Future Challenges Facing Italy’s Financial Sector1
The Italian financial system faces a number of challenges in order to restore profitability in a weak growth environment and to adapt to a changing global environment. The most challenging will be to shift from a bank-based financial system, common in EU countries, to a more “market-based” (“arm’s length”) system. Along with this shift comes a diversification of financing sources, led by further development of capital markets.
A. The Evolution of the Bank Business Model
1. Banks in Italy play a strong intermediation role, particularly towards corporates, where lending decisions rely heavily on relationships. Lending to corporates represented 52 percent of Italy’s GDP in 2013, against 35 percent for Germany.2 Relationships and collateral are important drivers for lending decisions. On average, two-thirds of bank loans are secured by personal guarantees or real estate collateral.3 In smaller banks, this coverage reaches three-quarters.
2. The large number of banks and bank branches, and the low level of digitalization are notable features of the banking sector. Market concentration, as measured by the Herfindahl-Hirschman Index (HHI),4 remains low in Italy, at 0.04 against 0.1 in Belgium and 0.2 in the Netherlands. Italy also displays one of the lowest numbers of inhabitants per branch among EU countries, with 1,871 inhabitants, three times less than the Netherlands (Figure 1). The over-branching is even more apparent in the Italian cooperative sector, which had 1,179 customers per branch in 2012, four times less than France and twelve times less than the Netherlands. This also reflects country-specific preferences with respect to banking services and in particular, the low level of digitalization in Italy. Only 22 percent of customers use on-line internet banking, the lowest percentage in the EU, after Greece.
Figure 1.Structural Issues and Profitability in Italian Banks
Sources: Bank of Italy; ECB; Eurostat; Morgan Stanley, SNL, European Cooperative Association; IMF staff estimates.
1/ Data for large banks’ branches and staff are as of 2014Q1.
Number of Inhabitants per Branch
3. Bank ownership is dominated by cooperatives and non-profit foundations. Italy has a large cooperative banking sector (Banche di Credito Cooperativo and Banche Popolari) accounting for 20 percent of banking assets. Restrictions on ownership (caps on investments) and voting rights (one member-one vote) limit the incentive for outside participation. Foundations, which are non-profit organizations with political representatives on their boards, remain major shareholders in Italian banks. As of March 2013, they controlled nearly one-fourth of banking system assets through large participations (above 20 percent of bank equity). In the large banks, they often exert de facto control, despite a lower capital share.5
4. Foreign ownership in the financial sector is low. According to the OECD data, foreign investment in the Italian financial sector is 4 percent of GDP, compared to 5 percent in France and levels close to 9 percent in Spain and the Netherlands. This may be related to the corporate governance of cooperatives and foundations, and also the low level of foreign investment overall in the Italian economy. Foreign-owned branches and subsidiaries account for 9 percent of the total banking assets, compared with 20 percent in Portugal and 28 percent in the UK. Only France, Germany and the Netherlands have a lower foreign bank ownership rate.
Percentage of Foreign-controlled Subadiaries and Branches
Low Bank Profitability
5. The Italian banking system faces a number of challenges to restore profitability and support the economy. Low net interest margins, rising regulatory costs, weak loan demand and high cost of credit have undermined banks’ profitability. While large banks6 have cut costs through staff reductions, branch closures, and cost savings, mid-size banks have not pursued a similar path. The weak economy, affecting indebted SMEs in particular, and persistent financial fragmentation have contributed to pressure on banks to deleverage and reduce risk exposures.
6. Bank interest margins are relatively low in Italy compared to other international advanced economies. Net-interest margin (NIM) equals net-interest income divided by the interest earning assets.7 It reflects interest profitability in banking activities and allows comparison over time and across countries. The NIM of Italian banks (1.4)8 ranks low compared to U.S. banks (3.3) and some other EU banking systems (Spain, at 1.9 and the Netherlands, at 1.5). Italian banks often lend against guarantees that offer some security, but typically interest rates are lower than for unsecured loans. The high number of banks and branches also fosters price competition that impairs bank margins. Finally, the ownership structures, mostly composed of non-profit bank owners, may limit the internal returns required from lending activities.
