ACRI
Association of Italian Savings Banks
2019 World Savings Day
Address by the Governor of the Bank of Italy
Ignazio Visco

The economic outlook
The trade tensions, the slowdown in China and the persistent uncertainty
concerning the United Kingdom's withdrawal from the European Union have
continued to affect the global economy. International trade, which has been
declining since last autumn, seems to have contracted in the second quarter as
well; for the year as a whole, it is expected to increase but at a rate of less than 1
per cent, the lowest since 2009.
In recent weeks, the International Monetary Fund revised downwards its
growth forecast for 2019 and 2020 for nearly every country. Going forward,
global demand may benefit from the stimulus measures implemented in the major
economies, but the risks remain significant and are aggravated by the high level of
public and private sector indebtedness in many countries.
In the euro area, the sharp drop in industrial activity, especially in Germany,
has thus far been partially offset by the performance of the service sector. However,
this sector has also started to show signs of weakness. Among the main economies,
GDP decreased in Germany while it continued to grow in France and Spain in the
second quarter. If the contraction in the German economy persists, it will inevitably
spread to other countries.
In Italy, economic activity seems to have remained substantially unchanged
during the summer, after having grown just slightly in the second quarter. The
manufacturing sector has suffered heavily from the close production and trade
ties with Germany, as well as from the negative effects stemming from the global
context; the sector's weakness seems to have been offset by a slight expansion in
services and construction.
In the surveys carried out by the Bank of Italy between September and
October, firms expressed less unfavourable opinions on the economic situation
and on the trend in demand for their own products in comparison with the opinions
expressed at the start of the year. The higher planned investment likely also reflects
the reintroduction of tax incentives in April; instead, firms that sell in Germany
further downsized their expenditure plans.
Despite the contraction in world trade, exports continued to grow in the second
quarter; Italy's current account surplus has helped to further reduce its net foreign
debtor position, which is now close to balance. The new tariffs applicable to the
European Union, announced by the United States administration, will affect a
limited share of Italian exports to the US but the indirect effects could be significant.
Thanks to the decline in uncertainty surrounding Italy's economic policy
stance, lessened tensions with the European institutions and greater monetary
accommodation, yields on Italian government securities have declined significantly,
falling to historically low levels; yields on ten-year bonds now stand at around 1 per
cent. The spread with the corresponding German bonds has narrowed, falling from
the peak of almost 290 basis points recorded at the end of May to approximately 130
basis points this week (Figure 1). However, it remains higher than the spread of other
euro-area countries such as Spain and Portugal. For Italy, the reduction in the spread
was in part due to the fall in the debt redenomination risk premium, which came to
almost 30 basis points, nearing the level recorded at the start of 2018.
Accommodative financial conditions attenuate the contractionary effects that
stem from the global situation; for our economy, this is an opportunity that should
not be missed. Looking forward, the average debt burden is expected to remain on a
downward path, reducing the effort needed to reach a primary surplus that is capable
of ensuring balanced public accounts. The decline in interest rates on government
securities has already significantly lowered the cost of wholesale bank funding and
of corporate bond issues. Interest rates on bank loans to firms and households also
fell slightly, though they ran the risk of increasing significantly had tensions not
abated on the government securities market over the course of the year.
The fiscal stance tries to strike a difficult balance between ensuring sustainable
public finances and supporting the economy. To counter the cyclical slowdown
effectively, the choice of measures must be based on their effect on aggregate
demand; in addition, guaranteeing the attainment of the balances envisioned is
essential to avoid a decline in private sector confidence. In order to reduce the
debt-to-GDP ratio decisively and durably, we must improve the growth outlook
through concrete initiatives that improve the environment in which economic
activity takes place. Removing uncertainty on the current and future situation of
the public finances is essential to protecting savings, which can only be amassed
and increased if the economy grows at sufficiently high rates along a stable and
sustainable path.
Monetary policy and savings
Inflation in the euro area remains at levels that are still too low, and these
low levels are pushing down short-term inflation expectations. The risk of a
de-anchoring of medium- to long-term expectations has emerged as they have
moved further away from the price stability aim (Figure 2). The inflation
expectations at the five-year horizon of the participants in the ECB's Survey of
Professional Forecasters have decreased by about 0.2 percentage points since
the start of the year, to 1.6 per cent. Those implied by the prices of
inflationlinked financial assets, which also incorporate a risk premium, fell by 0.4
percentage points over the five-year, five years forward horizon, to 1.2 per cent.
