Ignazio Visco: 2015 World Savings Day
Address by Mr Ignazio Visco, Governor of the Bank of Italy, at the 91st World Savings Day,
organised by the Association of Italian Savings Banks (ACRI), Rome, 28 October 2015.
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Since the beginning of this year the cyclical improvement has spread throughout the euro
area, benefiting from the expansive measures adopted by the ECB Governing Council. The
cyclical indicators confirm the continuation of the upswing in the third quarter in the area as a
whole and in Italy, with growth rates similar to those of the two previous quarters.
Italian GDP has returned to growth for the first time since the inception of the sovereign debt
crisis, at annualized rates of around 1.5 per cent. The initial stimulus from foreign demand
has been flanked by a boost from domestic demand components with the consolidation of
the recovery in private consumption and a gradual revival in investment. Business surveys
confirm growing optimism about demand, favouring the propensity to invest. The significant
expansion of employment, which has also benefited from government measures, will
continue to sustain household consumption. In 2015 economic activity could grow by close to
1 per cent, faster than our July forecast indicated.
Looking ahead, however, the euro area and Italy face risks in connection with the Chinese
economic slowdown and, more broadly, developments in the emerging economies. The
repercussions on world trade and commodity prices are delaying the return of inflation to
levels nearing 2 per cent. The Governing Council of the ECB is determined to use all the
instruments available within its mandate in order to achieve the most appropriate degree of
monetary accommodation under the current circumstances. We will assess the need for
additional monetary stimulus at our meeting in early December.
1. Credit access and cost
Credit dynamics have improved in the course of the year, benefiting from the economic
recovery and the plentiful liquidity made available by monetary policy measures. The volume
of lending to households has increased, albeit slightly, compared with the previous year.
Credit to manufacturing firms was up by 1.8 per cent in September, and the contraction of
lending to service firms moderated significantly; for construction firms, which are still
penalized by an uncertain outlook for the housing sector, the attenuation was less
pronounced.
The monetary policy measures had an even greater impact on the cost of credit. The
average interest rates on credit to firms and loans to households for house purchase in the
euro area dropped to their lowest levels since 2003 (when the collection of harmonized data
began); in August they were at 1.8 per cent and 2.3 per cent respectively. Differences
between countries, which had increased greatly in 2011-2013, narrowed considerably. The
average interest rate spread between Italy and the euro area for new floating-rate mortgage
loans and new financing to firms dropped to around 10 basis points.
In Italy, the heterogeneity in lending terms and conditions for firms according to size and risk
profile is also gradually diminishing, following a sharp increase during the recession. Since
the middle of 2014 the decrease in banks' lending rates, which had initially only benefited the
largest and financially soundest firms, has gradually spread to the rest. The reduced
dispersion of interest rates is related to the improvement in the macroeconomic picture,
which has been reflected in a generalized improvement in the outlook for earnings. This is
confirmed by business surveys: the share of firms that expect to post a profit for the year is
the highest in a decade. Interest rate dispersion is still historically high, but there is scope for
a further decrease as the recovery firms up and the quality of credit consequently improves.
The harmonized interest rates on new loans to firms and households are the best gauge of
the effectiveness of monetary policy, as they react most quickly to changes in monetary
conditions. However, their information content as regards the terms and conditions of lending
to single borrowers is only partial, because the harmonized rates are calculated as weighted
averages based on loan amounts, exclude non-performing loans and, for almost all types of
financing, are net of fees and other charges.
Further information on the lending conditions for different categories of Italian borrowers may
be drawn from other data collected and published by the Bank of Italy, and in particular the
data supplied to the Ministry of Economy and Finance for the purposes of the anti-usury law.
These rates are calculated as simple averages, and they include non-performing loans (but
not bad debts) and bank fees. They may therefore be higher, and in some cases
considerably higher, than those calculated by the harmonized method. The impact of bank
fees is greatest on current account overdrafts, which are commonly used in Italy, particularly
by small firms, which also rely on this instrument for liquidity management services, which
are remunerated by the fees. As the fees are, at least partially, fixed, they have a larger
impact on small loans.
The widespread use of overdrafts in Italy, much greater than in almost all the other euro-area
countries, should prompt a rethinking of their utilization. Firms need to consider more efficient
and less costly methods for managing liquidity; they should also weigh the advisability of
greater resort to fixed-term loans. Banks must guarantee that the liquidity management
services embodied in current account overdrafts do not cost more than their effective value,
and they must also take account, in their pricing, of the indirect advantages they reap from
the provision of these services. In fact, when the counterparties are small firms, the
information asymmetry between banks and firms is more severe, and managing the firms'
liquidity enables banks to gather further information, thereby attenuating the risks connected
with difficulties and uncertainty over the timing of credit recovery procedures.
