Ignazio Visco: 2020 World Savings Day
Address by Mr Ignazio Visco, Governor of the Bank of Italy, at the 96th World Savings Day (online
event), organized by the Association of Italian Foundations and Savings Banks, Rome, 30
October 2020.
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The cyclical situation, savings, and the economic policy response
Following the unprecedented contraction in the spring, the global economy recorded a better
than expected strengthening in the summer. As a result, at the start of this month, the
International Monetary Fund revised its estimates upwards for this year. However, the decline in
economic activity is the sharpest since the Great Depression, with a reduction in GDP in the
order of 4.5 per cent. The intensity with which the spread of the pandemic has picked up again
in recent weeks, particularly in Europe, and the associated high levels of uncertainty risk
producing further slowdowns in production and in the demand for goods and services in the
short term, with negative consequences on the outlook for the global economy next year as well.
In Italy, the return to growth in the third quarter was also much more marked than we had
forecast in July. This was due to the strong recovery of the industrial sector, where production in
August returned to pre-epidemic volumes. On the other hand, the slowdown in services seems
to have persisted, despite the positive trend in holiday spending in the summer, which was
mainly of domestic origin.
The strengthening of productive activity would not have been possible without robustly
expansionary economic policies, which also led to a marked improvement in conditions on the
financial and credit markets. Nevertheless, the resurgence of the epidemic threatens to
undermine the results achieved so far: an increase in cases of infection - even if countered by
less drastic measures than those adopted in the spring - risks negatively impacting household
and business confidence and consumption.
The greater pessimism of consumers recorded since the start of the crisis has led to a
considerable increase in their propensity to save. In the second quarter, the ratio between
savings and gross disposable income, close to 20 per cent, was almost double its 2019
average, mainly because of the decline in purchases of goods and services following the halt in
certain sectors of activity. Our estimates suggest, however, that savings have remained high in
recent months too, both for precautionary reasons, linked to a decline in disposable income and
to fears of job losses, and as a result of the persistent risk of infection and the consequent
health concerns, which discourage certain types of consumption, especially relating to travel,
tourism and leisure activities.
Although they have decreased over time in relation to disposable income, Italian household
savings, the main source of funding for investment, have historically been one of our economy's
strengths. However, in a phase like the current one, dominated by uncertainty and weak cyclical
conditions, unless the increase in the propensity to save is accompanied by a sufficient
recovery in investment and production, there may be a decrease in aggregate demand and
income, in turn fuelling further growth in saving for precautionary reasons and thus triggering a
vicious cycle.
There appears to be a concrete risk that the propensity to save will remain high in the next few
quarters, holding the recovery back. This is confirmed by the surveys conducted by the Bank of
Italy between the end of August and the beginning of September: the intention to save seems
widespread, including households that do not expect a drop in income. The share of households
intending to spend less on essential goods (for example, food) in shops and non-essential
goods (such as hotels and eating out) is not only higher among households that have had a
drop in income since the start of the pandemic, but also tends to increase as the number of
infections grows in the region of residence.
Government measures to protect jobs have so far limited the impact on income and
employment, but the overall stability of the unemployment rate since the beginning of the year
does, however, reflect the rise in 'discouraged workers', with the number of jobseekers going
down by 300,000. Although the total number of hours of authorized wage supplementation is half
the size of the second quarter peak, it is still particularly high. The worsening of the epidemic
could have new and serious repercussions on the already fragile conditions of the labour
market.
While the reallocation of workers among firms and sectors must not be obstructed, the
seriousness of the crisis calls for continued adequate protection for as long as necessary. At
the same time, the social safety net system can be revised to increase coverage, simplicity of
access and fairness. Going forward, as far as the macroeconomic conditions allow, the
extraordinary measures in defence of jobs could be progressively reduced and limited to the
sectors hardest hit by the crisis, also taking account of healthier firms needing to reorganize
themselves in response to the changing socio-economic outlook. Simplifying the rules
governing the labour market and extending the reduction of the tax wedge could encourage
firms to hire more workers. To ensure that the increase of job opportunities is permanent, the
capacity of the economy to grow must also expand.
