing dividends to
supplement the current dividend allocated to the shareholders. The shareholders will
therefore receive a total of €340 million this year too. The remaining balance of the
special item - equal to €140 million - would continue to be available should it be
necessary to supplement the dividend amount in the future.
The total amount effectively allocated to the shareholders over the last five years would
therefore be €1,544 million. The total allocated to the State over the same period in the
form of profits would amount to €21,629 million, in addition to the current taxes for IRES
and IRAP purposes of €4,005 million.