Uncertainty. This is the scenario at the end of 2022: the world economy is strongly affected by high inflation, energy and food supply difficulties, as well as the slowdown of the Chinese economy. The Bank of Italy’s Second Report on Financial Stability recalls that the central banks of many countries are continuing the process of normalizing monetary policy to counter inflationary pressures. And in Italy? Risks to financial stability have increased in recent months, “mainly due to persistent geopolitical instability, rising inflationary pressures and worsening growth prospects”.
«Economy must grow, prudent budget policies»
“To consolidate the trend towards the reduction of net debt and public debt, over the next few years it will be important – writes Bank of Italy – to achieve a significant and stable increase in growth potential in a context of prudent budgetary policies, also by leveraging the implementation of the PNRR”. Since the end of April, the spread between Italian and German government bonds has progressively increased, reaching around 250 basis points during the summer, a level close to that reached at the beginning of the pandemic, but very far from what was observed during the sovereign debt crisis . Since mid-October, the spread has narrowed, falling below 190 points.
For banks, the incidence rate of non-performing loans is reduced
In this context, the banks are solid. «During the year, the worsening of macro-financial conditions and the gradual disappearance of support measures for households and businesses did not affect the quality of bank assets. The loan default rate decreased slightly compared to the end of 2021, remaining at low levels. The stock of non-performing loans has continued to decrease. The share of loans for which banks detect a significant increase in risk (classified in stage 2 of IFRS 9) has decreased slightly, although heterogeneous among intermediaries.
Stable exposures to Russia and Ukraine
Direct exposures to Russia, Belarus and Ukraine have remained stable since the end of 2021, at 0.7 per cent of total financial assets, against a sizeable increase in funding ratios. Banks’ exposure to importers and exporters to countries in conflict remains limited (0.35 per cent of loans). However, the prospective evolution of the quality of bank assets is weighed down by the economic slowdown, the macroeconomic consequences of the conflict in Ukraine, the rise in interest rates and tensions on the energy goods markets.
Mortgages: fixed rate mortgages now prevail
In terms of mortgage loans, the situation, in the scenario of rising interest rates, is reassuring, exposure to the risk of an increase in the cost of servicing the debt on loans for the purchase of homes is limited. In September 2022, the share of variable-rate mortgages (usually parameterized at a market rate such as the Euribor) did not reach 40 percent of the total of outstanding ones, a low level in historical perspective. Before the 2008 financial crisis, the share fluctuated around 80 percent; it then gradually decreased from the second half of 2015. Starting from that year, also following the more accommodating monetary policies, the gap between the fixed and variable rates applied to new mortgages gradually narrowed, reaching a level similar to that of the euro area. This trend reflected the greater reduction in the cost of fixed-rate loans which, together with the benefit deriving from protection against the risk of future increases in market yields, has led households to prefer this type of mortgage.