Low inflation and the ongoing economic slowdown must be countered
decisively, lest they translate into a further, progressive reduction in inflation
expectations or into a re-emergence of the threat of deflation. The ECB Governing
Council took timely, appropriate and proportionate action to respond to the
cyclical downturn and the worsening inflation outlook by adopting a very broad
set of expansionary measures. It decided to restart, effective tomorrow, net asset
purchases at a monthly pace of €20 billion (they had reached €80 billion per month
between April 2016 and March 2017); to reduce by 10 basis points, to -0.5 per
cent, the interest rates on banks' deposits with the Eurosystem; and to lower the
cost and extend the maturity of targeted longer-term refinancing operations.
There was unanimous agreement within the Council on the need for action,
and broad consensus on the package of measures as a whole, although there
were differing views on the individual measures. While the effects of some of
them are uncertain, there is no reason to doubt their overall effectiveness. The
monetary policy stance will therefore remain resolutely expansionary for as a long
as necessary to support aggregate demand and, through this, ensure price stability.
Our analyses suggest that the ECB's asset purchase programme is likely the
most effective tool under the current conditions. The effects of the purchases are
transmitted through various channels: they have a direct impact on the yields of
the securities being purchased; they help to improve credit supply conditions; and
they strengthen the monetary stimulus to the entire economy through wealth and
portfolio-rebalancing effects.
The consequences of a reduction in the key interest rates to even more
negative levels - the true 'non-standard' instrument among those that have been
introduced thus far, given that open market operations have always been in the
toolbox of central banks - should be assessed more carefully. The evidence
suggests that reductions in the key interest rates have so far had significant
expansionary effects. Going forward, however, the risks of undesirable side
effects may grow the longer the key interest rates remain at negative levels and,
especially, the lower they fall.
There is the possibility that banks' balance sheets will be penalized by a
reduction in net interest income, with repercussions on their ability to grant loans,
especially to households and small firms, and on the transmission of monetary
policy. To counter this risk, we have accompanied the latest reduction in interest
rates with the decision to remunerate part of banks' excess liquidity holdings with
the Eurosystem at zero per cent as opposed to a negative rate. In addition, banks'
balance sheets benefit from the very favourable conditions (including negative
interest rates) applied to loans granted by the Eurosystem.
It has been argued that, as the whole term structure of interest rates remains at
very low if not negative levels, there could be an incentive for households, firms
and investors to take on excessive risks, fuelling possible misalignments between
the prices of financial and real assets and their fundamental economic value.
There are currently no signs of a generalized widening in euro-area imbalances.
The indicators continue to suggest that the weak phase of the economy is not
transitory and they do not signal imminent financial risks. The Governing Council
is constantly monitoring these developments.
In the years following the global financial crisis, Italian households were
cautious in their selection of portfolio investments. The share of deposits in
their total financial assets has continued to grow, reaching almost 30 per cent
in June, also as a consequence of the reduction in the yields on other financial
instruments (Figure 3). In addition, households have significantly reduced their
direct investments in bonds, especially government and bank bonds, bringing them
to 3.3 and 1.5 per cent of their total investments, down by 3 and 6 percentage
points respectively compared with 2007. Purchases of asset management products
increased (especially those of insurance products): their share in total financial
assets surpassed 31 per cent in June, some 11 percentage points higher than in
2007. Overall, portfolio diversification has increased.
Within this context, the activities geared at protecting savers, in which the
Bank of Italy, Consob and IVASS each play a part, are especially important. We
carry out our role on various fronts. On the one hand, we have strengthened our
supervision of bank products, most recently through measures on the handling of
complaints, on product oversight and governance, and on the rights of payment
service users. On the other hand, we are continuing to expand upon our financial
education initiatives for young people and adults, including in relation to the
effects of digital technology on payment instruments: we are completing the
update of the informational material for students; we will soon launch a new
financial education website; and we are working very closely with the national
financial education committee.
The main way to protect savers is through growth. This objective is currently
being pursued by maintaining very accommodative monetary conditions. In the
long run, the return on savings necessarily depends on the economic outlook.
The unsatisfactory level of market yields is the consequence of the insufficient
level of investment with respect to the supply of savings; more generally, it
is the result of the weakness in demand caused by negative long-term trends,
such as demographic trends, and by cyclical trends, such as the recent sharp
increase in uncertainty. If the latter is not tempered, it could further increase the
propensity to save for precautionary purposes, leading to a downward spiral in
economic activity that would lower, rather than increase, aggregate savings, as
convincingly maintained by Ragnar Frisch and John Maynard Keynes during
the Great Depression. Policies designed to stabilize the economy, which extend
beyond monetary policies, serve to combat this risk by stimulating investment
and consumption.
There would be less need to maintain our monetary policy measures for an
extended period of time - thereby also mitigating the risk of negative side effects -
if, in those countries where the public finances permit, fiscal policies were to
contribute incisively to strengthening aggregate demand and if Europe's focus
were placed on reforming the structure and functioning of the economy so as to
increase the growth potential, about which monetary policy can do little.
