Proceedings of the webinar – Presentation of the Eurispes Banking, Finance and Insurance Observatory | 11 May 2021
Proceedings of the webinar
Presentation of the Eurispes Banking, Finance and Insurance Observatory
11 May 2021
Marco Ricceri, Eurispes’ Secretary General
Good afternoon and a sincere thank you to everyone for taking part in this important initiative.
First of all, I would like to express the greetings and best wishes for the good work of the President of Eurispes, Gian Maria Fara. According to the programme, after the opening greetings, the following will speak: Claudia Bugno, Councillor Delegate for the development of the Observatory; then Luciano Panzani, President of the Observatory, who will be in charge of introducing and managing the presentation of the interventions and the organisation of the debate.
I think it would be useful as a preface to recall some essential aspects that have always characterised our Institute. Eurispes has existed and been in operation since 1982, a very long period of uninterrupted, fruitful and intense activity. Formally, Eurispes is a “non-profit association” registered since the 1980s in the Register of Research Institutions of the Ministry of Education, Universities and Research (MIUR), as it is exclusively dedicated to research, study and political, economic and social analysis. From the outset, the approach given to these activities has been based on an interdisciplinary and systemic approach, which has guaranteed their originality and high level of quality. An outstanding international recognition came three years ago when, to our surprise, Eurispes was included in the list of the world’s leading think tanks in the annual Global Think Tank Index report published by the University of Pennsylvania (USA).
Interestingly, the Institute was ranked among the best “independent institutes” (Best Independent Think Tanks), thus capturing another fundamental characteristic of Eurispes: the guarantee of independence that has always guided the research activities and evaluations carried out by the Institute. This international recognition reflects a constant commitment and a particularly strenuous effort to maintain a situation that has led many external observers and the press to publicly recognise Eurispes as “an island of freedom”. To this must be added the Institute’s full willingness and openness to evaluate and collaborate on those thematic areas and study proposals that are presented by scholars, experts, primary actors of common development and that may be of particular strategic relevance for growth in our Country.
The importance of the interdisciplinary and systemic approach that Eurispes has always applied in its research activities is currently explicitly recognised at the international level in the face of the structural changes imposed on our societies by the pandemic crisis, the evolution of globalisation processes, and the urgent, unavoidable need to work towards a new model of development that is sustainable and more balanced than the current one. We read this in all the international documents we refer to, such as, for example, the United Nations 2030 Agenda on sustainable development; the declarations approved at informal summits such as the G20; the documents of international institutions such as the OECD; the strategies approved by the European Union. I am pleased to see Professor Pier Carlo Padoan, whom I got to know from attending several OECD expert meetings when he was deputy secretary-general, participating in this presentation. I remember that he urged experts to “break out of the silos” of their scientific disciplines and open up to discussion by integrating their respective areas of knowledge, a recommendation – that of breaking out of the silos – which has spread widely in the strategic documents of the main international institutions and bodies. In a phase of a structural change such as the one we are currently experiencing, economists, jurists, sociologists, anthropologists and psychologists, for example, are increasingly required to work in synergy and define a valid interdisciplinary approach to assessing problems. The establishment of the new Bank, Finance and Insurance Laboratory will allow all of us to gain positive experience also in the application of that approach to the analysis and assessment of problems that the United Nations has defined as trans-disciplinary, capable of integrating the disciplinary approach with the cognitive heritage linked to the direct experience of operators whose scientific value has finally been recognised. The close, organic collaboration between the academic and research world and the world of operators, one of the points of commitment of the new Observatory, will allow to gain concrete experience in the integrated application of the two approaches to the evaluation of problems, interdisciplinary and trans-disciplinary, and to proceed in a coherent way with the specific recommendations of the UN.