Net Interest Margins, 2013
7. The crisis has eroded margins in Italy more severely than in other European countries. Net interest margins of large Italian banks have shrunk by 20 percent since 2010, against 9 percent for other EU banks,9 driven by tightened spreads in a low interest rate environment, lower loan volumes and rising funding costs. Although funding costs have eased thanks to the ECB’s Long Term Refinancing Operations (LTRO), they remain high compared to those also affected by the crisis. The deposit rates of Italian banks are 80 bps above those of Spanish banks, mostly because of retail bonds10 that carry higher interest rates than sight deposits. Retail bonds account for 17 percent of Italian banks’ liabilities (2013 FSSA) compared to less than one percent in Spanish banks.
8. Revenues from fees and commissions have not offset lower interest margins. Noninterest income includes fees and commissions paid by households (credit cards, account management fees), corporates (investment banking, issuance of bonds), and trading income. Fees and commissions have remained stable or declined, as banks have made limited progress in expanding asset management, private banking, and bank insurance products.
9. This drop in interest margins, however, does not reflect accrued interest on non-performing loans and carry trades. The accounting for accrued interest under International Financial Reporting Standards (IFRS) permits interest on all loans, including non-performing loans (NPLs), to be accrued. As a result, Italian banks continue to recognize interest income on NPLs even though the borrower is likely not to repay either the principal or the interest or both, resulting in the NIM being overstated.11 This accounting treatment also encourages weak banks to keep old NPLs that have accrued large amounts of uncollected interest. The interest earned on the large volumes of government bonds financed by cheap central bank funding (LTRO) has also temporarily boosted interest margins. Since 2011, exposures on Italian government securities have almost doubled, from €200 bn in January 2011 to €382 billion in May 2014.
10. NPLs have absorbed most of banks’ operating profits. Like in other EU countries, the protracted recession and the high levels of corporate leverage have significantly deteriorated the asset quality of Italian banks. About half of the corporate debt is from highly leveraged corporates, with interest expenses accounting for over half of the gross operating profit (IMF, FSSA, 2013). This high leverage, interacting with weak profitability, has created debt-servicing difficulties for corporates and led to an increase in NPLs on bank balance sheets (“corporate-bank” nexus). Corporate NPLs reached 29 percent, as of December 2013. As a result, Italian banks have increased loan loss provisions, absorbing more than their entire profits over 2012-2013.
Percent of Operating Profits Absorbed by NPLs, Large and Mid-size Banks
11. While large banks have proactively cut costs, through staff reductions, branch closures, and cost savings, progress has been uneven among mid-size banks. In the recession, banks have improved their cost-to-income ratio by reducing fixed expenditures (staff, buildings, and infrastructure), reducing other costs, and increasing productivity. According to the Bank of Italy, between 2008 and 2013 the total number of bank branches in Italy shrank by 7 percent. However, the large banks accounted for this decline, reducing their branches by more than 20 percent on average, and making sharp reductions in total staff.12 In contrast, the mid-size banks expanded their networks, and as a result, their operating costs increased by 15 percent from 2008 to 2013.
12. The return on equity of Italian banks has been negative since 2010, making it difficult to raise outside capital. The Return on Equity (ROE) is defined as net profit (or loss) divided by equity. The ROE of Italian banks has been negative for three years, as banks booked more than €42 billion in losses. In contrast, the ROE has remained positive in France and Germany, and rebounded in Spain. Italian banks are still trading at a discount compared to peers. Their price-to-book value stood at 0.6 in May 2014, against 0.8 for European banks and 1 for US banks.
Bank Profitability in Select Economies
Sources: ECB, FSI
Contracting Bank Credit
13. Credit has continued to contract. Aggregate bank credit started contracting in 2014, declining 4 percentage points year-on-year. However, the situation varies according to the size of the bank. The largest banks have been deleveraging since 2008 (-12 percent), while mid-size size banks, and in particular cooperatives, have been increasing lending since 2008. This increase in lending by mid-size banks (+23 percent) has offset the deleveraging by large banks by almost one-third.13
Loan Growth by Size of Banks, 2008-13
Source: SNL (sample of banks)
14. Boosting lending margins, diversifying lending activities, and incorporating new technology will support profitability. A combination of measures will be necessary to improve bank profitability. Italian banks will have to rethink their business models, further cut costs, and move to less capital intensive activities. Bank disintermediation is already advanced in the United States, but less so in Europe and in Italy.