Banks
In Italy the upturn in economic activity recorded in recent years, even if rather
modest, helped to improve the quality of banks' assets, an improvement that has
continued in recent months despite the stall in growth. In the first half of this year,
the ratio of NPLs net of loan loss provisions to total outstanding loans fell from
4.3 to 4.0 per cent for the banking system as a whole; it was 9.8 per cent at the end
of 2015. According to the reduction plans submitted by both significant and less
significant banks, this ratio should decrease further, to around 3 per cent by the end
of 2021 (Figure 4).
Going forward, however, NPLs dynamics could be affected by a protraction of the
current phase of cyclical weakness. Efforts to strengthen balance sheets must therefore
continue in an orderly but resolute fashion, especially by smaller banks, whose NPL
ratios are higher and coverage ratios lower than those of the significant banking groups.
The improvement in the quality of banks' assets was facilitated by the
development of the market for NPLs: in the three years 2016-18, NPL disposals
amounted to more than €120 billion, gross of provisions; so far this year they came
to around €20 billion. This was due not just to the fact that banks can access the state
guarantee scheme (GACS) for securitized bad loans, which was renewed in March of
this year, but was also spurred by the early results of the reforms undertaken to reduce
the length of credit recovery proceedings, which deters investors and affects disposal
prices. The expected time needed to sell foreclosed property decreased from more
than three years to around two years. The expected length of time needed to complete
all preparatory procedures also declined, albeit by only three months, to just over two
years. There is still room for further reductions, which can be accomplished in part
by following the best organizational practices promoted by the High Council for the
Judiciary, whose effects can already be seen in some areas of the country.
Progress can also be achieved by turning more frequently to corporate
restructuring and turnaround specialists (e.g. turnaround funds). This could lead
to some 'unlikely-to-pay' loans returning to performing status, benefiting both
banks' balance sheets and the economy.
The credit recovery sector has grown significantly in recent years. This
development has contributed to the reduction in NPLs in banks' balance sheets,
but it is not free of problems. Inefficient recovery performance can erode value,
reintroduce risks to banks' balance sheets and, in extreme cases, have repercussions
on the guarantee provided by the State through the GACS. The Bank of Italy remains
highly vigilant in supervising the intermediaries for which it is responsible.
Banks' profitability was helped by low funding costs and the drop in loan
loss provisions; excluding extraordinary items, in the first six months of 2019 the
return on equity was about 7 per cent on an annual basis. Net interest income
remains under pressure, also due to increased competition in the market for loans
to high-quality customers. Banks, especially small ones, must continue to diversify
their sources of revenue and to contain their costs; less significant banks have
reduced their operating expenses by just under 1 per cent in the first half of this
year, compared with a drop of almost 4 per cent for the significant banking groups.
Better profitability is critical for banks, and not just Italian ones, to enable them
to meet the challenges posed by competitive pressures, by prudential regulation, by
the new European crisis management framework, and by technological innovation
in the financial sector. This is essential for small and medium-sized banks which
are still suffering from the effects of the deep and protracted economic recession,
especially in the South of Italy. Among other things, these banks face greater
difficulties in accessing the market for debt and equity capital.
The heterogeneity of financial intermediaries in terms of firm size, business
models and corporate form can play an important role in the proper functioning
of the system. However, it must be compatible with the safety and soundness of
banks, which is essential for them to remain in the market. From this standpoint,
achieving various forms of integration could help significantly by unlocking the
benefits associated with a larger operating scale, a wider range of products, and the
adoption of innovative technologies.
With the launch this year of two new cooperative banking groups (Iccrea and
Cassa Centrale Banca), this sector can continue to support local economies from a
much sounder position. As a result of the reform, the structure of the Italian banking
system has undergone extensive change, moving towards less fragmentation. As
of last June, the 12 significant groups (which include both cooperative banking
groups) held almost 80 per cent of the system's total assets.
Many of the about 90 less significant banks, with the exception of the Raiffeisen
banks for which an institutional protection scheme is to be established, operate on a
very small scale, which also impacts their ability to adapt their business models to
technological change: more than half of them report assets of less than €1.5 billion
and over one third of less than €1 billion. Effective integration must be pursued in
this sector as well, especially among the smaller popolari banks, which suffer from
the typical governance problems that stem from the cooperative banking model.
For these popolari banks, the measures and projects we have been suggesting for
some time for their strengthening need to be implemented quickly.
