Bank of Italy, the banking risk and the golden power

Welcome to Outlook, Repubblica's newsletter that analyzes the economy, finance, and international markets. Every Wednesday we will talk about listed and unlisted companies, personalities, institutions, scandals, and investigations related to this world. If you want to write to me, my email is [email protected].

Happy reading,

Walter Galbiati, Deputy Director of Repubblica

The health of the Italian banking system was covered in a chapter of the Bank of Italy’s Annual Report , which Governor Fabio Panetta summarized in his Concluding Remarks last week. And he explains why the sector is consolidating .

From many to few . At the end of 2024, the banking system was made up of 134 intermediaries , when ten years ago there were 510. Of these, however, only 12 are classified as significant under the Single Supervisory Mechanism.

A low concentration. They account for over 80% of the total assets of the system, a lower degree of concentration than that of the other main European countries, because with the exception of Germany which is around 50% , France and Spain are above 90% .

An avalanche of profits . To this scenario we must add that in the last three years all the banks have been churning out profit after profit thanks to the rate hike by the European Central Bank .

ROE . Return on equity (ROE) hit its highest level since 2008 , rising from 12.3% in 2023 to 12.8% in 2024. But systemic banks , or the largest ones, made even more money with a ROE of 13.8% .

Unicredit and Banca Intesa , to give two examples, recorded profits of 9.3 and 8.6 billion euros respectively, with generous dividends for shareholders.

The reasons . According to the analysis of the Bank of Italy , the improvement in profitability is due to two reasons: 1) the increase in commissions (9.5%), in particular those deriving from managed savings , and to a lesser extent 2) the increase in the interest margin (3.7%).

Panetta's words . "Three years of strong profits - Panetta explained in the Considerations - have made significant resources available to banks, which are now being used to launch initiatives that would reduce the fragmentation of the Italian credit market , bringing its degree of concentration closer to that of other major European countries ."

The offers in progress . This is how Banco Bpm 's offer for Anima (which ended positively) was born to grab the commissions on Anima's managed savings, Monte dei Paschi 's takeover bid for Mediobanca which aims to control the savings held in Generali , Mediobanca 's offer for Banca Generali to create a champion of wealth management, Unicredit 's offer for Banco Bpm itself to increase its share in Italy, Bper 's offer for Banca Popolare di Sondrio for territorial complementarity and an identity of controlling shareholders and finally Banca Ifis 's takeover bid which aims at diversification by buying Illimity .

A crucial step . Panetta recognizes that mergers are an extremely delicate moment and believes that they should serve to strengthen intermediaries : "it is necessary - he says - that they are well conceived and aimed solely at creating value ".

But what does Governor Panetta mean by value? It is explained in three points : offering businesses and families 1) adequate financing in terms of quantity and costs 2) effective, transparent and fair-condition savings tools 3) qualified and innovative services , consistent with the development needs of the country.

The central point . There are three commitments that should support the growth of the country and among all of them, the one that stands out the most and is most easily identifiable is the first, that is, credit to businesses and families . Which is also a paragraph in the Annual Report of the Bank of Italy.

The data are not encouraging . In 2024 , loans decreased by 1.2% overall, but the reduction mainly affected companies ( -2.6% ) and among these, the most affected were small and medium-sized enterprises ( -6.8% ).

Businesses to blame... The Bank of Italy blames the reasons for this contraction partly on businesses, claiming that they had fewer credit needs for financing and had made greater use of self-financing .

… and those of the banks . But in part it must also recognize that the cost of credit , increased with the growth of rates , has driven away businesses and that banks do not willingly lend to medium and small businesses because they are considered "riskier and less transparent" .

Authorizations for risk . The Bank of Italy, in giving the green light to aggregation operations, although it considers them fundamental, does not take into consideration the type of employment , but verifies, in collaboration with the ECB and Ivass , the Insurance Authority, only that each operation complies with "Italian and European prudential regulations , and that the resulting intermediaries are solid in terms of capital , liquidity and risk management".

The devil is in the details . The government has seen fit to insert itself into these folds, using the golden power tool to raise the bar on employment not on all current offers, but only to stop Unicredit on Banco Bpm .

The text of the Dpcm . In the Dpcm proposed by the Mef and approved by the government on the golden power, it is written verbatim that "the powers attributed to the supervisory authority do not appear suitable to mitigate the risks associated with a potential reduction in the investments made in Italy since, as emerged from the hearing of the Bank of Italy , banking supervision evaluates the financial solidity of the acquisition project and more generally the sound and prudent management of the banks".

The prescriptions . Hence the need that the government felt to prescribe to Unicredit to maintain the same ratio between deposits and investments of Banco Bpm and to keep in Anima the same asset allocation in securities of Italian issuers .

The exception . It is not clear, given the downward trend in loans to businesses certified by the Bank of Italy, why this recommendation to Unicredit has not been extended to all current offers. And the same goes for the securities in the portfolio .

The final word on employment . But whatever the government writes, the final word still belongs to the Bank of Italy . Because, as the governor explains in the Final Considerations, “ employment policies do not affect financial soundness and prudent management”, only if they are carried out “ in compliance with supervisory rules” .

In other words, you cannot impose a predefined lending or securities purchasing policy on a bank, because you risk undermining its capital strength and prudential management.