This will also make it possible to better identify the strategic elements to be projected in the medium and long term, recovering an advantageous programmatic experience in this decisive phase but abandoned in practice by Italy for several decades. The last document in which medium-term planning was adopted in Italy dates back to the mid-1970s, and it is only in this year 2021, in the National Recovery and Resilience Plan (PNNR 2021) presented by President Draghi to the European authorities, that we find a projection of reforms and interventions to 2026, 2030 and 2050. There is, therefore, a widespread, objective need to confront a medium- and long-term culture, to measure ourselves against the ability to work not only on short-term trends but also on the long-term prospects and scenarios that we intend to build; and all this, at least to be in tune with the commitments that states have made in recent times and are still defining at the international level, for example, with the agreements signed in the G20 coordination and with the strategies approved within the EU.
It is the transition from an economic system centred on the ‘quantity’ of goods and services produced and consumed to a completely different economic system based on the value of the ‘quality’ of such production and consumption, where what will be increasingly important is not so much ‘what’ is produced but ‘how’ goods and services are produced, distributed and consumed. The commitment made by states to sustainable growth requires everyone to adopt a new development model, the organisation of a new economic and production system that is no longer ‘linear’, as it has been until now, but ‘circular’, capable of ensuring a proper balance between human activities and the environment in which we live and work.
It is in this framework that Eurispes is working and in which the specific activity of the new Bank, Finance and Insurance Observatory is inserted with today’s initiative, a structure aimed at offering a contribution to the new growth trends by identifying and representing the needs of those subjects that all international documents, such as the latest UN reports, identify as the true “drivers of development” (UN, Report 2019). The radical nature of sustainable development requires all governments to undertake synergic action with a wide range of external stakeholders – the definition of a new system of governance and partnership – among which the players in the banking, financial and insurance system are at the forefront. These primary growth players are required to work in harmony with the new requirements and strategies of sustainable development, but above all to guide and support other public and private players in embarking on this new path and acting consistently in compliance with the new conditions for growth. To the new Laboratory that is being presented today, the Eurispes Institute is making available, above all, the wealth of knowledge and experience it has acquired in the field of sustainable development, thanks also to the continuous contribution of ideas, information, documents and suggestions that the Institute has received from international collaborations promoted over time with highly qualified institutions and experts, as can be seen from the composition of the Institute’s Scientific Committee, which sees the active participation of a large number of foreign representatives.
One final remark. The introductory reflections carried out so far lead us to recall the value, for Eurispes, of the indications contained in the specific programme accompanying the United Nations 2030 Agenda on Sustainable Development, the programme on the relationship between Science and Politics, Science-Policy Interface (SPI) Program (2015), in which it is recommended that public and private operators draw up analyses and proposals in a manner consistent with the principles of social responsibility, to help promote the desired innovative processes ensuring that such processes are in any case “ethically acceptable, sustainable, socially desirable”. Therefore, we are sure that the new Bank, Finance and Insurance Laboratory, in tackling the main problems of development, such as the unresolved issues of the quality of regulation and, in particular, of a new relationship between law and economics, will also be able to operate in complete consistency with the principles defined by the aforementioned UN SPI programme. I thank you again for your participation and pass the floor to Claudia Bugno, Eurispes’ Delegate Councillor for the Development of the Observatory.