In August the Bank of Italy opened consultation on a draft of the resolution to be submitted to
the Credit Committee on the implementation of the newly revised Article 120 of the
Consolidated Law on Banking, which governs accrual of compound interest on banking
transactions.
Our proposal - prepared as required by the law - is intended as a clarification in the interests
of transparency of the rules. It is based on a reading of the law that is shared by the Ministry
of Economy and Finance. The solutions set out implement the principle established by the
law, namely the ban on compound interest on banking transactions, in keeping with the
economic substance of contractual relationships and avoiding uncertainty and any effect on
debtors that is contrary to the intentions of the legislature.
The most technically complex case to regulate is the current account overdraft, which, as I
just now noted, is a much more common form of credit in Italy than elsewhere. Since the law
states that banks cannot require the automatic settlement of the interest due on overdrafts,
we have had to create a framework of legal certainty to cover situations in which the
customer lacks - even temporarily - the liquidity needed to pay the interest on the due date.
The proposal settles this issue by forbidding banks from taking immediate action. It allows
the payment of interest by debiting the account, after a period of 60 days has elapsed, only
at the request of the customer, who has an interest in allowing payment in order to avoid the
legal and practical consequences of non-performance that he could otherwise suffer,
including default penalties and revocation of the credit line where the requisite conditions
apply. Finally, in accordance with the law's purpose, the draft proposes that interest be
calculated only once a year and not quarterly, as is the usual practice.
The consultation document envisages that the resolution be applied only after it enters into
force, in accordance with general legal principles. It does not take a position on how the law
should be applied prior to action by the Credit Committee. We hope for clear guidance on
this delicate issue, which will continue to be evaluated in light of the case law, in order to
ensure certainty in the law and in banking transactions.
The consultation was concluded a few days ago. We received numerous comments from an
ample cross-section of participants. We will analyse them carefully and consider the
suggestions for improving the text to be submitted to the Credit Committee.
2. Savings and the management of banking crises
Starting next year the new European banking crisis resolution system will be fully operational
with the transposition of the EU Bank Recovery and Resolution Directive (BRRD). The
system forms part of the broader process of reforming international financial rules to reduce
the probability and the impact of bank failures by strengthening capital requirements, setting
limits on financial leverage and instituting new minimum liquidity ratios. Banks deemed to be
systemically important are subject to additional safeguards, and further measures are being
discussed at the international level.
It must be understood that the new rules will tend to diminish both the profitability and the
size of banking systems, shifting a portion of the financing of the real economy to the capital
market and increasing the relative importance within the credit market of institutional
investors other than banks. In Italy, a shift of this kind in the financial system has long been
desirable to accompany the transition of the economy towards a more modern structure, with
less bank debt and more equity and bond issues.
Under the new European system the Single Resolution Board and the national resolution
authorities will be responsible for handling bank crises, with a division of competences that
takes account of the type of intermediary involved and the possible need for recourse to the
Single Resolution Fund. The Bank of Italy, designated as the national resolution authority,
has created a special unit that reports directly to the Governing Board and is independent of
the Directorate General for Financial Supervision and Regulation, as required by European
legislation.
The European regulatory framework envisages a variety of tools to help failing banks
restructure or exit from the market without interrupting the provision of critical functions and
jeopardizing the overall stability of the financial system. The primary innovation is the bail-in
procedure, which requires shareholders and creditors to directly bear the losses incurred by
banks in difficulty and to shoulder the burden of recapitalizing them.
This tool, which is entirely new for Italy, was requested specifically by those EU countries
that had to intervene heavily to support their banking systems during the recent global crisis.
In the euro area, these measures weighed on the public debt to the tune of around 5
percentage points of GDP in Belgium, the Netherlands and Spain, more than 8 points in
Austria and Germany, over 10 points in Portugal and over 20 points in Greece and Ireland. In
Italy, although the economy was hit harder by the recession than most of these other
countries, the system required practically no public intervention.
Now, notwithstanding the undeniable success of our model of banking supervision and crisis
management in containing and resolving cases of failure, with extremely marginal use of
public resources, this model must be adjusted to bring it into line with the new European
rules.