* * *
To make the fullest possible use of the expansionary potential of the monetary
policy measures adopted by the ECB Governing Council, the other policies also
have to move in the same direction. Fiscal policies that support economic activity
in the euro area can deliver a faster return to price stability. To ensure sustained
higher growth, reforms are needed to remove any obstacles to development, foster
innovation and help modernize the productive system. Acting in isolation, monetary
policy can do nothing but continue along the path of 'non-standard' measures. This
increases the risk of adverse side effects, which, in turn, need to be kept under
control using instruments of an increasingly administrative nature.
European economic and monetary union is still incomplete. As the President
of the ECB recalled last Monday, 'we need a euro area fiscal capacity of adequate
size and design: large enough to stabilize the monetary union'. In the current
circumstances, the difficulties arising from the absence of this fiscal capacity are
manifest. Such difficulties are not confined to the impossibility of using fiscal
policy to support aggregate demand, but also include the resulting obstacles to the
conduct of monetary policy and transmission of the related stimulus measures: the
euro area feels the consequences of the lack of a common safe financial asset that
plays the same role as the sovereign debt securities of other major economies.
Yet, Member States could coordinate their policies as they did at the height
of the global financial crisis. We should not now rule out this possibility and we
should assess in good time, for the purposes of prevention, the scale of the risk of
a return to an emergency scenario. Boosting the European economy's capacity for
growth also requires us to focus our efforts on the areas that are the most important
today, such as new digital technologies and the protection of the environment. This
can be done by drawing up a common public investment programme that is also
aimed at improving and redeveloping major infrastructure - energy, transport, and
urban services - to enhance service quality, reduce their environmental impact and
unleash private investment which, in the absence of any clear strategic direction,
today struggles to materialize. This type of programme could help to launch R&D
projects and would thus have long-term effects on the EU's productivity and growth
potential.
In the climate of mistrust that has emerged in recent years, also following the
damage caused by the financial and sovereign debt crises, there is less inclination
to consider coordinating national fiscal policies. While waiting for the realization
to take hold that action is needed at European level, Italy must make the most
of the favourable financial conditions to outline clearly the necessary process of
change and initiate it decisively. This process will involve the economy's productive
sectors, the government sector, and the definition of and compliance with the rules.
It will require a committed effort to develop the parts of the country that are lagging
behind and harness the available resources, especially in terms of human capital.
Changing the composition of the government budget to set aside more resources
for tangible and intangible investments can stimulate economic activity beyond the
short term.
However, collective action is required to raise the growth potential: economic
policy must create an adequate framework, providing incentives and removing any
brakes on productive activities; firms and banks must be prepared to invest in order
to seize the opportunities offered by the market and by technology; and everyone
must contribute to this change by looking to acquire new and better skills. Making
the best use of savings, achieving sustainable economic and social development,
protecting the environment and creating jobs all depend on the success of this
undertaking.

FIGURES
Figure 1
Yield spreads between 10-year government bonds
(daily data; basis points)
350 350
300 300
250 250
200 200
150 150
100 100
50 50
0 0
Italy - Germany Italy - Spain Italy - Portugal
-50 -50
Jan.-18 Apr.-18 July-18 Oct.-18 Jan.-19 Apr.-19 July-19 Oct.-19
Source: Bank of Italy, based on Bloomberg data.
Figure 2
Indicator of downside de-anchoring of euro-area
inflation expectations (1)
(daily data; per cent)
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Bank of Italy, Economic Bulletin, 4, 2019 (October 2019).
(1) An increase signals an intensification of the link between sharp drops in short-term and in long-term
inflation expectations.
Figure 3
Composition of Italian households' financial portfolio (1)
December 200 7 June 201 9
7.6%
8.2%
6.7%
23.5%
29.2%
18.7%
2.2% 21.3%
3.7%
20.0%
27.4%
31.4%
Deposits Currency Managed assets Shares and other equity Debt securities Other
Source: Bank of Italy.
(1) 'Managed assets' comprise investment funds, life insurance reserves and pension funds (other than
severance pay); 'other' comprises trade and other payables, derivatives and stock options, severance pay,
and any other insurance components not included under managed assets.
Figure 4
Ratio of non-performing loans to total loans (1)
(per cent)
18 18
16 16
Gross Net
14 14
12 12
10 10
8 8
6 6
4 4
2 2
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 June-19 2021
Source: Bank of Italy.
(1) The 'gross' ratio measures non-performing exposures (bad loans, unlikely-to-pay loans and past-due/
overdrawn exposures) in relation to total loans gross of loan loss provisions; the 'net' ratio excludes loan
loss provisions. The ratios for 2021 are estimates based on the NPL reduction plans that banks agreed with
the supervisory authorities.
Designed and printed
by the Printing and Publishing Division of the Bank of Italy