Claudia Bugno, Eurispes’ Delegate Councillor for the Development of the Observatory
Thank you, Marco, a greeting to everybody. I would like to briefly introduce the last year of work that we have carried out with President Fara and Eurispes, creating two important observatories that are part of a much broader framework of activities that you described earlier. The first is the Observatory for the Development of Territories, created in collaboration and symbiosis with the State General Accounting Office, and aimed at analysing all the resources linked to public allocations and investments for the territories, also trying to verify the planning capacity of the territories themselves to generate development: I have the honour of directing this Observatory together with colleagues from the State General Accounting Office. The second Observatory, which President Panzani will shortly be presenting, is the Observatory on Banking, Finance and Insurance: it was set up shortly after the Territorial Development Observatory and aimed to analyse these systems with a focus on the territorial sphere. It is clear that the Observatories are closely interconnected, so at the Institute, we intend to work very closely with them to bring out important research and results. The first activity we carried out was to consider, first of all, that the Observatories were born in a period of extreme fragility in our Country, which already had a pre-pandemic fragmentation of small and medium-sized enterprises and, therefore, a difficulty for an increasingly arduous path towards economic recovery. In addition, the morphology of the Country was changing in the large industrial groups with major acquisitions abroad and in Italy, and in the institutional apparatus with the tearing of that extraordinary and important function of listening to and connecting with the territories also carried out by the intermediate bodies. This process of detachment following the pandemic has led to the worsening of economic and social conditions, including for our banking system, with the need to re-articulate a functionality that sees banks in the process of having to regain, including through new technologies, new commitments and new tools, that neuralgic territorial proximity for the recovery of the Country. We wanted to carry out an in-depth analysis of the tools deployed by Europe first of all, and then also by the Government to react to the crisis; We wanted to carry out a thorough analysis of the tools deployed by Europe first and then by the Government to react to the crisis, and therefore to focus the Observatories on the Next Generation EU, on the declination of our Country, as well as others, in the NRPs, starting from the European appropriations of 750 billion euro for which Italy was, also because of the crisis situation described earlier, among the largest beneficiaries, with over 191 billion euro of funds related to the recovery and resilience mechanism, with additional funds of European plans, such as React EU, and national funds, such as the Complementary Fund, reaching a total of 236 billion euro. This is an important endowment for the recovery and relaunch of the Country, not only through financial resources but also through institutional and governmental reforms. We also wanted to broaden the analysis by considering not only these measures to react to the crisis, but also the residual portions of the Development and Cohesion Fund, those that were part of the previous planning for 2014-20, the new multi-year framework for ’21-’27, but also the entire functionality put in place by SACE, the instruments of CDP, which will now have to put in place new policies and adapt them to the current context, the Central Guarantee Fund, which I hold dear for access to credit, the simplification and support-bis decrees: a whole series of measures to combat the crisis. Turning to us, and this brings me to an end, the issue that we discussed with President Panzani is the fact that in this crisis situation, there is a risk of an increase in impaired loans for the banking system, but also a process of disposal of non-performing loans and the sale of such loans to third parties, and one point that I would like to put on the table today is the focus on the national interest. It is no coincidence that the liquidity decree of April 2020 included the financial infrastructure, including the credit, banking and insurance sectors – which are the so-called stakeholders of the Observatory – within the scope of the special powers of protection of the State, the Golden Power. There has therefore been an expansion and awareness of the national interest in these areas as well. To close, Eurispes’ commitment, with President Fara and the OBAF chaired by Luciano Panzani, is to monitor, support and develop analyses through the various Observatories in order to pay great attention to small and medium-sized enterprises and all the stakeholders that are linked to the territory and that must be protected and assisted by having, even in the process of analysis and evaluation of such complicated and difficult matters as NPLs and UTPs, a focus on the management, development and regeneration of what can be done to support our Country. With this, I close, greet everyone and give the floor to President Panzani.
Luciano Panzani, President of the Eurispes Observatory on Banking, Finance and Insurance:
Good morning everyone, the time has come to explain in a little more detail what the Observatory on Banking, Finance and Insurance consists of, to which we have also given an acronym, OBAF, to be quicker. It is the latest among Eurispes’ permanent observatories, and its ambition is to mark a greater presence of the Institute in this sector. This presence already existed, of course, but we intend to strengthen it.
We do not intend to limit ourselves to a descriptive activity but also to make critical evaluations that can contribute to the choices that have to be made.
The Observatory intends to operate by involving, from time to time, all those who are available, public and private bodies and institutions, and therefore public administration, the supervisory authorities, the protagonists of this sector: banks and the insurance world, trade unions, universities, but also the judiciary, law enforcement agencies, and we want to discuss specific projects. Specific projects that relate, of course, to issues that we consider to be key. The approach is typical of Eurispes: on the one hand, the rigour of the research and, on the other, the attention to social profiles and the effects on the national community.