15. Restoring lending margins is a key priority, while diversifying towards non-lending activities will provide new sources of revenues. On the funding side, efforts to clean up bank balance sheets, raise capital, and reform governance will help ease the premium paid by Italian banks on capital markets. In addition, banks will have to boost their deposit base and progressively move away from expensive retail bonds. This will help moderate their funding costs, and improve the loan-to-deposit ratios. On the revenue side, banks will have to resume lending on sounder grounds, and price risk based on creditworthiness rather than on guarantees. Banks will also find it beneficial from a capital and liquidity perspective to diversify towards market issuances and asset management, which generate more stable revenues in a low growth environment.
16. Streamlined branch networks and more digitalization will increase productivity. Banks should reduce further their operational costs through continued rationalization of branch networks in order to compensate for the lower revenues. Cost savings should also be used to invest in the “digitalization” (online channels, advanced ATMs, etc.) which will prepare banks for the next cost-cutting wave. While some large banks have already started, the authorities should encourage the smaller banks to streamline their physical networks and deploy internet banking.
17. Governance reforms will increase the attractiveness of Italian banks’ equity. Governance reforms should continue by requiring published audited accounts by foundations participating in banks, limits on their leverage, and proper governance rules. The ban on foundations controlling banks should be applied in practice, and over time, foundations should reduce their stake in banks to within proper concentration limits. The largest cooperative banks should also be encouraged to convert to joint stock companies and consolidate as a way to achieve synergies. Mergers based on solid economic foundations and market logic can facilitate increased efficiency, absorb higher compliance costs, and achieve better diversification.
Restructuring Bank Balance Sheets
18. Cleaner balance sheets would support new lending as the economy recovers. As noted in the Article IV, a three-pronged approach to the regulatory push should be considered:
Stronger provisioning and write-offs. Supervisory guidelines could foster convergence in provisioning rates. To encourage write-offs, the supervisor could monitor bank progress in working out NPLs, conduct targeted on-site inspections and tighten supervisory rules (higher capital charges or time-limits for writing off old NPLs).
Development of the private distressed debt market. An active NPL market would provide an alternative to lengthy bankruptcy, draw in needed financing, and boost loan recovery values.
An enhanced insolvency regime. The authorities should expand specialized bankruptcy courts and introduce time-limits to expedite reorganization. Greater reliance on online court filings could speed up foreclosures, while best practice guidelines for restructuring would encourage more out-of-court workouts.
C. Developing Further the Capital Markets
19. Italian corporates rely heavily on debt over equity financing. From 2000-2013, Italian firms’ debt-to-total capital ratios have averaged more than 10 percentage points above the euro area average (47 vs. 36 percent); and almost 20 percentage points above the global average (29 percent). The divergence narrows only slightly if the sample is limited to those firms included in global equity indices, where Italian firms’ debt-to-total capital averages 49 percent versus 39 percent for the euro area and 35 percent globally. While the ratio of debt-to-total capital has declined somewhat since the advent of the global financial crisis, the gap between Italian corporates and their euro area and global peers has widened slightly. This heavy reliance on debt financing and “undercapitalization” of Italian corporates exposes the sector to risks from higher interest rates and banking distress.
20. On debt finance, Italian firms rely more on bank funding than their euro area peers. On average, Italy’s non-financial corporate (NFC) sector has financed only 3.6 percent of its debt from securities issuance, versus the euro area average of 6 percent. At the same time, the share of debt raised from the markets has been steadily increasing over the past decade.
Debt to Capital, All Firms
Sources: Haver; IMF, Corporate Vulnerability Utility.
Outstanding Debt Securites
21. Notwithstanding the greater reliance on bank finance, the volume of Italian NFC debt securities issuance is on par with Italy’s relative economic weight in the euro area. Italian NFC debt securities outstanding, at €117 billion, represent about 13 percent of the euro area total. By comparison, Italy contributes about 16 percent to the euro area’s GDP, suggesting that Italian corporates, in aggregate, enjoy access to debt capital markets that is broadly in line with Italy’s weight in the euro area. NFC debt issuance as a share of GDP is also within the range of euro area peers, at 7 percent, as compared with 18 percent for France and just 4 percent for Germany.
