COMMISSION STAFF WORKING DOCUMENT In-depth review for Italy in accordance with Article 5 of Regulation (EU) No. 2011/1176 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2022 European Semester – Spring Package
Date: 2022-05-23
Institutions: European Commission, Secretariat-General
Subjects: European Semester, Italy, banking, credit policy, economic policy, economic recovery, economic reform, energy policy, labour market, macroeconomics, productivity

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.5.2022  SWD(2022) 635 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Italy         in accordance with Article 5 of Regulation (EU) No. 2011/1176 on the prevention and correction of macroeconomic imbalances      Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2022 European Semester – Spring Package {COM(2022) 600 final} - {SWD(2022) 628 final} - {SWD(2022) 629 final} - {SWD(2022) 630 final} - {SWD(2022) 631 final} - {SWD(2022) 632 final} - {SWD(2022) 633 final} - {SWD(2022) 634 final} - {SWD(2022) 636 final} - {SWD(2022) 637 final} - {SWD(2022) 638 final} - {SWD(2022) 639 final}  
 
 
On  the  basis  of  this  in-depth  review  for  Italy  undertaken  under  Regulation  (EU)  No 
1176/2011  on  the  prevention  and  correction  of  macroeconomic  imbalances,  the 
Commission has considered in its Communication “European Semester – 2022 Spring 
Package” (COM(2022)600 final) that: 

Italy is experiencing excessive imbalances. Vulnerabilities relate to high government debt 
and weak productivity growth, in a context of labour market fragilities and some weaknesses 
in financial markets, which carry cross-border relevance. Persistent low productivity growth 
has  been  a  key  factor  behind  Italy’s  protracted  weak  GDP  growth,  which  has  dampened 
government  debt  deleveraging,  dented  employment  opportunities  and  impacted  banks’ 
balance sheets. The government debt-to-GDP ratio started to decline in 2021 and is forecast 
to  further  decline  but  remains  a  risk  for  fiscal  sustainability,  the  financial  sector  and 
economic growth. Despite improvements in the labour market, low participation rates persist. 
Significant  improvements  have  been  achieved  in  reducing  non-performing  loans,  although 
the sovereign-bank nexus reinforced over the COVID-19 crisis and remains a challenge. In 
addition,  the  banking  sector  may  face  challenges  as  the  impact  of  the  phasing-out  of 
temporary  support  measures  in  response  to  the  pandemic  crisis  fully  unfolds.  The  RRP  is 
addressing  vulnerabilities, 
including  by  spurring  competitiveness  and  productivity. 
Nonetheless, the growth-enhancing effect of investment and reforms is likely to take time to 
unfold and crucially depends on swift and sound implementation. 

1 

 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic imbalances 

3.  Thematic chapter: Financial Sector 

LIST OF TABLES 

Table b.1.1: 

Selected exposures 

Table 2.1: 

Selected economic and financial indicators (Part 1), Italy 

Table 2.2: 

Selected economic and financial indicators (Part 2), Italy 

LIST OF GRAPHS 

Graph b.1.1:  Sectoral distribution of energy use and of energy imported from Russia 

Graph b.1.2:    Italy goods and service trade balance – fossil trade contribution 

Graph 3.1: 

Thematic Graphs: Financial sector 

3 

4 

13 

10 

11 

12 

9 

9 

16 

2 

 
 
 
 
 
 
1.  INTRODUCTION 

In  2021,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic  Imbalances 
Procedure  (MIP),  the  Commission  identified  “excessive  macroeconomic  imbalances”  in  Italy. (1)  
These imbalances were related to the high level of government debt and weak productivity growth, which 
have cross-border relevance in a context of labour market and banking sector fragilities. The 2022 Alert 
Mechanism  Report  concluded  that  a  new  in-depth  review  (IDR)  should  be  undertaken  for  Italy  with  a 
view to assess the persistence or unwinding of imbalances. (2) 

Italy’s economy closed  2021 on a relatively solid footing, despite sizeable headwinds. (3) Real GDP 
grew by 6.6% and almost reached pre-COVID-19 levels in the final quarter of 2021, despite rapidly rising 
infection  rates  and  surging  energy  prices.  Real  GDP  growth  is  projected  to  slow  to  2.4%  in  2022  and 
1.9%  in  2023,  as  high  energy  prices  and  supply  bottlenecks  further  exacerbated  by  Russia’s  military 
aggression against Ukraine continue to take a toll on economic activity. EU-supported investment and the 
still high stock of accumulated savings provide some safeguards against a severe growth slowdown going 
forward. The labour market recovered in 2021 on the back of temporary employment. Jobs growth is set 
to continue in line with slowing economic activity. Inflation is projected to accelerate further this year due 
to the  pass-through of  higher energy costs to consumer prices,  before  falling back in 2023. Energy and 
commodity  prices  are  expected  to  remain  high  throughout  2022  and  persisting  supply  bottlenecks 
continue  to  weigh  on  growth.  In  view  of  the  extremely  high  geopolitical  tensions  related  to  the  war  in 
Ukraine, the outlook remains subject to high uncertainty and substantial downside risks.   

This in-depth review presents the main findings of the assessment of imbalances. The assessment is 
backed  by  a  thematic  section  on  financial  sector  developments.  Spillovers  and  systemic  cross-border 
implications of imbalances are also taken into account. In addition, assessments of structural issues made 
in  previous  IDRs  and  in  the  context  of  fiscal  assessments  are  also  considered  if  relevant.  The  MIP 
assessment matrix is published in the 2022 Country Report for Italy. (4)   

(1)  European Commission (2021), European Semester Spring Package 2021, COM(2021) 500 final. 
(2)  European Commission (2021), Alert Mechanism Report 2022, COM (2021) 741 final. 
(3)  Forecast data are from European Commission (2022), European Economic Forecast: Spring 2022, Institutional Paper 172. 
(4)  European Commission (2022), Country Report Italy 2022, SWD(2022)616 final. 

3 

 
 
                                                           
2.  ASSESSMENT OF MACROECONOMIC IMBALANCES 

Assessment of gravity, evolution and prospects of macroeconomic imbalances 

Low  productivity  growth  was  the  main  factor  behind  Italy’s  weak  growth  performance  in  the 
decade  prior  to  the  COVID-19  pandemic.  Over  the  period  2010-19,  hourly  productivity  growth 
averaged 0.4% per year compared with an EU average of 1.2%. The capital-labour ratio, as measured by 
net fixed assets per unit of labour employed, stagnated when measured by hours worked or even gradually 
declined in terms of headcount employment. The high price for capital (relative to labour) reduced firms’ 
incentives  to  invest  in  equipment  and  intangible  assets,  thus  encouraging  them  to  remain  in  labour-
intensive  traditional  sectors.  As  a  result,  the  key  impediments  of  the  Italian  economy  to  higher 
productivity  growth,  notably  the  high  share  of  low-productivity  sectors  combined  with  a  small  average 
firm  size  and  low  investment  rates,  became  entrenched.  Hence,  the  slowdown  in  productivity  can  be 
associated  with  a  declining  capital  intensity  (i.e.  less  capital  deepening)  and  a  slow  diffusion  of  new 
technologies,  such  as  information  and  communication  technologies  (ICT).  Productivity  remains 
particularly low in lagging regions. 