I am pleased that this presentation of the Observatory comes immediately after the 33rd Italy Report. Whoever opens it (the RI) learns that Eurispes is the instrument for reading information in society, the economy, customs and culture, and this Observatory is set in this direction, it wants to operate with reference to a specific sector, but with a multidisciplinary focus, always taking into account those are critical issues of a general nature in our society and, I would like to mention the RI, a country that is tried by the pandemic, that is poorer, that is older in the sense that the share of people who have entered the third age continues to increase, and where there is a progressive impoverishment and a reduction of the influence of the middle class. I absolutely agree with RI’s assessment in identifying the middle class for the values of culture and industriousness as the backbone of democracy. After all, freedom of discussion, which is a fundamental rule in Eurispes, is a canon of democracy.
The Observatory has a Secretary-General, Simona Caruso, whom I greet and to whom I will give the floor immediately after my speech, and a Scientific Committee. A large Scientific Committee and I would like to take this opportunity to thank all the members for their passion and commitment. The themes that have been identified stem from the debate that has taken place over the last few months. We have chosen to focus mainly on issues relating to banking and insurance and have put the subject of finance in brackets for the time being, but the Observatory will be permanent, which does not mean that it will last forever, but that it will operate for more than a year, for a longer period of time, which means that we will have time to deal with things that we have not prioritised.
Some of the issues identified are issues that relate to old problems that have been given a greater sense of urgency by the pandemic. Among these is the issue of NPLs (non-performing loans), which is a long-standing problem in the banking system, not only in Italy, but certainly more so in Italy than in the rest of Europe, which was partially resolved in past years, but which has worsened again as a result of the pandemic and is especially worrying for smaller banks. As Claudia Bugno said very well, this is not just a question of the impact of the phenomenon on bank balance sheets, but I would say, above all, of the consequences that the choices made regarding the management of these loans could have on companies, which are the debtor companies.
It has been calculated that there are tens of thousands of companies in crisis because of Covid. In part, these companies have benefited from the 150 billion in disbursements guaranteed by the State with the Liquidity Decree and subsequent measures. A significant number of these companies, however, are facing restructuring, and we know – the comparison with other European countries, from this point of view, is absolutely pitiless – that the time required for negotiations, whether informal or structured through access to a procedure before a judge, is longer than in the rest of Europe. We have a real call from the European Union to update, revise and make efficient our insolvency regulations. It is estimated that the slowness of justice accounts for more than one point of GDP. It is, therefore, necessary to intervene immediately. The Ministry of Justice is working on these issues.
I will not go into more detail on this subject because Marcello Messori and Lorenzo Stanghellini will talk about it much better than I can. The research is entrusted to Professor Luigi Murro and Dr. Salibba of the Luiss Guido Carli University, Professor Marco Di Pietro of the Sapienza University and Dr. Nicolo Usai of the University of Florence. I would like to thank them, and I would like to thank for this collaboration both Marcello Messori and Lorenzo Stanghellini, who are directing the research on the economic and legal fronts, respectively.
I would like to quickly give you a few more indications on the other themes that the Observatory proposes to investigate. One issue is linked to the problems of justice, and here I am referring to the regulation of banking contracts and the disputes that this regulation generates, but we have similar problems in the insurance sector. The banking and the financial arbitrator has proved to be an efficient instrument, even if it only has the power of moral suasion. There has been a debate in recent months as to whether it would be advisable to make the arbitrator’s intervention compulsory and his decision binding. I have the impression, but it is only an impression that we will have to verify with a careful study that this type of intervention risks distorting it or depriving it of the reasons for its success. What is certain is that we have a large number of disputes before the civil courts concerning banking matters, mainly involving debtors who raise objections on the violation of the rules governing the bank-client relationship, mainly aimed at paralysing the bank’s recovery action. Here there is a fundamental issue: the slowness of credit payment times, which has a significant impact on the efficiency of our entire entrepreneurial system.
The mediation procedures on which much reliance has been placed do not seem to have affected this sector. We need to find the reasons before we can suggest solutions.
In insurance, the phenomenon is partly similar. The insurance referee is starting up, and it is not yet operational. The hope is that it will be in place soon and, therefore, we just have to wait and see how it will work. Again, there is significant litigation in the area of third party motor liability. The subject of liability for damages immediately comes to mind, but the contractual dynamics must also be investigated. The situation has improved compared to previous years, thanks to the better organisation of insurance companies in repressing fraud, and also thanks to the intervention of IVASS.