In applying the bail-in procedure, we must take into account the need to protect creditors
while at the same time safeguarding financial stability. We must act to make sure the
procedure is applied only in limited and extreme circumstances. The priority ranking of
creditors will, in any event, be respected, and no creditor will have to bear losses greater
than those that they would suffer if the failing bank were liquidated under ordinary bankruptcy
procedures ("no creditor worse-off" principle).
Bail-ins will not affect deposits up to €100,000, which in no case will be called upon to
contribute to the costs of resolution. Deposits above this threshold, going by the current
wording of the legislation transposing the Directive, will get preferential treatment over other
liabilities of the bank; consequently there is little chance that they will be hit by the resolution
of a crisis.
Unsecured bank bonds may be subject to the bail-in tool, after regulatory capital instruments
and subordinated debt. It is essential, therefore, that banks, bearing this risk in mind, fully
discharge their obligations of transparency and correctness in the issuance, placement and
trading of these securities with retail clients. The authorities will monitor compliance with the
rules. Banks, for their part, will have to consider how to direct less sophisticated customers
towards more secure forms of funding, those better protected in case of crisis.
To avoid the possible adverse effects of bail-ins, the resolution authorities will make sure that
banks carry the right amount and type of liabilities to ensure the absorption of losses and
recapitalisation; they may require that a part of the minimum requirement for liabilities eligible
for the bail-in tool consists of subordinated debt. In a resolution, where necessary to
safeguard systemic stability and the continuity of essential business functions, the resolution
authorities may exclude additional liabilities and resort instead to the resolution fund once at
least 8 per cent of the liabilities of the bank in crisis have been bailed-in.
In recent years we have managed a number of crisis situations, without losses for depositors,
costs to the Treasury, market distortions or interruption of essential services provided by the
banks. These objectives continue to guide the actions of the Bank of Italy, in a context that is
complicated by the transition towards the new resolution system and the increased
importance of the intermediaries involved. Recourse to certain instruments widely used in the
past, such as the support provided by deposit guarantee funds, has been called into question
by the recent European Commission stance on state aid; this field is often marked by
uncertainties, which may hinder the rapid action indispensable in crisis management. The
European authorities would do well to favour coordination and certainty of law in the
application of the competition provisions and the rules on bank resolution.
3. The state of Italian banks
3.1 Non-performing loans
Italian banks' large stock of non-performing loans is a legacy of the long and deep recession.
Their rapid reabsorption would facilitate a recovery in lending and a lowering of the cost of
credit. Parliament's recent measures to shorten credit recovery times are a step in the right
direction and are helping to rekindle interest in investing in the non-performing assets of
Italian banks. It is estimated that if Italian recovery time had been as short as those of France
and Germany, the ratio of bad loans to total loans would be less than half what it is now.
What matters now is to implement the measures rapidly. The efficacy of the bankruptcy
procedures could be further enhanced by strengthening the organizational and
independence requirements for curators and special administrators; significant impetus could
come from the institution, as in other jurisdictions, of a publicly accessible national electronic
register containing all the information and relevant documents relating to foreclosure and
bankruptcy proceedings.
In the three years 2012-14, Italian banks sold or securitized bad loans amounting to about
€11 billion (around 2 per cent of their outstanding bad debt). In the early months of this year,
the sales continued to be for small amounts. For the most part the transactions involved the
major groups and foreign banks operating in Italy. The smallness of the transactions to date
can be ascribed to information asymmetry between buyers and sellers relating to poor data
management at many banks and the objective difficulty of assessing the conditions of many
indebted small businesses. Public intervention, obviously in compliance with the regulations
on state aid, could facilitate the development of this market, serving as a catalyst for private
sector initiatives.
While the discussion continues on this matter between the Italian government, assisted by
the Bank of Italy, and the European Commission, further studies are being conducted to
ascertain the actual interest of both potential investors and banks in a company to purchase
and manage impaired assets, operating at market conditions. Public participation in this
asset management company would be marginal or nil; there could be a state guarantee for
the senior liabilities it issues to finance its asset purchases.
Over the next few weeks the feasibility of the project will be definitively determined.
Regardless of the outcome of the verification, banks burdened by large non-performing
exposures will still have to identify, in accord with the supervisory authorities, the best
procedure for efficiently managing those assets in order to gradually work off the overhang.