The risk that the pandemic could worsen and have negative repercussions on demand does not
affect Italy alone. The savings rate has doubled across the whole euro area, reaching values
that are even higher than those in Italy. The European Commission's surveys indicate that
consumers' saving intentions have reached the highest levels for the last 20 years. In the most
exposed sector, namely services, there are already signs of another slowdown in demand, with
repercussions on prices.
In the euro area, the recent fall in inflation to negative values largely reflects trends in energy
prices. Nevertheless, core inflation fell to its lowest level yet in September, just above zero, as a
result of the weakness of transport and tourism - spending items that are closely linked to the
course of the pandemic.
The risk of deflation is lower than it was six months ago but it cannot be ignored. It stands at 20
per cent today, based on option prices, compared with more than 40 per cent in mid-March. For
the professional forecasters surveyed by the European Central Bank (ECB), the likelihood of
deflation is still much lower. However, the share of forecasters that do not expect inflation to
exceed 1.5 per cent five years forward is equal to 35 per cent, against around 10 per cent
recorded on average between mid-2014 and end-2018.
That is why the ECB's Governing Council reconfirmed the need to maintain its very
accommodative monetary policy stance at its meeting yesterday, with securities purchases
continuing to be conducted in a flexible manner. At the same time, in light of the risks to
economic activity being tilted firmly to the downside and based on the new macroeconomic
projections being prepared for the December meeting, it will recalibrate its monetary policy
instruments as appropriate to respond to the rapid unfolding of the economic and financial
situation. In particular, financing conditions must remain expansionary to contribute to the
economic recovery, supporting demand and employment, thereby counteracting the negative
impact of the pandemic on growth in prices and to foster the convergence of inflation towards its
aim in a sustained and symmetrical manner.
Making determined progress in the health field is still the key factor in coping with the pandemic
and the crisis it has generated. In the meantime, economic policies at global level must maintain
a decidedly expansionary tone in order to support households and firms. In an environment of
extremely low interest rates, common to all the advanced countries, fiscal policies play a
particularly important role. From this perspective, the European spending package to help the
'Next Generation EU' must enable the rapid distribution of the resources envisaged to individual
countries, to be used for timely and effective structural programmes.
Financial intermediation
The climate of uncertainty that has spurred an increase in saving is also reflected in banks'
balance sheets. In the twelve months ending in September, households' deposits rose by 5.6
per cent (almost €50 billion), and those of firms by 24.4 per cent (€70 billion). In the latter case,
the increase is in large part attributable to the Government's credit support measures, which
have enabled firms to accumulate the funds they will require to meet their liquidity needs in the
coming months, as the economic effects of the health crisis persist.
Once the emergency is over, banks must be ready to finance the recovery; the focus must
therefore remain fixed on their capital strength as much as on the quality of loans made. In this
regard, banks can build on the progress made in recent years and on the extraordinary
measures taken by the Government and the supervisory authorities to handle the crisis.
Between 2007 and 2019, despite the double-dip recession that struck the Italian economy and
thanks to regulatory reforms, the common equity tier 1 (CET1) ratio almost doubled, to 14 per
cent. In the first six months of this year, it rose further, by almost 1 percentage point. The profits
for 2019, capitalized following the recommendations of the supervisory authorities on the
distribution of dividends, were crucial, as were the measures imposed by the European
regulator. However, the crisis has begun to have an impact on the return on equity and on
reserves, which fell considerably in the first half of the year, mainly due to higher loan loss
provisions. Banks' ability to support their capitalization level through profitability will remain under
pressure in the near future too.
Credit quality has been improving since 2015. The flow of new non-performing loans (NPLs)
remains at historic lows. The ratio of the stock of NPLs to total loans, gross of write-downs, has
fallen to 3.1 per cent, around two thirds lower than its peak. Disposals made on the secondary
market up until now, along with those that are expected to be completed in the final months of
the year, will enable banks to go through with the plans made at the start of 2020, before the
outbreak of the pandemic.
Italian banks are enjoying the fruits of their labours in the management of NPLs, spurred in part
by the regulation and the supervisory activities of recent years. Specific structures were created
to implement the reduction plans presented to the supervisory authorities; thanks to
improvements in information quality, banks are now able to better assess the actions to be
taken, through internal management and selling on the market, to address loan deterioration; it
is therefore possible for potential purchasers to make valuations more accurately and quickly.