However, there is still a significant number of cases before civil judges, which is worrying, not so much in terms of the absolute number, given that there are just over 200,000 cases, compared with a total of 3 million cases pending in Italy. It is worrying because these 200,000 cases are mainly concentrated in some regions, Campania and Lazio, and are mainly before the Justice of the Peace, i.e., the lowest level of jurisdiction. It is, therefore, a mass phenomenon in some regional areas.
The issue is linked to the wider problem of insurance fraud, which does not only concern third party motor liability, but also involves criminal law. With the cooperation of all interested parties, including the judiciary as well as the insurance companies, a full-scale investigation can determine whether there is scope for legislative and organisational intervention. It should be added that it does not appear that these frauds are adequately prosecuted by the insurance companies and are assessed as a serious phenomenon by the judicial authorities.
The rightful protection of the weaker policyholder in the insurance sector entails some critical issues in terms of the certainty of legal relations. Disputes on the violation of the rules for the protection of the weaker policyholder and of the principle of the adequacy of information provided by the intermediary on the suitability of the insurance product to meet the client’s needs give rise to litigation that also takes on profiles of an opportunistic nature.
A broader perspective that seems to me very promising and which has so far been studied truly little are the new frontiers opening up in the world of insurance. The pandemic crisis has posed the problem of covering Covid damage, not so much from the point of view of medical liability – those are familiar issues – but with reference to business crises. There has been litigation, particularly in the United States, in which attempts are being made to erode the principle that these damages are not compensable.
This type of action must also be combined with other types of reflection that start from the disruption of the territory and the events that periodically afflict our Italy, also linked to climate change, and the problem of covering so-called catastrophic damage. “Traditionally, such damage is not covered by insurance, but studies show that if a form of compulsory or at least incentivised insurance cover were to be put in place, the cost for each individual insured citizen could be contained, obviously with great advantages from the point of view of collective well-being.
More generally, the insurance product is the subject of progress that derives from the drive for technological innovation and takes on an incentive character with reference to objectives that we all consider socially relevant, such as improving health or the climate. Risk cover, for example, can be linked to virtuous behaviour on the part of the insured who undergoes periodic free medical checks or who, if they are a business, in the meantime can benefit from cover insofar as the systems are up to standard and are regularly checked.
There are also criminal liability profiles in relation to the protection of the company and the company’s creditors – I will not go into details because my speech is taking too long. However, I would like to say that we intend to work across the board, including on criminal profiles.
I would like to conclude by thanking President Fara, Claudia Bugno, Simona Carosso, all the members of the Scientific Committee and the entire Eurispes and give the floor to Simona Carosso for her introduction.
Simona Carosso, Secretary-General of the Eurispes Observatory on Banking, Finance and Insurance (OBAF):
Thank you, Mr President. Good morning everyone. I start from what has already been said by Secretary-General Ricceri, and that seems to be particularly important. I would like to focus on what I believe to be the innovative and specific feature of this research project, of those that will follow it and, therefore, of OBAF’s activities in general. First of all, I think it is a project of great quality, and it could not be otherwise, considering the high authoritativeness of the members of the Scientific Committee and the level of their contributions. The scientific referees and directors of the project have already been introduced: Professor Messori and Professor Stanghellini, assisted by this group of talented young researchers. These are brilliant young people – I believe they will be the new generation of researchers in Italy and elsewhere. However, this alone would not be enough to distinguish OBAF’s NPL project from others of a similar level in the national context. I believe that what will distinguish this project and make it innovative and peculiar is precisely the working method that Secretary-General Ricceri mentioned earlier, i.e. the method of the Eurispes Institute. It is a method characterised first and foremost by great freedom of thought, transparency and impartiality. The second element that distinguishes it is its multidisciplinary approach. In fact, the aim is to address the issues that the Scientific Committee will gradually select with a continuous comparison and connection between people with different training and professional backgrounds. This approach not only enriches the