22. By contrast, Italy’s equity market capitalization is below European peers, and well below market capitalization in the US and UK14. Italy’s equity market has also been slower to recover from the crisis period relative to European peers, although equity valuations globally have picked up in 2014, with Italian market capitalization now above 30 percent of GDP. Even with this uptick, however, equity market capitalization in Italy remains below its peak of around 50 percent of GDP. In terms of relative performance, among select euro area countries, only Greece’s Athens Stock Exchange index has performed worse than Italy’s Milano Italia Borsa (MIB) index since 2005.
Gross NFC Debt Securities, Stock
Sources: European Central Bank.
NFC Debt Securities, Stock
23. Low market capitalization can itself discourage investment in Italy. Institutional investors increasingly rely on benchmarking – referencing the composition of a given performance index – to guide investment decisions and measure performance. Research shows that benchmarks have significant and large effects on investment allocations and capital flows across countries (Raddatz, 2012). Given that benchmarks are closely related to market capitalization, it follows that low market capitalization can result in a relatively lower weight in a given benchmark, thereby influencing investors’ decisions to invest (or not) in a country.
24. These developments occur against a backdrop of lower public equity issuance by advanced economies more generally. A 2013 report by the OECD noted that public equity funding raised by OECD companies fell to half of the previous decade, while public offerings by emerging market (EM) countries’ companies increased more than five times and exceeded the total funds raised by OECD companies (OECD, 2013). This trend likely reflects a range of factors, all of which are relevant to Italy. They include i) the global financial crisis and sovereign debt crisis which acutely impacted a number of advanced economies; ii) better growth (and earnings) prospects in many EMs relative to advanced economies; iii) higher regulatory barriers to public filings; and iv) the growth of private equity as a source of equity capital.
25. The low level of equity capital in Italy reflects a range of factors. Tax treatment has historically favored debt over equity finance, owing to the deductibility of interest payments for corporate income tax purposes (IMF, 2013). In addition, distributed corporate earnings (in excess of a normal rate of return) are taxed at effective rates that are close to the top marginal progressive personal income tax rate (43 percent) rather than the rate on interest income (26 percent), reducing the net return on equity investment. So-called “cultural” factors, such as a reluctance to include outside equity investors, as well as a higher aversion to market risk and volatility – from the perspective of the entrepreneur as well as the investor – are also cited as reasons why equity capital is low in Italian corporates (Bocconi, 2013). Until recently, the ready availability of debt financing has meant that businesses were able to access financing without having to raise additional equity.
Sources: WEFE; London Stock Exchange; Group/Borsa Italiana; Wall Street Journal; and Financial Times.
26. The low contribution of equity to total capital limits Italian firms’ access to market financing. The quality of Italy’s corporate sector’s capitalization is relevant to capital market access insofar as a firm’s capital structure is a key determinant of a company’s creditworthiness, its ability to withstand shocks and cyclical downturns, and to finance investment. While the traditional bank-based model, facilitated by long-standing relationships, may have mitigated the need for formalized risk assessment, outside investors and markets in particular are more discerning on the basis of corporate fundamentals, for instance, relying on leverage and interest ratios, and credit ratings as assigned by independent rating agencies. Rating agencies, in turn, assign ratings based on companies’ business and financial risk profiles, including factors such as capital structure, financial policy, liquidity, and management and governance, which can all impact on investor interest (S&P, 2013).
27. Initiatives designed to boost equity investment in Italian corporates have the potential to improve their access to public capital markets. The authorities’ have taken steps to encourage Italian corporates to raise additional equity finance. In particular, the government introduced the Allowance for Corporate Equity (Aiuto Alla Crescita Economica or ACE), effective in 2012, which provides a tax deduction on new equity investment from retained earnings. In so doing, the policy reduces the tax advantage of debt finance and aims to improve the quality of capital. The ACE was expanded this year to include a tax credit on regional corporate taxes for loss-making companies and to increase the size of the ACE benefit for listed companies to promote funding on capital markets. However, the higher tax rate imposed on distributed corporate earnings versus interest income continues to favor investment in debt over equity from the investor’s perspective.
28. Industry participants have also taken steps to improve equity capital market access for Italian firms. In 2012, the Borsa Italiana introduced AIM Italia—MAC (Mercato Alternativo del Capitale), which encourages small and medium-sized companies to list on the exchange by introducing greater flexibility (for instance, reducing the time needed for admission to the exchange; reducing the minimum required free float of shares; and eliminating the minimum capital requirement for listed companies, among others). The program also assigns eligible companies a “Nominated Adviser” that will assist the filing company with information transparency, including financial filing requirements, and provide the listing country with introductions to legal and other advisors. Since its introduction, over €450 million in equity capital has been raised through initial public offerings (IPOs) associated with the program. Closely related is the ELITE program, which was established in 2012 by the Borsa Italiana, Italian industry association, Confindustria, private equity funds, the Ministry of Finance, among others. The program aims to identify and promote potential candidates for an eventual IPO by preparing selected enterprises via organizational changes and introductions to capital market participants.