The  policy  response  to  the  COVID-19  pandemic  offers  prospects  for  structural  productivity 
improvements. Labour productivity in terms of hours worked rose sizeably in 2020, likely influenced by 
a  compositional  effect,  as  the  reduction  of  hours  worked  in  small,  less  productive  firms  was  relatively 
more pronounced than in larger, more productive firms with higher capital endowments. This effect partly 
reversed  in  2021,  when  labour  productivity  declined  and  hours  worked  increased,  albeit  not  yet  to  the 
level  of  2019.  However,  increasing  investment  since  2015,  only  shortly  but  sharply  interrupted  by  the 
pandemic  in  2020,  and  policy  measures  included  in  Italy’s  Recovery  and  Resilience  Plan  (RRP),  in 
conjunction  with  Cohesion  Policy  Funds,  are  expected  to  spur  productivity  in  the  medium  term.  In 
particular, substantial investment in skills, innovation and digitalisation as well as reforms of the public 
administration,  the  judicial  system  and  insolvency  framework  are  set  to  contribute  to  an  efficient 
allocation of physical and human capital. By contrast, the fact that many companies have higher debt than 
at the outset of the pandemic risks curtailing their ability to invest in productivity-enhancing technology, 
and  school  and  university  closures  might  have  a  long-term  impact  on  income  and  productivity  growth. 
Private and public investment in key areas such as intangibles and education is still relatively low. 

Italy’s  high  level  of  public  debt  remains  a  risk  for  fiscal  sustainability,  the  financial  sector  and 
economic growth. The high sovereign financing needs to roll over existing debt and to service  interest 
payments make Italy strongly dependent on financial markets’ risk perceptions, with potential spillovers 
to  the  domestic  financial  sector,  given  its  high  exposure  to  the  sovereign.  The  low  interest  rate 
environment, the growing average maturity of outstanding debt and the Eurosystem’s increased purchases 
of government securities  have reduced fiscal sustainability risks, but sovereign financing conditions are 
expected to become less favourable with a less accommodative stance of monetary policy. Furthermore, 
high  debt  servicing  costs  limit  the  scope  for  growth-enhancing  expenditure.  The  Commission’s  fiscal 
sustainability assessment shows that Italy faces high fiscal sustainability challenges over the medium term 
and medium challenges over the long term. (8) However, the reforms outlined in Italy’s RRP are expected 
to  have  a  substantial  positive  and  persistent  growth  impact  in  the  coming  years,  which,  ceteris  paribus, 
should strengthen debt sustainability. 

Italy’s government debt started to decline in 2021, albeit from a high level. Italy’s public debt ratio in 
2019 stood at 134.1% of GDP, high in a euro area comparison, partly due to persistently weak growth. 
The  pandemic-related  emergency  policy  measures  and  the  sharp  drop  in  GDP  raised  the  debt  ratio  to 
155.3% of GDP in 2020. The subsequent economic recovery boosted economic output and government 
revenues  and  public  debt  fell  back  to  150.8%  of  GDP  in  2021.  Italy’s  public  debt  ratio  is  projected  to 
gradually decline to 146.8% of GDP by 2023 along  with the  expected economic growth, low  financing 

(8)  See  European  Commission  Country  Report  on  Italy  for  the  latest  results  and  the  ‘Fiscal  Sustainability  Report  2021’, 

Institutional Paper 171, 25 April 2022 for methodological details. 

4 

 
                                                           
2. Assessment of macroeconomic imbalances 

costs and lower primary deficits. The expected budgetary improvements stem from a gradual phasing out 
of emergency measures and the projected economic growth, which are expected to more than offset the 
deficit increasing impact of permanent measures introduced in recent years. 

The  labour  market  continues  to  face  structural  challenges  with  low  participation  rates,  regional 
and gender disparities, and high youth unemployment. Participation rates, especially among women, 
have been rising from albeit very low levels in the years prior to the pandemic and are about 13% below 
the  EU average (15 to 64 years). The unemployment rate  of  women in 2021 was about two percentage 
point higher than for men (10.6% vs 8.7%). Youth unemployment dropped from its 2014 peak of 42.7% 
to  29.7%  in  2021,  owing  largely  to  the  increase  in  temporary  employment  of  young  people.  The 
employment rate (15-64 years) records a substantial regional gap, between 66.4% in the North and 44.8% 
in the South (Mezzogiorno).  

The  labour  market  weathered  the  pandemic  shock  but  recent  job  gains  are  largely  driven  by 
temporary  employment.  Headcount  employment,  in  particular  jobholders  with  permanent  contracts, 
were  effectively  protected  by  short-time  work  schemes  and  the  drop  in  employment  was  contained  in 
2020.  The  job  market  recovered  in  2021,  with  surging  temporary  employment  (9.7%)  being  the  main 
pillar of employment growth. The  unemployment rate  fell  between 2019 and 2021 from 9.9% to 9.5%. 
However,  activity  and  employment  rates,  in  particular  of  women  and  young  people,  remain  markedly 
below the EU average. Moreover, the size of the shadow economy in Italy, albeit on a falling trend, was 
estimated  at  11.3%  of  GDP  in  2019 (9)  reflected  by  widespread  undeclared  work.  Looking  ahead,  jobs 
growth  is  forecast  to  continue,  as  policy  measures  favour  a  more  efficient  functioning  of  the  labour 
market and are also expected to lift labour supply and promote labour market transitions.  

In  2021,  the  banking  sector  restored  its  profitability  and  made  significant  progress  in  reducing 
legacy  non-performing  loans.  Banks’  profitability  recovered  to  pre-pandemic  levels,  registering  a 
return-on-equity of 5.8% in Q3 2021, mainly due to lower loan-loss provisions. Since Q4 2020, the CET1 
ratio  for  Italian  domestic  banks  slightly  declined  to  15.4  %  in  Q3  2021,  but  remained  above  the  pre-
pandemic level of 14%% in 2019. The legacy stock of non-performing loans (NPLs) continued to decline, 
with the  gross NPL ratio falling to 4% in Q3 2021, from 5.6% in Q3 2020 and from the pre-pandemic 
level of 6.7% (at the end of 2019). However, the rising share of loans that show a significant increase in 
credit risk (Stage 2 loans) underlines the need for close monitoring. Moreover, the full impact (10) of the 
pandemic  on  asset  quality  will  likely  become  visible  only  with  a  certain  time  lag,  once  state-support 
measures are being fully phased-out and granted moratoria have expired. Following three prolongations, 
83% of approved moratoria had expired by 31 December 2021 and the total volume of loans with non-
expired moratoria (i.e. legislative and voluntary moratoria granted by banks) amounted to EUR 44 billion. 
Risks  also  persist  that  potential  second-round  effects  on  economic  growth  from  Russia’s  unprovoked 
invasion of Ukraine could lead to further vulnerabilities associated with private sector debt (see box 2.1). 