debate, but we believe that it enables us to tackle the issues and technical problems with a new, non-preconceived approach, and thus to grasp the stimuli, insights and connections between various aspects of the phenomena being researched that may not be immediately apparent. As the Secretary said earlier, we must not remain within the silos (to quote Professor Padoan). It is necessary to get out of the silo of individual professionals and take from each one that new look that will tap into new aspects of the phenomena being researched. The last element, which I believe is extremely important in this working methodology, is the desire for dialogue and comparison with the worlds that will be the object of our research. These worlds must not only provide data and information – which are obviously essential and indispensable for analysis and research – but we believe it is essential to listen to all those involved, in order to intercept market trends, the needs and requirements of operators and also to be able to understand what the real effects, not only economic but also social, of the phenomena we intend to study may be. I believe that it is precisely this peculiar trait, which is typical of the Eurispes institute’s methodology, that will lead us to innovative results of certain interest, not only for the scientific community but also for operators in the sector. Finally, so as not to take up any more of the speakers’ time, I would like to thank President Fara, Dr Bugno and all the members of the Scientific Committee for their great willingness, commitment and enthusiasm in taking part in all our activities and meetings. I would like to extend my thanks to all the people we have gradually involved in our activities and contacted, who have responded with great willingness, courtesy, and, I must say, great interest in our research projects. Finally, I would like to thank all the staff at the Institute for their invaluable help and their infinite patience with our requests and requests. Thank you for your attention, and I leave the floor to the speakers. Thank you.
Luciano Panzani: Thank you Simona, I wanted to thank Professor Ricceri again for his initial words because he placed Eurispes’ activity, and therefore also the Observatory, in an international perspective, assuring everyone that this is also our intention. Let us now move on to the topic of “Banks NPL restructuring”. Marcello Messori is a senior fellow at the Luiss School of European political economy. He is a well-known and well-known scholar and, I must say, I am particularly grateful to him for the extreme willingness he has shown since the beginning and the enthusiasm he has shown in this research activity, finding the time, despite his numerous commitments this work as well. Thank you Marcello, the floor is yours.
Marcello Messori, Senior Fellow at the Luiss School of European Political Economy:
First of all, I would like to thank Luciano Panzani, as President of the Observatory, and Eurispes in general, for allowing me to address this topic. A topic, that of non-performing loans (NPLs), which was very important for the Italian banking sector between 2013 and 2016 and which, albeit in different forms, could become important again in the post-pandemic both for the evolution of the banking sector itself and, more generally, for the development of our Country’s economy. The interdisciplinary nature of this research has already been emphasised in previous speeches, so I will not repeat it. I would just add that my presentation will be in addition to Lorenzo Stanghellini’s; our two analyses will be complementary and will be two sides of the same coin.
I do not wish to bore the participants in our meeting too much by going into the technical aspects of the research. However, some detailed considerations are inevitable to justify why it remains important to study NPLs in order to appreciate the problems that the Italian economy will have to face in the post-pandemic phase. Between 2011 and 2016, we all remember that the Italian banking sector was characterised by a strong and growing incidence of problematic loans on its balance sheets. If NPLs are calculated gross of provisions and value adjustments, the Italian banking sector reached peaks of EUR 360 billion of problem loans, which weighed just under 20% of total bank loans. In particular, these peaks were reached between the end of 2015 and the beginning of 2016. For the sake of comparison, we need only consider that in the EU as a whole, the maximum level of NPLs as a percentage of total loans did not reach 8%. The problem of NPLs was, therefore, peculiar to the Italian banking sector (and to other banking sectors in fragile European countries such as Greece, Cyprus and Portugal), albeit as part of a more general trend of increasing insolvencies following the international financial crisis and the specific nature of the European crisis. It should also be stressed that even going beyond expectations, the disposal of these problematic loans was very rapid in Italy. Between the end of 2016 and 2019, the Italian banking sector as a whole managed to dispose of well over half the incidence of its non-performing loans. If we focus on the most significant part of Italian banking groups, the reduction of NPLs on bank balance sheets has affected about two-thirds of the total.
