A complicated year in the face of rising interest rates. Bank of Italy closed 2023 with a gross loss of 7.1 billion euros. A red that was common to most monetary institutions in the euro area, including the European Central Bank (ECB). In addition to the worsening of the interest margin by 11.4 billion, it was affected by the decline, by 3.5 billion, in the net result of the redistribution of monetary income. The Bank of Italy made use of the general risk fund for approximately 5.6 billion euros to absorb the gross loss. And taking into account the positive contribution of 2.3 billion deriving from the tax recovery of the gross loss – which will allow lower taxes to be paid in the future – the year ended with a positive net result of 0.8 billion. The next budget is also expected to be red. Return to profit in 2025.
In line with forecasts, the Bank of Italy records a shrinking balance sheet. It is not the first loss in history, of course, but it is the result of the normalization of monetary policy. In other words, the tightening of the cost of money has had a marked impact. This inconvenience was addressed with prudential provisions. At the end of 2023, the Bank of Italy’s balance sheet assets amounted to 1,253 billion, 223 less than in 2022. The reduction, explains the governor of the Bank of Italy Fabio Panetta, «is destined to continue also in the current financial year for further repayments of TLTRO3 operations (long-term refinancing operations, ndr) and as a result of the decisions of the Governing Council of the ECB regarding the deadline for the renewal of expiring securities”. On the assets side, “similarly to what was observed for the other central banks of the Eurosystem, the contraction is mainly attributable to refinancing operations, which decreased from 356 to 150 billion”. Monetary policy securities also “reduced, but to a lesser extent: at the end of 2023 they amounted to 657 billion, 39 less than the previous year, and consisted of approximately 600 billion in Italian government bonds”.
On the liabilities side, Panetta explained, “the decline affected both bank deposits, which fell by 57 billion, and – above all – the Bank’s debt balance in the TARGET system, which fell from 684 to 521 billion”. And the significant reduction in the latter item is «largely attributable to the net purchases of Italian securities, mainly public, by foreign investors and to the expansion of net funding abroad by Italian banks. These liquidity inflows were “partially offset by investments in foreign securities made by Italian residents”. “The third and fourth installments of the funds relating to the Recovery and Resilience Device, disbursed to the Italian State through the TARGET system” contributed to the decrease in the debt balance. The deficit balance, then, «continued to decrease in the first months of 2024; in March it averaged around 500 billion.”
The monetary tightening was necessary to stem the price flare-ups, but it had consequences. Panetta highlighted this in his report. “The increase in the ECB’s reference rates has led to an increase in the cost of budget liabilities, represented above all by bank deposits, against which there has been no corresponding increase in the return on monetary policy activities,” he explained. Despite this, “the capital funds accumulated over the years to deal with the possible materialization of risks are today largely sufficient to cover both the loss for 2023 and that estimated for 2024”. To such an extent that out of the net profit of 815 million, it was proposed to “pay Participants a dividend of 200 million, an amount 140 million less than the previous year”. To supplement the current dividend attributed, 140 million of the stabilization item is used, for a total of 340 million. It follows that the profit for the State is equal to 615 million, with a reduction of 1,061 million compared to the previous year.
Then there is the chapter on the costs of the Bank of Italy. Governor Panetta explained that he wanted to make the costs of Via Nazionale more “aware”. No clear cuts or a marked and specific cost containment objective, but a rationalization of internal processes, as in the case of structures, seizing the opportunities given by digitalisation. According to Panetta, «special attention must be paid to the conscious use of financial resources, to constantly keep cost dynamics under control and preserve the solidity of the budget». Also from this perspective, the governor points out, «making the most of the experience acquired with the hybrid work model – which involves a lower need for space in the offices – a program for reallocating the structures has been defined which will produce a significant decrease of real estate costs”. Also in this case, optimization through a conscious use of digital will be crucial for the future of the Bank of Italy.