Since  the  beginning  of  the  pandemic,  Italian  banks  had  increased  their  exposure  to  domestic 
sovereign. According to ECB data, Italian banks' holdings of Italian sovereign debt increased by EUR 71 
billion  since  December  2019  and  reached  a  peak  at  EUR  710  billion  in  September  2020, (11)  before 
falling  back  to  EUR  671  billion  by  December  2021.  Sovereign  exposure  of  the  Italian  banking  sector 
remains high and sovereign debt accounted for 21.3% of total banking sector assets in December 2021. 
The 10-year sovereign bond yield increased by around 160 bps in the first four months of 2022 continuing 
the increasing trend since summer 2021. Bank of Italy estimates that the impact on banks’ capitalisation 
of an upward shift in the sovereign yield curve would be limited. (12) However, the risks associated with 
the increased share of public guarantees on banks’ balance sheets amplifies the sovereign-bank nexus, as 
illustrated in the thematic chapter. Finally, the Italian financial system remains predominately bank-based 
and  despite  some  progress  in  recent  years,  access  to  non-bank  finance  remains  underdeveloped  and 
concentrated in northern regions.  

(9)  Istat (2021), Economia non osservata nei conti nazionali, 18 October 2021. 
(10)  In  view  of  the  pandemic’s  delayed  impact  on  corporate  solvency,  the  Italian  Banking  Association  expects  3.8%  of  loans  to 

become non-performing in 2022 (after 2.1% in 2021), implying a rise in the NPL ratio. 

(11)  ECB BSI Data: Domestic exposure is calculated as the loans to the Government, plus the amount of government securities held 
by the banking system. The level of debt securities stood at EUR 410 bn in Q4 2021. See the thematic chapter for more granular 
information. 

(12)  Bank of Italy, Financial Stability Report, 19 November 2021, p. 40. 

5 

                                                           
2. Assessment of macroeconomic imbalances 

Italian  banks’  exposure  to  Russia  is  contained  but  is  amongst  the  highest  in  the  EU,  with  total 
claims representing about 1.2% of Italian GDP. According to the latest EBA dashboard (Q1-2022), the 
exposure of Italian banks to Russian counterparts amounted to EUR 21.8 billion or 28.6% of the total EU 
exposure  towards  Russian  counterparts  at  the  end  of  December  2021.  Italian  banking  groups  increased 
operations on the Russian market since 2015, but are currently re-assessing their exposure to Russia (and 
Ukraine)  and  considering  options  to  mitigate  the  risks  associated  with  this  exposure.  However,  the 
exposures to Russia appear small relative to the total assets and loan books of parent groups exposed to 
Russia. Even a full write-off of banks’ investments in their Russian subsidiaries in an extreme scenario is 
expected to have only a moderate impact on the capital buffer at the group level (see also Box 2.1). 

Assessment of MIP relevant policies 

Italy  has  started  to  implement  its  Recovery  and  Resilience  Plan  and,  if  fully  implemented,  the 
measures  are  expected  to  spur  competitiveness  and  productivity.  The  enabling  law  to  reform  the 
judicial  system  adopted  in  2021  is  set  to  enhance  the  efficiency  of  the  judicial  system  provided  further 
implementing steps foreseen in the RRP proceed on schedule. Moreover, additional resources are being 
deployed to clear the backlog of cases before the courts. The timeliness and greater predictability of legal 
decisions  should  make  the  Italian  economy  more  attractive  for  foreign  investment.  Similarly,  the 
measures on public procurement reform adopted in 2021 and the envisaged revision of the code of public 
procurement by 2022 are conducive to simpler and faster procedures for awarding public contracts and 
ultimately to the improvement of the business environment. A public administration reform planned for 
2022  under  the  RRP  has  the  potential  to  strengthen  administrative  capacity  and  reform  public 
employment  at  all  levels  of  government.  Similarly,  the  government  intends  to  remove  barriers  to 
competition in  selected sectors in 2022 and has implemented the  Transizione 4.0 tax credit in 2021, as 
part of RRF-supported measures to favour the digitalisation of business.  

Reforms,  including  those  in  the  Recovery  and  Resilience  Plan,  are  expected  to  improve  the 
efficiency of revenue collection and public spending in the medium term. The government maintained 
its  emergency  support  for  households  and  firms  and  further  stepped  up public  investment  in  2021. The 
reforms and investments included in Italy’s Recovery and Resilience Plan are expected to help reduce the 
debt  ratio  by  supporting  GDP  growth,  enhancing  revenue  collection  and  tailoring  spending.  With  the 
2022 Budget, the government reduced the  personal income tax rates for middle-income earners and the 
draft  delegation  law  of  October  2021  sketched  out  a  general  tax  reform.  Past  reforms  to  bolster  tax 
compliance  have  already  mitigated  the  still  high  revenue  losses  from  tax  evasion.  The  RRP  measures 
planned  for  2022  are  expected  to  further  improve  tax  collection.  On  the  expenditure  side,  the  RRP 
envisages  reinforcing  spending  reviews  and  completing  the  reform  of  fiscal  federalism  to  increase 
transparency  and  encourage  spending  efficiency  across  all  government  levels.  By  contrast,  the  large 
number of guarantees granted during the pandemic increased the government’s contingent liabilities and 
hence the risk of higher public spending in the next years. In addition, pension expenditure is projected to 
grow  until  2026,  in  part  due  to  the  temporary  early  retirement  scheme  for  the  period  2019-2021  and 
prolonged to 2022 with stricter eligibility criteria, before the provisions of the 2011 pension reform are set 
to slow pension spending. 

