Address by Governor
Ordinary General Meeting of Shareholders
Rome, 29 March 2019
year
financial
125th
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Address by Governor
Ordinary General Meeting of Shareholders
Rome, 29 March 2019

Ladies and Gentlemen,
In 2018 the Bank of Italy continued its capital reallocation, a process
that began with the reform of the Bank's ownership structure (Law 5/2014).
As at 17 February 2019, the last date by which a shareholder could acquire
shares with the right to dividends for 2018, 33.3 per cent of the capital
had been transferred. Of the Bank's 124 shareholders at the above date,
92 became shareholders after the reform: 6 insurance companies, 7 pension
funds, 9 social security institutions, 24 banking foundations and 46 banks.
Shareholdings that exceeded the 3 per cent threshold introduced by Law
5/2014 amounted to €2.5 billion, out of a total of €7.5 billion.
Increasing the number of shareholders was one of the goals of the reform.
On behalf of the Board of Directors and the Governing Board, I would like
to welcome those who are attending their first Shareholders' Meeting. While
the reform confirmed that the Bank is a privately-held company, it did not
change the nature of the Bank of Italy itself: it remains a public-law institution
that performs its functions in the general interest conferred upon it by Italian
and European legislation.
The Bank performs its functions autonomously and independently
within the guidelines established by the Governing Council of the European
Central Bank (ECB), being accountable for its operations in accordance with
the principle of transparency. Based on the treaties signed by Italy and by
the other member states of the European Union, the members of the Bank's
bodies may not seek or take instructions from national or European public
entities or from private parties. Law 5/2014 confirms that the Shareholders
and the Board of Directors may not intervene in the Bank's institutional
functions and limits shareholders' ownership rights to the value of the capital
and to the dividends. Shareholders have no claim whatsoever on the Bank's
gold and foreign currency reserves, the holding and management of which
constitutes one of the fundamental roles assigned to a central bank under
the Treaty on the Functioning of the European Union. Irrespective of the
specifics of national legislation, the Treaty refers to the task of holding and
managing reserves: in our legal system this is implemented through the right
of ownership.
The annual accounts presented today for your approval show a net profit
of €6.2 billion. This amount is significantly higher than the €3.9 billion
reported last year, which was nevertheless the highest level ever recorded by
the Bank. The improvement was partly due to the further increase in the
amount of securities held for monetary policy purposes and the decline in
transfers to financial buffers to offset balance sheet risks.
In December 2018, after four years of uninterrupted growth, the extended
asset purchase programme (APP) was terminated. During that four-year
period, the balance sheet of the Bank of Italy and that of the Eurosystem both
doubled in size. The securities held for monetary policy purposes increased
approximately tenfold. Gross profit before taxes and transfers to the provision
for general risks increased by about 50 per cent to stand at €8.9 billion.
Looking forward, balance sheet profits will continue to be affected by
the general state of the economy, by changes in monetary policy measures
and by the riskiness of assets.
The Eurosystem's expansionary monetary policy and the Bank of
Italy's annual accounts
In 2018 the Eurosystem's monetary policy stance remained expansionary
in order to encourage the gradual convergence of inflation rates to below, but
close to, 2 per cent over the medium term.
The ECB Governing Council kept key interest rates unchanged at
0.0 per cent for the main refinancing operations and at -0.40 per cent for
the deposit facility. Rates are expected to remain at these levels at least
until the end of 2019 and, in any case, for as long as necessary to ensure
that inflation moves towards the stated objective.
In the euro area, net purchases of public and private-sector securities
were halved, falling to €30 billion per month at the start of 2018; that amount
was further reduced to €15 billion from October. As mentioned earlier, these
purchases were terminated in December. Central banks are re-investing the
principal payments from maturing securities, a measure that is expected to
continue for an extended period of time and, in any case, for as long as
necessary to maintain favourable liquidity conditions and an ample degree of
monetary accommodation.
The Council also announced that it would assess the possibility of taking
further measures to ensure that the banking system had the liquidity necessary
for the smooth functioning of the monetary policy transmission mechanism.
Hence, on 7 March 2019 the Governing Council decided to launch a new
series of targeted longer-term refinancing operations (TLTRO3), each with a
maturity of two years, carried out on a quarterly basis starting in September
2019 and ending in March 2021. Counterparties will be entitled to borrow up
to 30 per cent of the stock of eligible loans as at 28 February 2019. The interest
rate will be indexed to the interest rate on the main refinancing operations
over the life of each operation. Like the outstanding TLTRO operations, the
new operations will feature built-in incentives for credit conditions to remain
favourable.
The balance sheet
At the end of 2018, the Bank's balance sheet assets amounted to
€968 billion, €37 billion more than at the end of 2017. The growth was
much smaller than that registered in 2017 and was almost entirely due
to securities purchased for monetary policy purposes, which amounted to
€393 billion. Most of these securities were Italian government securities,
whose value reached €320 billion last year.
Refinancing operations declined by €8 billion, falling to €244 billion,
owing to maturing and voluntary repayments of targeted longer-term
operations. Overall, assets held for monetary policy purposes represented
two thirds of total balance sheet assets.
