Panetta Speech at Assiom Forex
Loan quality would deteriorate over the next two years
Fabio Panetta Bank of Italy governor held a speech in Genoa during the 30th edition of ASSIOM FOREX Associanzione . Associazione Operatori dei Mercati Finanziari.
According Mr. Panetta the world economy is being held back by ongoing monetary tightening in several countries and uncertainty raised by ongoing conflicts. Geopolitical rifts are emerging globally that, if not addressed, could undermine development prospects, integration among countries, and the multilateral architecture that has underpinned international relations since World War II.
In Europe, the economy has not experienced a deep recession so far, but it has been stagnating for many quarters and there are no signs of a decisive acceleration emerging. Inflation is falling rapidly, and risks to price stability have subsided. If monetary policy takes too long to accompany the ongoing disinflation, downside risks to inflation could emerge that would run counter to the symmetrical nature of the target set by the ECB Council.
The weakness of the European economy extends to Italy. To embark on a path of sustained growth, we must act along two directions. Investors must be given certainty about a downward trajectory of public debt; the reduction in risk premiums that could result would make the path less arduous. Investment that can increase innovation and productivity should be stimulated.
Focus on Non Performing Exposures
Past experience indicates that an increase in interest rates has positive effects on bank balance sheets in the short run, but over extended horizons often ends up negatively affecting the financial conditions of households and businesses, with feedback effects on credit.
According to bank of Italy’s estimates, loan quality would deteriorate over the next two years. The incidence of impaired loans would remain well below the peaks reached after the sovereign debt crisis, but unforeseen events could lead to more unfavorable scenarios.
Banks are required to exercise prudence in classifying loans and scrupulous application of international accounting standards, according to which expected losses should be recognized and adjustments made even when losses have not yet materialized.
Where models are unable to fully capture the effects of new risk factors on the probability of default, intermediaries are required to make specific adjustments31. This type of intervention is being used by some banks, but heterogeneously. The Bank of Italy is conducting in-depth investigations to disseminate best practices in this respect.
Conclusions
Positive signs have emerged in recent years: the increased accumulation of capital, the strength of the labor market, the competitive ability of many firms in international markets, and the strength of bank balance sheets. These are significant elements that can play an important role in reviving Italy's development.
Relevant Links:
https://www.bancaditalia.it/media/notizia/il-governatore-fabio-panetta-al-30-congresso-assiom-forex/
This newsletter is free please consider supporting it with a small donation
See my full professional profile (available for consulting projects)
My Podcast on Financial News and Education
My new Podcast on Italian Politics