The  RRP  includes  measures  to  increase  participation  rates  and  the  government  has  extended  the 
social safety net. The National programme for the Guaranteed Employability of Workers (GOL) and the 
National Plan for New Skills, adopted in 2021, have the potential to raise labour market participation and 
facilitate  jobs  transitions  while  reducing  hysteresis  effects,  regional  disparities  and  skill  mismatches. 
Similarly,  the  2021  reform  of  university  degrees  easing  access  to  some  professions  as  well  as  the 
envisaged  2022  reform  of  the  orientation  services  in  upper  secondary  schools  are  expected  to  facilitate 
students’  transition  from  education  to  the  labour  market.  However,  lowering  the  entry  barriers  to  the 
labour market more effectively, particularly for women, requires strengthening the provision of affordable 
quality  early  childhood  education  and  care,  as  well  as  counteracting  the  effects  of  labour  market 
segmentation on young people. The reform of the social safety net included in the 2022 budget law and 
detailed in the Decreto Sostegni Ter extends inter alia the sectorial coverage of short-time work schemes. 
While  this  measure  is  welcome,  the  reform  does  not  fully  address  one  of  the  major  structural 
shortcomings of short time work schemes’, namely the focus on the protection of specific jobs instead of 
workers.  The  impact  of  the  reform  will  in  part  depend  on  the  strengthening  of  regional  public 
employment  services  as  part  of  the  GOL  reform.  The  adoption  of  the  three-year  plan  2020/2022  to 

6 

2. Assessment of macroeconomic imbalances 

combat  labour  exploitation  in  the  agricultural  sector  (Piano  triennale  di  contrasto  allo  sfruttamento 
lavorativo  in  agricoltura  e  al  caporalato  2020/22)  and  the  RRP-sponsored  National  Plan  tackling 
undeclared  work  across  all  economic  sectors  set  to  be  adopted  in  2022  might  contribute  to  reduce 
irregular employment and the size of the shadow economy. 

The  extension  of  previous  measures  and  the  steps  made  for  reforming  the  insolvency  framework 
continue  supporting  the  improvements  made  in  addressing  NPLs.  NPL  disposals  and  the  dynamic 
secondary  market  of  impaired  assets  have  supported  the  reduction  in  non-performing  exposures  by  the 
Italian  banking  sector.  The  government  also  extended  the  state-supported  NPL  securitisation  scheme 
(“Garanzia sulla Cartolarizzazione delle Sofferenze” – GACS)  and other emergency  measures (13) until 
June 2022. The loan moratoria and tax credit for NPL disposal have been phased out at the end of 2021, 
as discussed more in detail in the thematic chapter, and the next two years will be an important test for the 
resilience  of  the  Italian  banking  system.  Furthermore,  the  implementation  of  the  RRP  investments  in 
energy  efficiency  and  building  renovations,  may  have  a  positive  impact  on  the  recovery  of  the 
construction sector, which was a major contributor to the peak of NPLs reached in the aftermath of the 
great recession. Finally, some progress was made in the implementation of the reform of the insolvency 
framework in the second semester of 2021. An efficient insolvency regime is essential to better cope with 
a  potential  increase  in  bankruptcies  as  it  allows  viable  companies  to  restructure  debt,  avoid  the 
accumulation of non-performing debt and support a  more  efficient reallocation of resources.  As part of 
the  Italian  RRP,  the  reform  introduced,  in  November  2021,  a  new  out-of-court  settlement  procedure 
(composizione  negoziata),  an  enhanced  digitalization  of  insolvency  proceedings  and  a  reinforced 
specialisation of courts.  

Conclusion 

Italy continues to face vulnerabilities with cross-border relevance, relating to the high government 
debt and weak productivity growth, in a context of labour market fragilities and some weaknesses 
in the financial sector. The public debt-to-GDP ratio started to decline in 2021, albeit from a high level. 
As a result of the pandemic-induced recession and policy response, Italy’s public debt rose from 134% of 
GDP in 2019 to 155% of GDP in 2020. Along with the economic recovery in 2021, the debt ratio fell to 
around 151% and is forecast to further decline over the next two years. Low productivity growth remains 
a  key  growth  impediment,  given  persistent  structural  shortcomings.  Italian  banks  are  more  exposed  to 
their sovereign following the COVID-19 crisis. Banking sector asset quality has considerably improved, 
but may face challenges as the impact of the pandemic fully unfolds. The unemployment rate continued to 
fall in 2021, while employment partly recovered the losses incurred in 2020. However, the labour force is 
still lower than before the pandemic crisis mostly because of the decrease of working age population and 
joblessness  continues  to  persist,  especially  among  the  young.  Increasing  energy  prices  associated  with 
Russian military aggression against Ukraine  may further aggravate economic vulnerabilities, along with 
the risk of the disruption of energy goods imports from Russia (see box 2.1). 

The measures included in the RRP are expected to address imbalances in Italy. Reforms to improve 
the  business  environment  and  to  enhance  the  efficiency  of  the  public  administration,  as  well  as 
investment,  particularly  in  innovation,  digitalisation  and  transport  are  expected  to  spur  competitiveness 
and  productivity.  The  effect  of  investment  and  reforms  can  take  time  to  become  visible  and  crucially 
depends on implementation. To proceed with the government debt-ratio reduction that started in 2021 and 
to prepare for rising debt servicing costs along with normalising monetary policy, prudent fiscal policies 
and growth-enhancing reforms, as well as an efficient use of national and European resources are critical. 
The  measures  adopted  to  further  improve  tax  compliance  and  tax  collection  and  strengthen  spending 
reviews  are  expected  to  lead  to  a  more  efficient  use  of  resources.  Measures  to  increase  labour  market 
participation tend to go in the right direction. Related challenges, notably the lack of affordable quality 
childcare  and  the  weak  coordination  between  the  social  safety  systems  and  other  labour  market 
institutions,  are  not  yet  effectively  addressed.  The  measures  adopted  to  support  the  employability  of 
workers and those forthcoming are expected to make the labour market more efficient. The progress made 
in  the  implementation  of  the  insolvency  reform  is  expected  to  support  a  more  efficient  allocation  of 
financial resources.  

(13)  Among  others,  the  Central  Guarantee  Fund  for  SMEs,  Sace  guarantee  and  Gasparrini  Fund,  were  the  main  extraordinary 

measures introduced to support firms and households after the pandemic.  

7 

                                                           
Based  on  the  findings  in  this  in-depth  review,  the  Communication  “European  Semester  –  2022 
Spring  Package” (14)  sets  out  the  Commission’s  assessment  as  to  the  existence  of  imbalances  or 
excessive imbalances in Italy, in line with Regulation 1176/2011.  

2. Assessment of macroeconomic imbalances 

(14)  European Commission (2022), European Semester Spring Package 2022, COM(2022)600 final. 

8 

 
 
                                                           
2. Assessment of macroeconomic imbalances 

Box 2.1: 

Exposures to the commodity price surge and to Russia 

This  box  summarises  risks  and  exposures  related  to  the  commodity  price  surge  and  the 
direct links with the Russian economy. The surge of commodity prices since the second half of 
2021 has been aggravated by the Russian military aggression  against Ukraine. This box reviews the 
risks  for  Italy’s  economy.  The  data  presented  in  this  box  suggests  that  surging  energy  prices  are  a 
pressing  concern,  along  with  the  risk  of  the  disruption  of  energy  goods  imports  from  Russia.  The 
energy  price  increase  has  already  started  affecting  the  current  account  balance  and  will  likely 
negatively  affect  households’  real  disposable  incomes  and  companies’  expenditures,  with  uncertain 
repercussions over the medium term. 