The breadth and depth of the economic crisis that we are experiencing will nevertheless result
in an increase in business insolvencies. Our studies indicate that in 2020, the deterioration in
their financial situation will lead to a sharp increase in the probability of insolvency: the share of
financial debt owed by the riskiest borrowers could exceed 20 per cent, compared with a
prepandemic level of 13 per cent. In the coming years, the evolution of firms' riskiness will inevitably
depend on cyclical developments, which are now extremely uncertain, and on the range and
effectiveness of measures that may be introduced to encourage them to reduce their financial
leverage.
In the next few months, banks will be called upon to do their utmost in that which is the essence
of banking: support worthy entrepreneurial projects, recognize without delay any losses arising
from exposures that are highly likely to become insolvent, and restructure loans to debtors in
difficulty. Compared with the past, banks find themselves facing new restrictions, both
accounting and regulatory, in recognizing losses and classifying loans. These are obligations
designed to ensure stable and effective lending; they are, as is well known, particularly strict in
countries such as Italy that are characterized by delayed payment of commercial debts and
particularly lengthy civil proceedings, although the latter have improved in recent years. In the
absence of measures that can make decisive inroads on these fronts, the burden of the
restrictions on our country's banks is therefore still greater than the European average.
Supervisory authorities can take advantage of the room for flexibility to ward off the procyclical
effects on credit supply, which would lead to a further deterioration in credit quality. Flexibility is
nonetheless limited by the need not to delay the emergence of highly probable losses, bringing
forward a part of the loan loss provisions before insolvencies become evident. Efforts should be
made to counter the risk that banks could accumulate an excess of NPLs on their balance
sheets that have not been adequately written down.
Being proactive in recognizing losses may enable banks to avoid finding themselves in
situations similar to those they experienced immediately after the sovereign debt crisis, when it
was only after decisive action from the Bank of Italy's supervisory function - and considerable
resistance from banks - that significant increases in loan loss provisions were actually effected.
I recall that in 2012, in this very venue, I highlighted the need to raise the coverage ratio for
nonperforming loans, which had fallen to worrying levels (below 40 per cent). Shortly before that, we
had launched a series of targeted inspections intended, among other things, to assess the
adequacy of the provisioning policies. In part owing to this supervisory action, the downward
trend in the coverage was reversed, though with markedly varied results. The average increase
exceeded 5 percentage points over the following two years.
Despite the overall stability in the flow of non-performing loans, in the first half of this year, Italian
banks increased their loan loss provisions by 53 per cent on average compared with the same
period of 2019. The write-downs were mostly used to raise the coverage ratio for performing
loans, whose riskiness increased owing to the deteriorating economic outlook. The ratio
between the write-downs recorded up to last June relating to loans to households and firms
benefiting from the debt moratoria, which are facing greater uncertainty as to how their riskiness
will evolve, and the gross exposures to these counterparties combined, is equal to 1.2 per cent,
one third higher than the average for all loans to households and firms.
The growth in loan loss provisions, however, was highly uneven and largely driven by the
actions of some large credit institutions. Several banks, both significant and non-significant,
show coverage ratios for performing loans that are well below the banking system average.
These gaps must be closed. Special attention will have to be devoted to the banks that are, on
average, more exposed to the firms that have benefited from the moratoria and to the sectors
that have been hit hardest by the effects of the pandemic. Obviously, this must not be done
indiscriminately, and it will be necessary to work in careful coordination with the support
measures introduced by the Government. The Bank of Italy is monitoring this issue closely.
The idea currently being discussed at European level of creating a network of NPL-handling
national asset management companies (AMCs) should be considered favourably. To enable
these companies to operate effectively against the backdrop of a macroeconomic shock such
as the one caused by the pandemic, however, it would be necessary to reconsider the criteria
used so far, in light of the State aid guidelines, to determine sale prices. Account should also be
taken of the fact that 'market' prices can reflect yields that are typical of situations marked by the
presence of information asymmetries and high buying power.