D. Role of Institutional Investors
29. A well-funded and well-managed institutional investor base can play an important role in fostering capital market development. Such a base can create demand for traded securities and generate market liquidity that allows for market entry and exit while minimizing the potential for destabilizing price movements. While Italy’s institutional investors – pension funds, insurance companies and investment funds – manage a substantial pool of assets, their investment in Italian capital markets has typically been concentrated in fixed income securities, a large portion of which is government debt. Creating an environment in which such investment pools will find equity investment an attractive option depends importantly on Italy’s fundamentals, while a number of structural factors (e.g., higher contribution rates to private pension plans; the phasing out of defined benefit plans) also have the potential to expand the eligible investment pool and support greater investment in Italian securities, and Italian equities in particular.
30. Insurance companies are the largest institutional investors in the euro area, with €6.2 trillion in assets as of end-2013. For the euro area as a whole, nearly half of all insurance company assets are invested in securities other than shares, namely sovereign and non-financial corporate debt (44 percent of assets). Investment and money market funds account for the next largest share, accounting for 21 percent of assets, while shares and other equity account for 10 percent, currency and deposits account for 9 percent, and loans account for 7 percent. The balance (9 percent of assets) is comprised of prepayments and other reserves, non-financial assets, and other investments.
Sources: European Central Bank; Insurance Corporations and Pension Funds Online, July 2014.
31. By contrast, Italian insurance companies are more concentrated in debt instruments. Italian insurers’ assets total about €600 billion or 38 percent of GDP, of which two-thirds are invested in securities other than shares, about 50 percent higher than for the euro area as a whole. More than half of this amount (45 percent of the total) is invested in Italian government bonds. The allocation to shares and other equity investments, at just over 10 percent of total assets, is consistent between Italy and the rest of the euro area, while allocations to currency and deposits, loans, prepayments and other reserves, non-financial assets, and other investments are all below the euro area as a whole, resulting in an asset portfolio that is much more concentrated in fixed income.
32. Looking at how insurance companies across the globe invest in Italy, there is an almost exclusive focus on debt instruments. In general, insurance companies are heavily invested in fixed income instruments, with bonds accounting for 64 percent of the $12 trillion in insurance investments among OCED and other insurance companies globally15. Of the $12 trillion, only 1 percent or $122 billion is invested in Italy, whereas Italy accounts for nearly 3 percent of global GDP in US dollar terms. Of the $122 billion invested in Italy, the vast majority (90 percent) is invested in bonds; by contrast, among the 42 countries for which this data is reported, only investments in Costa Rica, Hungary and Turkey are more heavily concentrated in debt instruments.
Direct Insurance or Reinsurance Companies: Investments in Italy, 2012
Source: OECD, 2012.
Direct Insurance or Reinsurance Companies: Global Investments, 2012
33. As an investor class, Italy’s private pension funds have the potential to play a significant role in meeting the financing needs of Italy’s corporate sector. At €116bn, the market value of Italy’s pension fund assets is equal to about 7½ percent of GDP16. While the size of private pension systems among euro area countries varies considerably, the current size of Italy’s system, while having more than doubled since 2007, remains well below the OECD average of 35.5 percent of GDP. Growth in private pensions as a store of wealth and savings will expand the pool of resources available for investment in publicly traded securities.
34. Investment in domestic equity securities represents less than 1 percent of Italian private pension funds’ portfolios. While asset allocation among Italian pension funds is broadly in line with the median allocation among OECD countries by type of investment, this masks the very low investment by private pension funds in domestic equity securities. Roughly half of Italian pension assets are invested in fixed income instruments, while 16 percent of pension assets are invested in equities, broadly in line with OECD average. However, there are wide disparities between countries, with assets in the largest pension market, the US, invested roughly 50 percent in equities, and only 20 percent in fixed income. On the other end of the spectrum, Germany, Japan and Korea are among the countries with less than 10 percent of assets allocated to equity shares. In addition, while 16 percent of Italy’s private pension portfolio is invested in equities, domestic equities account for just 5 percent of total equities, or less than 1 percent of the total portfolio. The single largest allocation is made to domestic sovereign bonds which account for 27.5 percent of the portfolio.
