Cleaning-up Bank Balance Sheets: Economic, Legal, and Supervisory Measures for Italy

Abstract

To stabilize and bring down nonperforming loans (NPLs) in the Italian banking system, the Italian authorities have been implementing a number of reforms, aimed among others at speeding up insolvency and enforcement proceedings, strengthening bank corporate governance, cleaning up balance sheets, and facilitating bank consolidation. This paper examines the Italian banking system's NPL problem, which ties up capital, weighing on bank profitability and authorities' economic reforms. It argues for a comprehensive approach, encompassing economic, supervisory, and legal measures. The authorities' reforms are important steps toward this end. The paper describes measures that could further support their actions.

Can Italy grow out of its NPL overhang? A panel threshold analysis

“…These findings are broadly in line with other cross-country analyses; see, for instance, Espinoza and Prasad (2010), Nkusu (2011), Glen andMondragón-Vélez (2011), andKlein (2013). With regard to Italy-specific studies, using a dynamic panel-data analysis covering the 62 largest Italian banks, Garrido et al (2016) show that while economic growth has been the most important determinant of the NPL buildup following the crisis, this was exacerbated by bank specific factors. Quagliariello (2007) concludes that Italian banks' riskiness and profitability are affected by the evolution of the business cycle.…”

“…However, the insolvency reforms, once fully implemented, are expected to yield benefits only gradually over time. Thus, additional measures are needed to deal with the existing high stock of NPLs, including more intensive use of out-of-court debt restructuring mechanisms; strengthened supervision; and a systematic assessment of asset quality for banks not already subject to the ECB comprehensive assessment, with follow-up actions in line with regulatory requirements; for more details, see Garrido et al (2016). Should the need arise, effective use of the framework for the prompt resolution of banks is also important and concerns related to the bail-in of retail investors should be dealt with appropriately (International Monetary Fund 2016).…”

Can Italy Grow Out of Its NPL Overhang? A Panel Threshold Analysis

“…These …ndings are broadly in line with other cross-country analyses; see, for instance, Espinoza and Prasad (2010), Nkusu (2011), Glen and Mondragón-Vélez (2011), and Klein (2013. With regard to Italy-speci…c studies, using a dynamic panel-data analysis covering the 62 largest Italian banks, Garrido et al (2016) show that while economic growth has been the most important determinant of the NPL buildup following the crisis, this was exacerbated by bank speci…c factors. Quagliariello (2007) concludes that Italian banks'riskiness and pro…tability are a¤ected by the evolution of the business cycle.…”

“…However, the insolvency reforms, once fully implemented, are expected to yield bene…ts only gradually over time. Thus, additional measures are needed to deal with the existing high stock of NPLs, including more intensive use of out-of-court debt restructuring mechanisms; strengthened supervision; and a systematic assessment of asset quality for banks not already subject to the ECB comprehensive assessment, with follow-up actions in line with regulatory requirements; for more details, see Garrido et al (2016). Should the need arise, e¤ective use of the framework for the prompt resolution of banks is also important and concerns related to the bail-in of retail investors should be dealt with appropriately (International Monetary Fund 2016).…”

Eurozone Governance in 2016: The Italian Banking Crisis, Fiscal Flexibility and Brexit (Plus Plus Plus)

“…By 2015, 18 per cent of total loans by Italian banks were non‐performing. This marked a three‐fold increase since the beginning of the crisis, with Italy accounting for more than half of all non‐performing loans in the eurozone (Garrido et al ., , p. 3). Italy's dismal growth performance during this period was a major contributory factor.…”