In the face of such empirical evidence, it is important to understand how such a process was possible, what were its impacts, and how the Italian banking sector managed to manage these impacts. In this regard, I recall a few figures. In the balance sheets of Italian banks, problematic loans were on average recorded at values much higher than those at which these same loans could have been sold on the market. If we refer to the so-called net value of problem loans, i.e., their value after deducting provisions and value adjustments, we are not far from the truth when we say that – on average – the book value of NPLs was equal to half or slightly less than half of their nominal value. Although it is difficult to define an average market price with regard to the various forms of NPL divestment (including outright securitisation), there is evidence that many major Italian banking groups and several Italian banks in difficulty have divested through bilateral relationships or placed their problematic loans on the market at an average price of less than 20% of their nominal value. We should, therefore, have expected great difficulties from the Italian banks in disposing of their problematic loans – which, as I have just said, did not happen. Alternatively, we should have expected that the rapid absorption of this abnormal amount of problem loans would have had a negative impact on the degree of capitalisation of Italian banks; capitalisation which, I would remind you, at the end of the international financial crisis and the European crisis complied on average with European capital requirements but was well below the average for the euro area.
Conversely, this problem did not occur either: between the end of 2016 and the end of 2019, the Italian banking sector absorbed the stock of problem loans very quickly and, at the same time, managed to do so without paying the price in terms of capitalisation. On the contrary, if we use a well-known capitalisation indicator (Core Tier 1), the ratio increased from around 7% to around 14% between 2008 and 2019. That ratio has, therefore, doubled.
This set of good news might call into question the relevance of our research. Why study non-performing loans anymore when the Italian banking sector has been able to quickly reabsorb its surplus? Today, the incidence of gross non-performing loans on total loans of Italian banks is still higher than the European average, but it is approaching the threshold set by European recommendations: 5%. Moreover, if we exclude the subset of the most problematic Italian banks or if we refer to net NPLs, the Italian figure is – roughly – in line with the European average. Finally, Italian banks have achieved this result by strengthening their capitalisation.
In reality, the many pieces of good news should not hide the fact that today, we are not able to give analytical answers to two questions: the detailed identification of the mechanisms that have allowed such a rapid process of disposal of problematic credits in Italy; the ways of increasing capital requirements, since the profitability of the Italian banking sector has been below the cost of capital. As Luciano Panzani recalled, the Observatory cannot cover all the problems of the Italian banking sector; therefore, the research group does not intend to address the second question – at least for the moment – but to focus on the first. Nevertheless, even a cursory examination of the empirical evidence available on the process of disposing of problematic bank loans reveals that the information is so limited and contradictory as to justify a research effort.
The first piece of empirical evidence is that, in Italy, the banking sector has managed to expand a securitisation market that was initially characterised by an oligopolistic structure on the demand side of NPLs, or even as a sort of monopsony. The intuition is that this market structure was one of the causes of low average demand prices for securitised problem loans. However, little is known about the variability of market prices corresponding to the different types of NPLs that have been produced and securitised. Equally little is known about the actual weight of securitisations compared to other forms of NPL disposal. It is known that several Italian banking groups have disposed of NPLs outside the market or have built ad hoc specialised vehicles. It is also known that other Italian banking groups have participated in the ownership of existing specialised vehicles also to place part of their stock of problematic loans. However, the weight of each of these disposals and the prices at which they took place are unknown. In addition, publicly-owned servicers (Amco) have been strengthened, or subsidy mechanisms within the banking sector (Fondi Atlante) have been constructed. The result is that there is no empirical evidence on how NPL tranches were structured and priced.
The second piece of empirical evidence concerns public incentives. Pier Carlo Padoan, who was then Minister of Economy and Finance, is obviously much more qualified than I am to examine the role played by guarantees on the less risky (senior) tranches of problem loans: the so-called Gacs. As far as research is concerned, suffice it to say that there is inadequate empirical evidence on the actual impact of the Gacs both in facilitating divestments and in changing market prices and the weight of unsecured (mezzanine and junior) tranches relative to secured ones. For example, it would be important to verify whether there were any distorting effects on those prices and weights.