Graph b.1.1: 

Sectoral distribution of energy use and of energy imported from Russia  

Notes: The left panel displays the distribution of primary energy usage in Italy according to Eurostat energy balances. The horizontal axis displays the 
relative importance of energy-consuming sectors. The vertical axis displays the importance of energy from Russia in satisfying that need. Note that this 
dependence on Russia differs according to sector’s use of natural gas vs oil and coal. For comparison, the right hand panels displays the same concept for 
the EU aggregate. Russian imports include oil and petroleum products,natural gas and solid fossil fuels. 
Sources: Eurostat and European Commission services calculations 
Italy’s  energy  production  relies  significantly  on  natural  gas  and  depends  considerably  on 
Russia for its energy goods supply. In 2020, Italy’s gas imports from Russia amounted to 43% of 
its total natural gas imports, close to the EU average (Table b.1.1). Electricity production and heating 
are strongly based on the use of natural gas and firms and households are thus particularly exposed 
to gas price increases and potential disruptions of Russian energy imports (Graph b.1.1). Therefore, 
the  recent  commodity  price  surge  and  possible  supply  disruptions  are  likely  to  have  a  strong  and 
direct impact on the Italian economy. 

The  commodity  price  surge  has  a  strong  direct  impact  on  the  trade  balance.  Higher 
commodity  prices  are  expected  to  lower  the  trade  balance  by  close  to  2  pp.  of  GDP  in  2022  (see 
Graph b.1.2). Nonetheless, the trade balance is likely to remain in surplus. Overall, the terms-of-trade 
shock is likely to negatively affect household real disposable incomes.  

Graph b.1.2: Italy goods and service trade balance – fossil trade contribution 

Notes: The graph displays the trade balance as % of GDP, and highlights net trade of petroleum products, natural gas and solid fossil fuels (mainly coal), in 
2015 import prices. The ‘fossil price impact’ component details the impact of price changes on the (also changing) real trade balance. 2022 and 2023 figures 
reflect central assumptions of the Commission spring forecast, notably combining the forecasted fossil price evolution with broadly forecasted import 
quantities of fossil energy sources. 

Financial exposures vis-à-vis Russia are concentrated on the banking sector. Italian banks are 
among those in the EU most exposed with total claims representing about 1.2% of Italian GDP, the 
bulk of which is accounted for by large banking groups (See Chapter 3). However, the capitalization 
and Russian asset-to-liability ratios of the latter suggest spillover risks to be limited even in case of a 

9 

 
 
 
 
 
 
 
 
 
 
 
2. Assessment of macroeconomic imbalances 

full  asset  wipe-out  in  an  extreme  scenario.  Financial  sanctions  and  related  effects  can  thus  be 
surmised to have a minor potential effect on the Italian banking sector and financial stability.  

Table b.1.1: 

Selected exposures 

Data sources: Eurostat for commodity exposures, European Commission Figaro for value-added exposures, BIS for consolidated banking exposures, 
European Commission FinFlows for other financial exposures. Energy gross inland consumption excludes net imports of electricity and derived heat. 

10 

Trade & financial exposuresunitITEUEnergy mixunitITEUDomestic value added embodied in exports to Russia% of GDP0.4%0.4%Solids fossil fuels (incl. peat)% of Gross inland consumption 20203.7%10.8%Non-energy Russian import content in final demand% of GDP0.4%0.4%Oil and petroleum products% of Gross inland consumption 202032.4%32.7%Russian tourist nights spent% of total 20192.6%2.7%Natural gas% of Gross inland consumption 202042.0%24.4%FDI assets held in Russia% of 2020 GDP0.8%2.5%Renewables and waste% of Gross inland consumption 202022.0%19.0%Portfolio & other inv. assets held in Russia% of 2020 GDP0.4%0.9%Nuclear% of Gross inland consumption 20200.0%13.1%FDI liabilities towards Russia% of 2020 GDP0.0%1.2%Commodity exposuresunitITEUPortfolio & other inv. liabilities towards Russia% of 2020 GDP0.1%1.1%Net petroleum imports from all countries% of GDP 20211.2%1.2%Consolidated banking exposures towards Russia% of 2021 GDP1.2%0.5%Crude oil imports from Russia '20% of oil imports11.1%25.7%Net gas imports from all countries% of GDP 20210.8%0.6%Gas imports from Russia '20% of gas imports43.3%43.6% 
 
 
 
 
 
 
 
 
Table 2.1: 

Selected economic and financial indicators (Part 1), Italy 

2. Assessment of macroeconomic imbalances 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary pressures. 
The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. Raciborski, W. 
Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating Potential Growth 
Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors and 
global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account benchmarks", 
European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to reach and stabilise the NIIP at -35% of GDP over the 
next 20 years. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment (FDI) 
equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding instruments that 
cannot be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. Methodology 
to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., Turrini, A., 
Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42 
Source:  

11 

all variables y-o-y % change unless otherwise stated2003-072008-122013-17201820192020202120222023Real GDP 1.1-1.40.40.90.5-9.06.62.41.9Potential growth  (1)0.8-0.2-0.10.00.0-0.10.20.51.0Contribution to GDP growth:Domestic demand 1.0-1.70.21.10.2-7.96.22.71.8Inventories 0.1-0.20.20.1-0.4-0.30.20.00.0Net exports 0.00.6-0.1-0.30.7-0.80.2-0.20.0Contribution to potential GDP growth (1):Total Labour (hours) 0.3-0.30.1-0.3-0.4-0.3-0.2-0.10.4Capital accumulation 0.60.3-0.10.00.0-0.10.10.30.3Total factor productivity -0.1-0.1-0.10.30.30.30.30.30.3Output gap (2)1.8-1.3-3.20.20.7-8.3-2.4-0.50.3Unemployment rate7.68.512.110.69.99.39.59.58.9Harmonised index of consumer prices (HICP)2.32.40.61.20.6-0.11.95.92.3GDP deflator 2.31.51.01.10.91.40.53.12.4External positionCurrent account balance (% of GDP), balance of payments-1.0-2.21.92.53.23.72.51.21.6Trade balance (% of GDP), balance of payments-0.1-0.72.92.43.43.72.4..Primary income balance (% of GDP)0.1-0.30.01.10.81.21.2..Secondary income balance (% of GDP)-1.0-1.2-1.0-1.0-1.0-1.2-1.1..Current account explained by fundamentals (CA norm, % of GDP) (3)0.00.61.42.12.22.32.12.22.1Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)-0.3-0.2-0.30.10.30.40.60.80.9Capital account balance (% of GDP)0.10.10.10.0-0.10.0-0.1..Net international investment position (% of GDP)-16.7-21.0-16.6-5.0-1.12.07.4..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)-9.4-22.4-15.9-6.0-0.11.16.7..Net FDI flows (% of GDP)0.41.0-0.10.0-1.1-0.30.90.12.4CompetitivenessUnit labour costs (ULC, whole economy)2.32.10.52.01.32.1-0.11.80.9Nominal compensation per employee 2.71.10.52.01.3-5.16.03.61.7Labour productivity (real, hours worked)0.10.00.30.00.52.3-1.30.60.0Real effective exchange rate (ULC)1.4-0.1-0.41.7-2.3....Real effective exchange rate (HICP)0.1-0.8-0.21.9-2.20.9-0.3..Export performance vs. advanced countries (% change over 5 years)-0.8-12.5-8.7-2.4-3.9-2.4...Private sector debtPrivate sector debt, consolidated (% of GDP)97.0121.3115.9107.8106.0118.7116.4e..Household debt, consolidated (% of GDP)32.842.441.940.841.145.044.7e..Household  debt, fundamental benchmark (% of GDP) (6)22.430.436.436.837.141.039.0..Household  debt, prudential threshold (% of GDP) (6)35.135.637.639.941.443.643.8..Non-financial corporate debt, consolidated (% of GDP)64.278.973.967.064.973.771.7e..Corporate debt, fundamental benchmark (% of GDP) (6)47.453.258.557.156.862.058.4..Corporate debt, prudential threshold (% of GDP) (6)57.159.965.069.172.177.377.7..Private credit flow, consolidated (% of GDP) 9.32.9-0.62.00.34.13.3e..Corporations, net lending (+) or net borrowing (-) (% of GDP)-0.10.62.83.23.36.15.24.85.1Households, net lending (+) or net borrowing (-) (% of GDP)2.40.91.81.51.47.24.41.80.7Net savings rate of households (% of net disposable income)8.74.63.12.62.410.27.5..forecast 
 