The value of the gold reserves stood at €88 billion, €3 billion more
than in 2017. In line with Eurosystem accounting rules, the unrealised
gain was prudently allocated to the revaluation accounts - which record the
unrealized gains with respect to the purchase price - in order to offset the
negative effects of any future declines in the price of gold.
On the liability side, the Bank of Italy's negative balance in connection
with the TARGET2 payment system reached €482 billion at the end of
2018, an increase of €43 billion compared with 2017. The widening of the
negative balance occurred mainly in May and June and largely reflected net
sales of Italian securities by foreign investors. In the last few months of the
year, capital outflows decreased and the Bank's negative TARGET2 balance
improved, with inflows peaking in December. In the first few months of
2019, the balance has fluctuated significantly, but has remained on average at
the level recorded at year end.
Deposits held by credit institutions with the Bank fell from €143 billion
to €89 billion. Banknotes in circulation, disclosed in the balance sheet in
proportion to the Bank's share in the ECB's capital, grew by €10 billion
to stand at €198 billion. The euro-denominated deposits held by general
government increased from €7 billion to €32 billion.
Profitability, risks and organizational measures
As mentioned earlier, gross profit before taxes and transfers to the
provision for general risks amounted to €8.9 billion in 2018.
The increase of €0.5 billion over the previous year is mainly due to the
growth in net interest income, which benefited from greater interest income on
securities purchased for monetary policy purposes and lower interest expense
on longer-term refinancing operations. The growth in net interest income
was partly offset by the fall in realized gains arising from financial operations
and higher write-downs on securities and foreign currency holdings.
In the light of both the expansion of the balance sheet and the Bank's
overall risk exposure, assessed under even the most adverse scenarios, the
Bank continued to gradually strengthen its financial buffers, increasing the
provision for general risks by €1.5 billion (€2.9 billion in 2017). Taxes for
the year amounted to €1.2 billion (€1.6 billion in 2017).
Operating expenses fell by 2.5 per cent, mainly owing to the decrease
in staff severance payments and the decline in transfers relating to staff
severance pay and pensions. As a result, costs for in-service and retired staff
fell by €54 million; the remaining costs increased by €4 million overall.
At the end of 2018, the Bank had less than 6,700 employees, 1,000 fewer
than in 2008. This decrease reflects the reorganization implemented over the
years, largely on account of technological advances, to contain operating costs
without compromising the effective performance of institutional functions.
During the year the reorganization of the banknote production
function became fully effective. Reflecting the changes underway in Europe,
this resulted in a more streamlined organizational structure that makes the
Bank's printing works more efficient, productive and competitive within
the euro-area public sphere.
The closure of the last ten territorial service units (TSUs), which were
set up on a temporary basis in 2015, marked the completion of the plan for
the reorganization of the Bank's branch network that was first implemented
in 2008. The number of branches declined to 39, 58 branches fewer than in
2008. The current branch network is more agile and efficient in performing
the Bank's institutional functions and it plays a larger role in the protection
of bank customers, financial education, prudential supervision of non-bank
financial intermediaries and communication campaigns.
The reorganization of the Financial Supervision and Regulation function
was finalized at the end of 2018. The aim of the reform was to enhance the
Bank's participation in the decision-making processes of the Single Supervisory
Mechanism, intensifying coordination with other supervisory authorities and
strengthening the branches' supervisory activities, taking account of changes
to the geographical distribution of financial intermediaries in Italy.
Further information on the activities of the Bank and on the
organizational and management measures implemented in 2018 is available
in the Report on Operations and Activities of the Bank of Italy which will
be published on 31 May 2019, on the occasion of the presentation of the
Annual Report.
Proposal for the allocation of the net profit
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. On behalf of the Board of Directors and the Governing Board, I would
like to take this opportunity to thank the members of the Board of Auditors,
who have reached the end of their term, for their valuable contribution.
As you may recall, under the dividend policy in force, 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. The difference between the upper limit of the range and the
dividend paid to the shareholders is allocated to the special item for stabilizing
dividends, until such item reaches a maximum amount of €450 million.
Accordingly, from the net profit of €6,240 million, we propose allocating
€340 million as a dividend to the shareholders, equal to 4.5 per cent of the
capital. As a result, €40 million would again be allocated to the special item for
stabilizing dividends, which would amount to €120 million.
Pursuant to the Statute, shares exceeding the 3 per cent threshold are not
entitled to a dividend. The corresponding dividend, equal to €113 million, is
allocated to the ordinary reserve. Therefore, the dividend actually due to the
shareholders would amount to €227 million.
We propose transferring €150 million to the ordinary reserve. Taking
into account the dividends withheld on shares exceeding the threshold, the
total allocation would amount to €263 million.
With the transfer of €1.5 billion to the provision for general risks,
together with the share of profits allocated to the ordinary reserve, the total
amount allocated to the financial buffers would be €1.8 billion.
As a result, €5,710 million of the Bank's net profit would be allocated to
the State, an increase of €2,344 million compared with 2017.
Designed by
the Printing and Publishing Division
of the Bank of Italy