Sources: OECD, Global Pension Statistics; Commissione di Vigilanza sui Fondi Pensione (COVIP).
35. Institutional investors’ asset allocation reflects a number of considerations. These include the regulatory environment and treatment of certain asset classes for regulatory purposes, which relates closely to the need to match assets and liabilities. While regulations are designed to provide adequate capital buffers, they also can limit investor interest in certain asset classes, including equities. Another critical aspect is the choice made by individual investors, where “guaranteed return” products and the legacy of defined benefit pension plans may favor fixed income investments with defined coupons and maturity dates over higher risk but potentially higher yielding equity investments. As mentioned, the preference among institutional investors for debt over equity instruments when investing in Italy also likely reflects Italy’s relatively low market capitalization in the context of a high degree of benchmarking among institutional investors, as well as the overall economic outlook.
Increasing Supply: Boosting Equity in Italian Corporates
36. Efforts to increase equity capital in Italian corporates will support the diversification of funding sources to include capital markets. Boosting entrepreneurs’ interest in outside sources of equity finance is essential to the development of Italy’s capital markets. In particular, increasing equity issuance will expand the available pool of equity instruments for investment.
37. Incentives to encourage market listings can also improve corporate governance and support market access. Filing requirements typically include corporate governance elements such as the inclusion of outside directors on corporate boards and board oversight of senior executive compensation. “Light” filing and other reduced requirements for public listing (e.g., no formal requirement for internal audit or remuneration committees) such as those supported by the AIM Italia program should serve as a bridge to best practice and foster the overall business environment in Italy.
Boosting Demand: Investor Interest in Capital Market Investments
38. Institutional investors’ interest in Italian securities and equities in particular will be bolstered by improving the capitalization of Italian corporates. Attracting new equity capital into Italian corporates will help improve the quality of capital, reduce leverage ratios, and support investor interest for both equity and debt instruments. While the improved capital quality will support investor interest in Italian corporate securities, a higher market capitalization should boost Italy’s weight in industry benchmarks, spurring additional inflows. Noting the disparity in asset allocations between Italian institutional investors and other large global investors, and highlighting the potential impact on returns, can encourage a higher allocation to equities and alternative assets, thereby expanding the demand for long-term risk capital instruments. Over time, reducing the gap between the taxation of public and private securities in Italy would encourage more investment in the private capital markets17.
39. Future work should investigate the drivers behind investment allocation in Italy. As mentioned, Italian savings in the form of institutional pools is low relative to peers. It is worth evaluating the key drivers behind investor preferences, including various incentives (e.g., fiscal treatment), institutional quality, and the macroeconomic environment (e.g., growth and stability considerations). Sovereign credit quality also has an important role to play in supporting capital market access, as sovereign credit quality has been shown to have a strong effect on the volume of corporate credit or equity issued (Das, 2010).
40. The underlying challenges facing Italian banks have abated rather than disappeared. Their business models and asset and liability management would benefit from substantial changes. Efforts should prioritize measures targeted towards cost-cutting and NPL disposals in the weakest banks to break the vicious circle between weak financial metrics and lower credit growth. In turn, these measures would help restore confidence in the wider banking sector and restore credit growth.
41. The ECB’s forthcoming BSA could provide valuable assistance in restoring banks back to health. More broadly, it is also a possible catalyst for banks to restructure, and may put pressure on banks to merge, improve their corporate governance, and sell distressed assets to the market.
42. Market funding can help bridge this gap and rebalance the financial system towards a more “market-based” system. On the supply-side, this means encouraging capital market issuance, and equity issuance in particular, among Italian corporates. On the demand-side, stronger corporate capitalization and an improving economic outlook should support investor interest in Italian private sector securities. A higher allocation among Italian institutional investors to equities, in line with large global investors, could also expand the demand for long-term risk capital instruments, provided some of the higher allocation is directed toward domestic securities.
CasselliStefanoCarloChiarellaStefanoGatti and GimedeGigante. The Capital Markets for Italian Companies: A Resource to Relaunch the Country and Renew Growth. Bocconi. 2013.