 
   
 
Table 2.2: 

Selected economic and financial indicators (Part 2), Italy 

2. Assessment of macroeconomic imbalances 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is estimated 
in a cointegration framework using a system of five fundamental variables; total population, real housing stock, real 
disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, based on 
Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - Discussion Papers 2015 - 
048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. Price-to-income and price-to-
rent gaps are measured as the deviation to the long term average (from 1995 to the latest available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest available 
year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 

Source: Eurostat and ECB as of 2022-05-02, where available; European Commission for forecast figures (Spring forecast 2022) 

12 

all variables y-o-y % change unless otherwise stated2003-072008-122013-17201820192020202120222023Housing marketHouse price index, nominal6.10.3-3.2-0.6-0.11.92.6..House price index, deflated3.6-1.6-3.7-1.5-0.72.10.9..Overvaluation gap (%) (7)8.816.5-2.9-9.2-9.9-7.7-7.8..Price-to-income overvaluation gap  (%) (8)5.616.30.5-8.4-9.4-5.5-7.0..Residential investment (% of GDP)5.45.44.24.14.04.04.9..Government debtGeneral government balance (% of GDP)-3.1-3.7-2.6-2.2-1.5-9.6-7.2-5.5-4.3General government gross debt (% of GDP)105.6117.6134.4134.4134.1155.3150.8147.9146.8Banking sectorReturn on equity (%)9.7-0.6-3.05.84.80.8...Common Equity Tier 1 ratio6.98.812.114.115.117.2...Gross non-performing debt (% of total debt instruments and total loans and advances) (9)4.48.312.46.95.43.5...Gross non-performing loans (% of gross loans) (9)..14.88.46.74.54.0..Cost of borrowing for corporations (%)4.84.02.61.81.71.61.3..Cost of borrowing for households for house purchase (%)4.33.82.51.91.41.31.4..forecast 
   
 
 
3.  THEMATIC CHAPTER: FINANCIAL SECTOR 

The  Italian  banking  system  has  reduced  vulnerabilities  since  the  global  financial  crisis.  The  NPL  ratio 
considerably  decreased,  although  it  is  higher  than  the  EA  average  and  lengthy  insolvency  procedures 
impede  a  fast  resolution  of  legacy  NPLs.  The  exposure  of  Italian  banks  to  sovereign  risk  remains 
significant and especially smaller and innovative firms lack access to finance, in particular in regions that 
lag behind. 

Asset quality and non-performing loans 

Italian  banks  further  reduced  their  stock  of  non-performing  loans  (NPL),  with  NPL  workouts 
continuing during the pandemic. On the back of the NPL disposals, the gross NPL ratio (gross NPL as 
percentage of total loans) at system level decreased from the peak of 16.8% in Q3-2015 to 6.7% in Q4 
2019. By Q3 2021, the NPL ratio further declined to some 4% (22), due to both an increase in total loans 
(denominator effect) and a reduction in the NPL legacy stock (numerator effect), while the share of NPLs 
remains  significantly  higher  for  non-financial-companies  (NFCs)  than  for  households  (Graph  3.1  (a)). 
The disposal of bad loans (sofferenze), the worst category of impaired assets, has been the main driver of 
banks’ legacy NPL reduction, with a large part of non-performing private debt transferred to specialised 
financial institutions. As a result, the segment of unlikely-to-pay (UtP) (23) loans represents an increasing 
share of the remaining NPL stock. (24) The coverage ratio at system level remained broadly stable over 
the last year (52% in Q4-2021). (25) 

The COVID-19 pandemic did not lead to a rise in NPLs so far, notably due to government support 
measures. Borrower relief measures and liquidity support, in particular loan moratoria, helped shoring up 
corporate  balance  sheets.  The  disposal  of  NPLs  has  been  supported  mainly  by  NPL  securitisations 
benefitting  from  government  support  (GACS  scheme),  but  also  by  the  provisions  of  the  “Cura  Italia” 
Decree of March 2020, allowing banks to convert deferred tax assets into tax credits against NPL sales. 
Moreover,  the  prudential  guidance  of  supervisory  authorities  on  the  flexibility  concerning  the 
classification of loans, which aimed to reduce the potentially pro-cyclical effects of an increase in credit 
risk,  and  the  regulatory  relief  provided  through  the  Capital  Requirement  Regulation  II  (CRR  II) (26) 
amendments also helped.  

The Italian government prolonged the loan moratoria for the last time until December 2021. This 
third  prolongation  affected  only  the  capital  component  of  the  instalments,  while  borrowers  had  to  pay 
interest rate expenses. By 31 December 2021, 83% of approved moratoria had expired. The total volume 
of loans with non-expired moratoria (i.e. legislative and voluntary moratoria granted by banks) amounted 
to  EUR  44  billion,  of  which  EUR  36  billion  concerned  loans  to  non-financial  corporations. (27)  The 
ability  of  these  debtors  to  return  to  regular  debt  servicing  will  be  tested  in  2022,  with  potential 
repercussions on asset quality and NPL accumulation. The increase in Stage 2 loans (i.e. loans that show 
a significant increase in credit risk according to IFRS 9) as a share of total performing loans from 12.9% 

(22)  Controlling  for  loans  growth  the  ratio  would  be  4.83%  in  Q3  2021  (gross  NPLQ3-2021/Loans  Q4-2019).  The  level  of  gross  non-
performing  debt  was  EUR  138.5  bn  in  Q3  2019  and  decreased  to  EUR  91  bn  in  Q3  2021.  (Numerator  effect).  In  the  same 
period, the level of total loans increased from EUR 1971 bn to EUR 2314 bn. (Denominator effect). 

