A year on from Aspen Italia’s 2013 National Conference on the banking system, participants gathered for this third edition of the event to take stock of the role and responsibilities of banks in the current economic situation.
It was noted that the past year has been marked by several significant milestones in the European banking sector. First and foremost of these has been the completion of the EU banking union, with the creation of a number of its key pillars, namely, the Single Resolution Mechanism (or SRM, to be launched on 1 January 2016) and the Single Supervisory Mechanism (or SSM, to come into operation on 4 November 2014), as well as the consolidation of EU-level laws governing the financial sector (the so-called “Single Rulebook”). In the lead-up to the entry into operation of the SSM, an Asset Quality Review has been undertaken by the ECB of the balance sheets of the 128 banks that it will be called on to directly oversee as the designated “Single Supervisor”. However, while there was a consensus that much has been accomplished in the banking sector at the European level, it was conceded that much remains to be done. The regulations, although enacted, have yet to be duly implemented. New risks will also need to be addressed, including those associated with the setting of capital benchmarks. Moreover, coordination with the G20 and the Financial Stability Board must be optimized so as to ensure regulatory harmonization at a global level. Finally, the banking union will need to be accompanied by a capital markets union.
The drying up of credit supply was viewed as currently the number one problem preventing the Old Continent from bouncing back from an economic tailspin now also compounded by the specter of deflation. With interest rates almost reduced to zero, the launch of targeted longer-term refinancing operations (or TLTROs), and the imminent purchase by the ECB of asset-backed securities and covered bonds, monetary policy has almost exhausted all the weapons in its armory. It was suggested that whether or not all of this will succeed in reviving a moribund economy remains to be seen. The global regulatory framework – which seems to pull in the opposite direction and is at present built into the European system – is no help in this regard. While the ECB sets about injecting liquidity into the system, the rules stemming from Basel III pursue an opposing objective: more capital, which inevitably results in less credit. The core message of global policy has for years now been – in a word – “deleveraging”.
Turning to consider the position in Italy, the participants observed that the macroeconomic outlook is certainly no more reassuring, with growth not only regularly lower than global average, but also below that of the eurozone. While no major bank bailouts have proved necessary, the country’s banking system is not immune to the difficulties experienced elsewhere, with profitability levels currently at record lows. The real economy needs the full backing of the financial system to bring about genuine recovery, yet such support has been slow to materialize. While acknowledging that policies and mechanisms are needed to facilitate access to credit for businesses, the participants remarked that the ECB’s liquidity injections have not proved capable of kick-starting the credit cycle.
The real problem was seen as lying more on the demand than the supply side. On the one hand, there are far too many firms in need of credit, but on the other, the demand for credit expressed by the majority of them cannot be classed as falling within a quality level that banks would be willing to meet with ECB liquidity. Furthermore, the financial fragility of the domestic production system is made evident by the under-capitalization or over-indebtedness of its constituent businesses.
It was suggested that the priority now is to restore and strengthen the dialogue between banks and businesses, which must be based on trust. There was also a perceived need to put a stop to the proliferation of regulation now overwhelming the banking system. The participants called for a pause for thought as well as a temporary halt in implementation, allowing for a process of simplification which favors consolidation over the accumulation of regulations, and which, in the implementation of the more detailed rules falling under the remit of the “Single Supervisor”, avoids penalizing the Italian banking system vis-à-vis that of the rest of the continent. Also deemed necessary were alternative mechanisms that at the same time are innovative and exploit non-banking channels, such as mini-bonds, which, while no magic solution, could offer reasonable potential. In addition, it was felt that inter-firm networks need strengthening, the Guarantee Fund for SMEs requires support, collective credit guarantee consortia need restructuring, and the backstop role that institutions such as the Cassa Depositi e Prestiti (a specialized lender to the Italian public sector) can play should be expanded along the lines of the German development bank KfW.
Nevertheless, it was stressed that these measures are likely to prove insufficient and ineffective if weak domestic demand does not pick up again, which leads back to the problem of Italy’s low level of growth, the remedies for which are much more complex, and range from the articulation of clear industrial policy choices to restoring confidence so as to kick-start the cycle of investment and growth.
Yet although confidence was recognized as the cornerstone of any economic system, the responsibility that it imposes on every actor to do their best to play their part was considered no less significant a component. While banks are called on to provide credit, gauging as best as possible the industrial needs and potential of firms, entrepreneurs must show faith in their own businesses first by investing more of their own capital. In turn, the government is called upon to do its share, not just by providing various kinds of tax incentives, but also, and most importantly, through more effective and far-reaching measures, ranging from tax reform and developing an industrial vision, to structural reforms and renewed investment.
In conclusion, it was observed that the troubles afflicting the banking sector today are symptoms of a broader economic malaise. In order to overcome this situation, there is a need not only for rules and for genuine integration across the continent, but also for confidence and trust to be restored in the relationship between banks and businesses, which, foremost among all the actors in the economic system, were urged to make their indispensable contribution towards recovery. Only then will the banking system once more be at the service of the country, and represent part of the solution rather than the problem.