DasUdaibir S.Michael G.Papaioannou and ChristophTrebesch. Sovereign Default Risk and Private Sector Access to Capital in Emerging MarketsIMF Working Paper WP/10/10January2010.
International Monetary Fund2013. “Reforming Capital Taxation in Italy” IMF Country Report No. 13/299.
PanteghiniPauloMariaLaura Parisi and FrancescaPighetti2012. Italy’s ACE Tax and Its Effect on a Firm’s Leverage.
OECD2013 “The Role of Banks, Equity Markets and Institutional Investors in Long-Term Financing for Growth and Development, Report for G20 Leaders” available at www.oecd.org/finance/lti.
OECD2013 “Pension Markets in Focus” available at http://www.oecd.org/pensions/PensionMarketsInFocus2013.pdf.
RaddatzClaudioSergio L.Schmukler and TomásWilliams2012. International Asset Allocation: The Benchmark Effect.
Standard & Poor’s Rating Services Ratings Direct Corporate Methodology. November192013
Prepared by Nadege Jassaud (MCM) and Stephanie Segal (SPR).
December 2012 (2013 FSSA)
According to the Credit Register data, one quarter of loans to corporates is backed by real estate collateral, as of December 2013 (28 percent for all loans, i.e. including households and producing households). The remaining secured lending is backed primarily by personal guarantees.
The HHI is defined as the sum of the squared market shares of individual banks. As a general rule, a low HHI signals low concentration, while a high HHI signals a high concentration.
See IMF Working paper // :reforming the governance of Italian banks
In this paper, large banks refer to the 5 largest Italian banks in terms of total assets. Mid-size banks refer to the 6th to 15th largest Italian banks, banks that will be under the ECB Balance Sheet Assessment (BSA). Small banks refer to banks outside of BSA, beyond the 16th largest bank.
Interest earning assets encompass gross loans and investment securities.
Data is based on a sample of 34 European banks’ financial statements (SNL database): Unicredit, Intesa, MPS, BP, UBI, Deutsche Bank, Commerzbank, Landesbank Baden Wurttemberg, Bayerische Landesbank, BNPP, SocGen, CASA, Dexia, KBC, Rabobank, Erste Group, Raiffeisen, Bankia, Santander, BBVA, Banco Popolar Espanol, Caja de Ahorros y Pensiones, HSBC, Barclays, RBS, Lloyds, Swedbank, SEB, Svenska Handelsbanken, Nordea Bank, Danske Bank, AIB, Bank of Ireland, and six American commercial banks: PNC financial, Citigroup, Wells Fargo, US Corp, BB&T, SunTrust.
In Italy, retail bonds are bonds issued by banks with maturities from 1 to 3 years. Sold to retail customers, these bonds were senior debt instruments, but in rare cases included risky subordinated debt (2.2 percent of bank liabilities). In Spain, the retail bonds bailed-in under the Financial Sector Assistance Program (2012-2014) accounted (12 billion EUR, i.e. less than 1 percent of bank liabilities) were all subordinated debt, mostly sold to retail customers.
As NPLs account for 16 percent of total loans, the proportion of accrued interest in the interest revenues is likely to be of the same size order, or above (due to penalty interests).
As of year-end 2013, there were 326 listed companies on the Borsa Italiana, of which 87 percent are domestic firms. This compares with 720 listed companies on the Deutsche Börse (89 percent domestic) and more than 3,200 (99 percent domestic) on the BME Spanish Exchanges.
OECD dataset, “Destinations of investments by direct insurance or reinsurance companies”. Sample includes OECD countries minus Canada, plus Argentina, Bolivia, Colombia, Costa Rica, El Salvador, Indonesia, Malaysia, Panama, Peru, South Africa and Uruguay.
Italy’s total private pension system consists of: (i) “old” pension funds, which refer to both defined contribution and defined benefit pension funds in operation prior to the 1993 reform and account for just over 40 percent of system assets; (ii) contractual pension funds, which support occupational plans, and account for 30 percent of the system; (iii) individual pension plans, or “PIPs”, which are offered by insurance companies to support personal plans and account for 17 percent of the system; and (iv) open pension funds, which support both occupational and personal plans, and comprise just 10 percent of the system.
Income earned on corporate securities is taxed at 26 percent versus 12.5 percent on government securities.