(23)  While loans are classified as ‘bad loans’ based on the criteria related to past-due payments, the classification as ‘unlikely-to-

pay’ relies less on the quantitative criteria and defines some events that trigger the non-performing classification. 

(24)  Some second-tier banks have NPL ratios above the system level, though they represent a smaller part of the overall NPL stock. 
(25)  Bank of Italy: Financial Stability Report (April 2022). 
(26)  The CRR “quick fix” modified the IFRS 9 transitional arrangements to mitigate the impact on regulatory capital and on banks’ 
lending  capacity  of  the  likely  increases  in  expected  credit  loss  (“ECL”)  provisioning  under  IFRS  9  due  to  the  economic 
consequences of the COVID-19 crisis. The CRR quick fix amended Article 473a CRR, which contains arrangements allowing 
institutions  to  add  back  to  their  Common  Equity  Tier  1  (“CET1”)  capital  a  portion  of  any  increase  in  provisions  due  to  the 
introduction  of  ECL  accounting  under  IFRS  9  during  a  transitional  period.  The  CRR  “quick  fix”  also  introduced  a  new 
transition period that allows financial institutions to add-back increases in ECL provisions for non-credit-impaired assets to CT1 
capital during 2020-2024. 

(27)  Bank of Italy, COVID 19 Task force: Press release, January 13, 2022. 

13 

 
                                                           
3. Thematic chapter: Financial Sector 

in June 2020 to 14.6% at the end of 2021 indicates that the close monitoring of these exposures remains 
warranted (see footnote 14). 

Liquidity, capital, and profitability 

Liquidity  conditions  of  Italian  banks  remained  stable.  Short-term  liquidity  of  Italian  banks,  as 
measured by the Liquidity Coverage Ratio (LCR) at system level, stood at 203,2% in February 2022, far 
above  the  required  level  of  100%.  The  Net  Stable  Funding  Ratio  (NSFR)  for  Italian  banks  equalled 
134.5% as of Q4 2021, while none of the Italian institutions posted a ratio below the mandatory threshold 
of 100%. (28) The comfortable liquidity position is, inter alia, attributable to the Eurosystem refinancing 
operations  providing  abundant  liquidity  and  to  the  increase  in  deposits,  both  by  companies  and 
households. 

The capitalisation of Italian banks is markedly higher than it was prior to the double-dip recession 
between  2008  and  2013.  Lower  loan-loss  provisions  amid  a  more  favourable  macroeconomic 
environment  had  a  positive  impact  on  capitalisation,  while  the  resumption  of  dividend  payments 
contributed somewhat negatively to the banks’ capital base. The Common Tier 1 (CET1) ratio at system 
level stood at 15.1% in Q3-2021, implying a drop of 40 basis points compared to Q4-2020. This decrease 
is  mainly  attributable  to  the  phasing-out  of  the  transitional  prudential  arrangements  connected  with  the 
adoption of IFRS 9.   

Banks’ profitability underpinned by sound asset quality would be a key element for strengthening 
the capital base. In the first half of 2021, the profitability of Italian banks rose considerably compared to 
the end of 2020, contributing to an organic build-up of capital. As such, the Return on Equity (ROE) at 
system level rose from 1% to 5.8% in Q3-2021. The increase is mainly attributable to the drop in loan-
loss provisions, compared to a very high level 2020, and to a rise in banks’ net fees.  

Insolvency  

Insolvency  proceedings  in  Italy  remain  lengthy  compared  to  other  EU  economies,  but  the  full 
implementation of the 2019 insolvency code is currently underway. The pandemic delayed the entry 
into  force  of  the  reform  of  the  insolvency  framework  to  2022  and  alternative  in-court  and  out-of-court 
arrangements  introduced  over  the  last  years  had  a  limited  impact  so  far.  A  new  out-of-court  settlement 
procedure  (composizione  negoziata  per  la  soluzione  della  crisi  di  impresa)  adopted  in  August  2021  is 
expected  to  help  restructure  companies  that  are  under  distress  at  an  earlier  stage,  thus  reducing  the 
workload  of  courts  and  enhancing  the  efficiency  of  the  judicial  system.  In  2022,  Italy  is  expected  to 
transpose the EU Directive (29) and to adopt the delegated acts on insolvency. The full implementation of 
the 2019 insolvency code coupled with efficiency gains in the court system, as part of Italy’s RRP, could 
be  beneficial  both  for  addressing  a  potential  increase  in  bankruptcies  and  for  averting  the  new 
accumulation of  non performing debt, as the effect of the pandemic on NPL could become visible with a 
certain time lag.  

Sovereign-bank nexus 

Italian  banks’  exposure  to  sovereign  risk  remains  significant.  Domestic  exposure (30)  as  a  share  of 
banks’  total  assets  increased  slightly  from  20.8%  in  December  2019  to  21.3%  in  December  2021, 
significantly above the Euro area average (Graph 3.1 (e) and (f)). More specifically, debt securities held 
by  the  Italian  banking  system  amounted  to  EUR 410 billion  in  December  2021,  accounting  for  13%  of 
total banking assets. This segment of domestic exposure constitutes a potential short-term vulnerability as 
domestic  sovereign  bond  volatility  could  negatively  affect  banks’  capital  base.  Italian  sovereign  bond 
yields had fallen to 0.3% by summer 2021, largely due to the ECB’s asset purchasing programmes, but 
rose to 2.86% by end of April 2022. (31) The ECB’s Governing Council decided to discontinue net asset 

(28)  As  of  June  2021,  the  Net  Stable  Funding  Ratio  (NSFR)  became  a  mandatory  requirement.  The  source  for  NSFR  data  is  the 

statistical annex of the Financial Stability Report (April 2022) of Bank of Italy.  

(29)  The Council of Ministers approved – in preliminary examination - the related changes in March. 
(30)  ECB  BSI  Data:  Domestic  exposure  is  calculated  as  the  loans  to  the  Government  and  the  government  securities  held  by  the 

banking system. 

(31)  Bloomberg, 10-years Italian sovereign bond, “BTP decennale”. 

14 

                                                           
3. Thematic chapter: Financial Sector 

purchases  under  the  Pandemic  Emergency  Purchase  Programme  (PEPP)  at  the  end  of  March  2022  and 
recent bond market volatility has underscored the uncertainties surrounding the outlook.  