As I have often noted, including recently, the action and interventions of the Bank of Italy are
designed to ensure that intermediaries are able to operate on the market by responding to loan
applications effectively against a backdrop of sound and prudent management. In some cases,
however, exiting from the market becomes inevitable. When this occurs, it is important that the
crisis be managed in an orderly fashion, avoiding repercussions for the funding of the economy
and for financial stability. Therefore, it would be beneficial to see an EU initiative that lays down
harmonized procedures that can ensure the orderly exit from the market of small and
mediumsized banks. The US Federal Deposit Insurance Corporation could serve as a model, to be
adapted to the specific features of the European context.
Banks are facing a number of challenges - in particular regarding innovation, rationalization of
the cost structure and, more broadly, the recovery of profitability - that the pandemic makes
even more relevant today. In an environment marked by interest rates that will presumably be
low for a very long time and by fierce competition on the digitalization of the services being
provided, banks will have to be able to rethink their business models, with adequate
technological investments and without neglecting the establishment of sufficient protection
against the connected cyber risks.
Of course, the challenges are not restricted to the banking sector. In recent years, the asset
management industry has experienced strong growth, with positive effects on the stability of the
financial system as a whole. This has benefited firms, which have embarked on a process to
expand their sources of funding, and savers, who have been able to diversify their investments
further. However, the current crisis has shown that, especially when leverage and the degree of
maturity transformation are high, potentially systemic risks may emerge in the investment fund
industry. While banking sector regulation was made significantly more stringent in the years that
followed the global financial crisis, only now is the question of adapting the rules for the
nonbank sector being tackled firmly. It is necessary to continue to work at international level, in
particular within the Financial Stability Board, to acquire the tools, including macroprudential
ones, that can help to deal with the risks that may arise in this sector. This is an issue that Italy's
forthcoming presidency of the G20 intends to prioritize among the financial issues.
Technology, finance and payments
In Europe, the pandemic has led to a sharp acceleration in the spread of digital payment
instruments with a high technological content. According to a recent survey conducted by the
ECB, some 40 per cent of the population in the euro area have decided since March to reduce
the use of cash for day-to-day purchases, notwithstanding the increased demand for
mediumand high-denomination notes, likely connected to the heightened uncertainty. These changes
are having a significant impact on Italy as well: even over the summer, when the risk of infection
was low and the social distancing measures were very limited, the use of payment cards rose,
especially for those with a higher technological content such as contactless cards, and the use
of cash decreased. Based on the experience of other European countries, the change in
consumer habits towards a more and more frequent use of digital payment instruments can be
expected to continue, though probably still at a gradual pace.
New technologies can bring tangible benefits to the financial system and to users: they foster
the efficiency of intermediaries and improve risk selection and diversification and they contribute
to expanding the range of services available to households and firms, to enhancing their quality
and to reducing their costs. The need for an adequate control system, however, cannot be
ignored if the emergence of risks to users and to the integrity and security of the financial
system is to be avoided.
In the payment services market, innovation has thus far favoured the use of instruments
associated with private currencies issued by banks or by operators that are in any case closely
supervised. In the future, and indeed the near future, there are likely to be even more innovative
instruments available, namely 'stablecoins', which are a type of crypto-assets whose value is
guaranteed by adequate collateral issued by companies operating on a regional or even a global
scale. This phenomenon raises delicate questions regarding IT risks, personal data processing
and management, the correct functioning of the payment system, financial stability and the
transmission of monetary policy. There is also the risk of tax evasion, money laundering and the
financing of terrorism. The complexity and global nature of these issues make regulation at
international level essential.
The attention of regulators, central banks and supervisory authorities is at a maximum. The
finance ministers of the leading European countries recently published a joint declaration on the
risks stemming from the possible introduction of stablecoins by non-bank operators. The
European Commission has proposed regulations to be applied to issuers of these instruments
and to operators providing related services. The proposal contains a broad range of rules on,
among other things, own funds requirements and rules for managing liquidity and for
interoperability with traditional payment systems. It also envisages additional obligations for
issuers and providers of services connected with crypto-assets guaranteed by collateral defined
as significant. Negotiations have just begun.
In order for the distribution of such instruments to take place in conditions of reasonable safety
both for users and the financial system, the principle whereby the same activities are subject to
the same regulatory safeguards must be respected, regardless of who performs them, the
European standards for the security of payment systems must be upheld, savers must be
protected and any abuses must be prevented. When drawing up the definitive regulatory
framework, the implications for financial and monetary stability will have to be assessed.
