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July 27, 2017

IMF published its staff report and selected issues report on the 2017 Article IV consultation with Italy. Directors noted that progress is underway to safeguard financial stability. They called for additional measures to enhance operational efficiency of banks and materially reduce nonperforming loans (NPLs). Directors highlighted that NPL reduction and restructuring strategies of banks should be ambitious and credible, aided by supervisory assessments.

The staff report highlights that against the backdrop of high NPLs and weak profitability, the authorities have been taking actions to stabilize the banking sector. This includes efforts to deal with weak banks, bank consolidation frameworks, and lowering the stock of NPLs. Moreover, capital ratios of significant banks improved slightly but remain notably below the European average. The common equity tier 1 ratio stood at 10.4% in the fourth quarter of 2016, about 3.7 percentage points below the average in a sample of large European banks compiled by EBA. Including the successful capital increase of EUR 13 billion in early 2017 by Unicredit, Italy’s largest bank, the ratio would stand at about 11.6%. The latest annual supervisory review resulted in additional capital requirements for a few other banks. The staff recommends that a credible and comprehensive policy package would include establishing ambitious targets with individual banks to reduce NPLs and improve insolvency and debt enforcement procedures; the policy package should also involve making timely and effective use of the resolution framework and encouraging bank rationalization and consolidation, accompanied by proactive supervision and better governance to raise profitability.

 

The selected issues report examines the fiscal and wage reforms in Italy and seeks to quantify the net benefits of a comprehensive reform package aimed at addressing Italy’s inter-related challenges. Italy is struggling with modest growth, high public debt, and a banking system burdened with high NPLs and weak profitability. The report also takes a look at the country's pension system, examining the impact of the transition from the old Defined Benefit system to a Notional Defined Contribution (NDC) Scheme and highlighting that the 2017 budget dilutes expected gains from past pension reforms. The pension system would benefit from separating the insurance and social protection/welfare functions. Although the NDC in the very long run is expected to reduce pension spending, by itself it is not sufficient to deal with Italy’s fiscal problems. The authorities project long-term pension spending to remain relatively subdued, supported by the implementation of the past pension reforms and a strong recovery in employment.

 

Related Links

Staff Report (PDF)

Selected Issues Report (PDF)

Keywords: Europe, Italy, Banking, Insurance, NPLs, Resolution Framework, Capital Adequacy, IMF

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