Due  to  some  mitigating  factors,  short-term  risks  stemming  from  home  bias  are  still  lower  than 
during  previous  periods  of  market  turmoil.  The  temporary  prudential  filter  for  unrealised  gains  and 
losses  on  banks’  holdings  of  public  debt  measures  at  fair  value,  implemented  under  the  Capital 
Requirement Regulation (CRR) “quick fix” and in force until 31 December 2022, decreases the impact of 
increasing sovereign yields on banks' core equity. In addition, Italian banks continued to rebalance their 
sovereign  exposures  in  favour  of  the  amortised  cost  portfolio, (32)  thereby  increasingly  shielding  their 
capital  base  from  sovereign  bond  volatility.  A  recent  simulation  by  the  Bank  of  Italy  shows  that  an 
upward shift of 100 basis points in the entire sovereign yield curve would lower the common equity tier 1 
ratio (CET1 ratio) on average by 21 basis points. (33) In comparison, a similar exercise performed in 2019 
led to a decline of 40 basis points on average in banks’ CET1 ratio.  

However, the level of public guarantees in banks’ portfolios significantly amplified  the sovereign-
bank nexus. In Q4-2021, bank loans guaranteed by both the SME Guarantee Fund and SACE as a share 
of  total  loans  to  non-financial  corporations  stood  at  41%, (34)  corresponding  to  6.9%  of  total  banking 
assets. The SME Guarantee Fund issued the largest share of guarantees, covering a credit volume of about 
EUR  272billion (35)  as  of  31  December  2021,  compared  to  a  pre-pandemic  level  of  13.3  billion  in 
December  2019.  Finally,  loans  to  corporates  and  SMEs  granted  by  SACE,  the  Italian  export  credit 
agency, reached almost EUR  32.6 billion in February 2022. (36) Government provisions  however, seem 
sufficient to cover potential losses on the stock of guaranteed loans.  

Access to bank and non-bank finance  

Italy’s  financial  system  remains  predominately  bank-based  with  limited  access  for  firms  to  non-
bank  finance.  In  2020,  venture  capital  investment  as  a  share  of  GDP  stood  at  0.02%, (37)  with  Italy 
ranking below the EU average and peer countries. An increase in the volume of market finance, including 
equity,  would  allow  firms  to  diversify  their  funding  sources,  make  Italian  firms  less  vulnerable  to 
potential shocks in the banking sector and allow for wider risk sharing. Among the initiatives to promote 
non-bank finance, the allowance for corporate equity (ACE), abolished in 2019, was reintroduced in 2020 
and further reinforced in 2021. (38) In 2019, the government launched the  National Fund for Innovation 
(Fondo  Nazionale  Innovazione)  to  promote  venture  capital.  The  Decree  Law  121/2021  (“Decreto 
Infrastrutture”)  increased  the  capital  endowment  of  the  fund  with  a  budget  of  up  to  EUR  2  billion.  In 
addition, the Recovery and Resilience Plan will allocate a further EUR 300 million for start-up financing 
and  EUR  250  million  to  develop  the  venture  capital  market  in  the  field  of  green  transition.  However, 
major  policy  interventions  are  limited  to  start-ups  and  early-stage  investment,  while  promoting  private 
equity  financing  could  be  beneficial  both  for  the  growth  phase  of  young  firms  and  the  restructuring  of 
established firms. Furthermore, targeted training for firms on the use of the different non-bank financing 
facilities (financial literacy) could help increase the diversification of financing sources. 

(32)  Bonds placed into the amortised cost portfolio are not valued with market prices and therefore shielded from market volatility. 
(33)  Further  breakdown  reveals  18  basis  points  for  significant  banks  and  37  basis  points  for  less  significant  banks.  

See Bank of Italy Financial Stability Reports 2021 No. 2 and 2019 No. 2.  
(34)  These numbers considered only the loan share covered by the public guarantees. 
(35)  MISE:  SME  Guarantee  Fund  Data: These  estimates  refers  to  the  amount  guaranteed  as  December  2021.  Total  value  of  bank 

loans under public guarantee for this measure: EUR 218 bn as of 31 December 2021. 

(36)  MEF Press release of the 13/01/2022 and 23/02/2022. These estimates are preliminary, as the measure have been extended until 

June 2022.  

(37)  Source: OECD, Enterprise Statistics, Venture Capital investment. (2020) 
(38)  The Decree Law 73/2021 (“Decreto Sostegni bis”) introduced the “Super ACE”, substantially increasing the percentage used to 
calculate the fiscal deduction (15% from 1.3% previously, with a cap of EUR 5 million) and providing for the possibility to turn 
the deduction into a tax credit. 

15 

                                                           
Graph 3.1: 

Thematic Graphs: Financial sector 

3. Thematic chapter: Financial Sector 

Source: European Commission services 

16 

0.02.04.06.08.010.012.014.016.018.020.018Q119Q120Q121Q1(a) NPL ratio by sectorOverall NPL rateNFCHHOthers% of sectoral loans and advancesSource: EC baced on ECB data,consolidated banking data,domestic banking groups and stand alone banks.-20-15-10-50510200920102011201220132014201520162017201820192020Return on Equity, %(b) Return on equityReturn on Equity (%)EU (chaning composition)Euro Area (chaning composition)Source:based on ECB CBD2, consolidated banking data, all domestic banking groups and stand alone banks.-4-3-2-1012345610Q111Q112Q113Q114Q115Q116Q117Q118Q119Q120Q121Q122Q1% of GDP (over last 4 quarters)(d) MFI lending (flows) to the domestic private sector (loans & corporate bonds)domestic corporate bondsdomestic NFC loansdomestic HH loanstotal lending & corporate bonds acquistionsSource: based on ECB BSI02040608010012014016018020018Q218Q318Q419Q119Q219Q319Q420Q120Q220Q320Q421Q121Q221Q321Q4market value in % of GDP (over preceding  4 quarters)(e) Detailed holder composition of general government debt (market value as % of GDP)Domestic central banksMFIs excl. central banksNon-bank fin. corp.Private sector (NFCs & HH)Unallocated domesticLiabilities to rest of EA19International central banksUnallocated foreignTotal domestic-held debtNominal debt (face value)Source: Commissionservicesbased on ECB,Eurostat and IMF024681012141618202011201220132014201520162017201820192020Tier 1 ratio, %(c) Tier 1 ratioTier 1 ratio (%)EU (changing composition)Euro Area (changing composition)Source: ECB bank lending survey010203040506070809010009Q310Q311Q312Q313Q314Q315Q316Q317Q318Q319Q320Q321Q3% of total financial assets (over last 4 quarters)(f) MFI assets decompositiondom HH loansdom NFC loansdom corp bondsdom equity and funds (exMFI)dom other fin lendingdom govtrest EAext assetsother assetsSource: BSI ECBdata