The ECB recently published a report on the possibility of issuing a digital euro. This study,
approved by the Governing Council, is the result of the work of a high level Eurosystem task
force. Specifically, in a world in which retail digital payments are the norm, the possibility has
been considered of issuing an instrument for making payments in central bank money, which by
its very nature is secure. Issuing a digital currency also poses several questions of a legal,
technical and economic nature. Current investigations concern, among other things, the laws
necessary for this instrument to be legal tender. We are also committed to resolving, by means
of experimentation within the Eurosystem, some technical issues linked, for example, to
creating solutions for offline payments. We are also assessing the potential impact on the
financial system's structure, on banks' profitability and on the transmission of monetary policy.
The Bank of Italy is committed to guaranteeing the security and the financial inclusion of less
competent IT users during the transition towards a more digital economy. Important innovations
are currently being made in the TARGET Instant Payment Settlement (TIPS) infrastructure,
managed by the Bank of Italy, which will allow users to make transactions on their mobile
phones in real time and will considerably increase the number of financial intermediaries
connected to this system. The initiatives of our new Directorate General for Consumer
Protection and Financial Education include the commitment to promoting financial education to
cope with the current environment, in which the use of digital channels for using payment,
investment and lending services is growing steadily.
Strengthening and coordinating our initiatives relating to technological innovation for the financial
sector and the functions linked to retail payment services - from cash circulation to monitoring
digital payment services and instruments - is promoted in the Bank of Italy by a department
dedicated to the integrated management of these activities. The dialogue with operators takes
place firstly via the 'FinTech Channel', which provides advance knowledge of new projects in
order to assess their compliance with legislation and identify potential problems, and secondly
via the processes for authorizing market access. Our plans for collaborating with industry and
for supporting projects that can bring systemwide benefits, for selecting contributions from
experts and independent firms, and for research and analyses in tandem with institutions and
universities will all be reinforced by the creation of the 'Milano Hub' centre, due to start by the
end of the year.
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The better than expected recovery in economic activity observed over the summer shows how
the Italian economy maintains a considerable ability to recover and is proof of the effectiveness
of the monetary and fiscal policies introduced to protect households and firms and to boost
aggregate demand. Nevertheless, there is the risk that the repercussions of the health crisis for
the global economy, for the euro area and for Italy may be with us for some time to come, even
after the emergency is over. This is due to the impact of the effects of the uncertainty over the
economic outlook on savings and on aggregate demand, of the difficulties we will encounter
when coming out of a phase of too low inflation, of the need, which will emerge in any case, for
a broad reallocation of resources between sectors and firms, and of the needs linked to the
digital revolution, to the new ways of working and producing, to the transition to a low-carbon
economy and to the challenges facing the financial system.
It is precisely for this reason that we cannot focus solely on responding to the emergency. Italy
must deal with the structural problems that have been holding back growth for almost three
decades and whose resolution has been made more urgent by the crisis. The areas requiring
intervention are well known, as we have recalled on various occasions this year too. They
concern the quality and timing of the services provided by general government; innovation in all
sectors, with sufficient investment, not only from the public sector, in new generation
infrastructures, human capital and more environmentally-friendly technology; and the protection
and enhancement of our natural, historical and artistic heritage. The opportunity provided by the
availability of common financial resources at European level must be seized rapidly, and will
make it possible to sustain production, incomes and employment long after the relief measures,
which are also made necessary by the crisis.
The Government has announced its intention to begin reducing the debt-to-GDP ratio next year
and bring it back to pre-pandemic levels by the end of the decade. If growth exceeds
expectations over the next few years, the ratio could decrease more quickly, with a more
marked improvement in the primary surplus. The public debt is sustainable, but if it remains at
high levels, it leaves us exposed to the risks and shocks stemming from financial market
tensions or from any further economic shocks. Achieving the Government's objective assumes
the efficient use of the funds borrowed to deal with the crisis, as well as those made available by
European programmes. We must make a considerable effort, though one that is within our
country's reach, to increase: innovation and production capacity; the safest and most
sustainable investments for our savings; the employment opportunities offered by our economy;
and labour market participation, especially on the part of young people and women.