Italy’s financial sector has stabilized but the continued slow growth remains a major threat to its banks, the International Monetary Fund (IMF) said Tuesday.
“The Italian financial system has shown remarkable resilience in the face of a severe and prolonged recession at home and a major crisis in Europe,” the IMF said in a report on the country’s banking system.
Italian banks have increased domestic deposits and raised additional capital, and the liquidity support from the European Central Bank has sheltered them from market funding volatility, the global lender said.
However, it cautioned that the Italian financial system is not immune from risks while “continuing weakness in the real economy and the link between the financial sector and the sovereign remain key risks.”
The IMF said the recession was reflected in low bank profitability and deteriorating loan quality.
In addition, banks with large holdings of sovereign securities remain exposed to losses and higher funding costs if sovereign yields rise substantially.
“While Italian sovereign yields have declined from their peaks, the crisis in Europe has not ended,” it noted.
The IMF said preliminary stress tests results suggest the Italian banking system as a whole would withstand both a scenario of concentrated shocks and one of protracted slow growth. But under such scenarios, it estimated, the buffers banks have built against challenges would be depleted.
“Restoring economic growth through the pursuit of macroeconomic stability, prudent public finances, and growth-enhancing structural reforms remains the most important precondition for financial stability,” the IMF added.