3.2 Governance, cooperative (popolari) banks and mutual banks
Change to the banking system has been given significant impetus by the reform of Italy's
main cooperative (popolari) banks. The first steps provided for by the law for their conversion
into joint stock companies have been taken: the presentation of the plans laying out the steps
required and the timeframe within which the operations will be completed, which in many
cases could be by the middle of next year. In recent days the project for the conversion of
one large cooperative group - directly subject to the Single Supervisory Mechanism - was
approved by the shareholders' meeting. As I have often had occasion to observe, a change
in the legal form provides a golden opportunity for strengthening corporate governance to
permit more rapid access to capital markets and facilitate mergers that could help to increase
profitability.
It is not for the authorities to suggest or impose any merger plans, which must be identified
and decided by the corporate bodies themselves. Merger projects developed by the market
will be carefully appraised in terms of their current and future financial soundness and the
effects on the banks' situation.
For some unlisted cooperative banks, conversion into joint stock companies will be part of a
broader transformation of governance also comprising stock exchange listing. These
interventions will greatly enhance access to capital markets and help overcome the problems
with the current process of share price determination, which the law reserves to the
shareholders' meeting. Stock exchange listing will also ensure the liquidity of the investments
of shareholders who wish to dispose of their holdings.
The Banca Popolare di Vicenza is one of the cooperative banks that have embarked on this
process as part of the measures required by the supervisory authorities. As the explanatory
note published on our website yesterday describes in more detail, in 2014 evidence emerged
that this bank had committed irregularities in share buybacks. In agreement with the new
European supervisory bodies, which were about to start operating, we scheduled a targeted
inspection for immediately after the European Comprehensive Assessment. This
intervention, conducted by Bank of Italy inspectors as part of the Single Supervisory
Mechanism, revealed other practices not in compliance with the rules. As soon as the initial
findings of the investigations begun last February started to emerge, the Bank of Italy and the
ECB concurred fully on urging the Banca Popolare di Vicenza to adopt immediate corrective
measures. The top executives and almost all of the senior management were replaced; a
capital strengthening plan was drawn up, the success of which is ensured by the presence of
an underwriting consortium; and a radical reform of corporate governance is planned for the
cooperative's conversion into a joint stock company and its simultaneous stock exchange
listing.
A reform of the mutual banking sector is also needed now. Self-financing, the main source of
funds for increasing these banks' capital, has essentially dried up as a result of the
recession. In the absence of any decisions, the necessary increase in provisions to cover
non-performing loans would lead to a further reduction in the capacity for self-financing; a
significant part of the mutual banking system would incur negative evaluations by the
supervisory authorities and might not be able to meet the need for a larger capital
endowment. This could give rise to situations that would be difficult to manage within the new
crisis resolution framework, also considering the constraints of the regulations on state aid.
Mutual banking systems in other euro-area countries have long since instituted highly
integrated organizational structures capable of realizing economies of scale, unitary risk
control mechanisms, and safety nets for the liquidity and solvency of the participating banks.
Some of these arrangements are already in place among Europe's major banking groups.
We have followed the recent discussion within the mutual banking sector over plans for
selfreform. A point on which there is still open debate is whether there should be just a single
mutual banking group or more than one. The idea of a single group, if agreed upon within the
category, certainly has positive aspects, but the possible lack of consensus on a single group
should not be a reason for blocking the reform. Greater capitalization, greater efficiency and
improved corporate governance could also be achieved by a limited number of groups.
* * *
If economic activity falters and incomes shrink, as has happened in Italy for seven long
years, it then becomes difficult to protect savings. The first response is macroeconomic
policies and decisive and forward-looking structural reforms to promote strong and balanced
growth, efforts to which we are strongly committed as part of our mandate as the central
bank.
A long and deep recession weighs heavily on the banking system. Recent years have also
seen serious instances of malfeasance, compounded by the economic problems in
themselves. We are active in countering situations of serious difficulty or crisis by means of
supervision, strict enforcement of the rules, and verification of organizational adequacy,
prudence in lending, and transparency and correctness in funding. When a crisis does occur,
action must be taken to resolve it and limit its repercussions. This is no easy task, it is a
constant challenge, yet those episodes of malfeasance that have occurred in these difficult
years came to light also thanks to the usually decisive if not always publicly known
contribution of the Bank of Italy.
Notwithstanding the recession and notwithstanding instances of misconduct, the system as a
whole has held firm. I am confident that the banks, good credit and sound finance, will
contribute significantly to the economic recovery, which needs to be consolidated and
strengthened. Our economy must make up for its accumulated lag in adapting to the
transformations of the global economy, technology and demographics, a process in which
finance and the banks will play a vital role.