These two examples are sufficient to highlight the general problem of the research. The available empirical evidence does not allow us to reconstruct, in sufficient detail, the various components of the NPL divestment processes by the Italian banking sector. Even less does it allow us to grasp the specific strategies followed by the different types of banks and the different types of potential buyers, the determinants of the various prices and the allocations characterising the various types of problem loans. The latter aspects are particularly relevant because, as is well known, problem loans cannot be treated, even in a first approximation, as a homogeneous whole. For example, as Claudia Bugno has already mentioned, non-performing loans in the proper sense and “unlikely to pay” (UTP) loans are part of NPLs; yet these two components have heterogeneous characteristics, and their disposals have quite different economic impacts. And similar considerations can be repeated with regard to the different types of services and the composition of their portfolios.
In order to analytically reconstruct the NPL divestment process implemented by the Italian banking sector and to assess its actual impact in terms of bank balance sheets and borrower assets, it would be necessary to address all of the above issues. However, this is not feasible in the absence of adequate information flows. This applies, in particular, to the link between the treatment of NPLs (and, in particular, UTPs) and the performance of the related lending corporations. The latter tend to be very vulnerable with respect to the handling of NPLs and, in particular, UTPs. Therefore, an essential aspect of the research should aim at examining the following question: under what conditions do the way NPLs are sold and the functioning of the securitisation market affect the success of rescue and restructuring processes of problematic firms that are in difficulty but still have growth potential?
I would like to conclude by emphasising that the questions posed are not merely of academic research interest and do not lead to investigating the reality of the Italian banking sector through a rear-view mirror that prevents us from looking to the future. On the contrary, these questions can be extremely relevant to future economic policy choices for at least two reasons.
The first reason is that the post-pandemic (2022) will lead to a significant increase in the incidence of NPLs and – in particular, of UTPs – in Italian bank balance sheets. If Italy is able to get back on a sustainable development path, this increase will not lead to the peaks reached in 2015-2016; moreover, thanks to their higher capitalisation, Italian banks will be better able to manage problematic loans. However, the fact remains that the currently low profitability makes our banking sector vulnerable to any variable that could weigh down its balance sheet. It would therefore be particularly useful to understand in more detail how the accumulation of NPLs between 2016 and 2019 could be effectively disposed of. The second reason is even more substantial. The way in which NPLs (old and new) are managed is relevant to the likelihood of successful restructuring of the relevant borrower firms that have potential margins for recovery. Therefore, understanding recent but past divestments facilitates identifying and overcoming those problematic issues that have hindered corporate restructuring. This is all the more true in a framework in which the growth of Italian companies will require strong financial support not limited to bank credit but also – if not above all – focused on raising capital and ‘market credits’.
In closing, Lorenzo Stanghellini reiterated that a set of economic and institutional factors inherent in the Italian banking sector makes it particularly useful to understand in analytical detail how problematic loans have been managed in the recent past. This would offer policy indications and facilitate the design of appropriate incentives for the banking sector to be a positive player in the post-pandemic economic development of our Country.
Luciano Panzani: I would now like to introduce Lorenzo Stanghellini, Professor of Commercial Law at the University of Florence, author of key researches and monographs, which have marked the development of insolvency doctrine in Italy. Several times member of reform committees. Most recently, he was among the experts who participated in the work of drafting the European Commission’s Directive of 20 June 2019 (so-called Insolvency Directive). He is a member of the Commission chaired by Ilaria Pagni, appointed by the Minister of Justice, Marta Cartabia, to update the Crisis Code in our legislation. Professor Stanghellini follows the legal part of the research. Thanking him for his participation and enthusiasm, which, as always, he shows, I leave him on the floor.
Lorenzo Stanghellini, Professor of Commercial Law, University of Florence:
The importance of integration between the legal and the economic part, I think, is obvious to everyone in a subject so dense of implications under multiple profiles. First of all, the research starts from the moment in which the exposure is detected as impaired by the bank: that is, from the moment in which the bank turns on a “beacon” – which can be only internal or, instead, in cases of more marked non-performing loans, also with external relevance by means of a report to the Central Risk Centre of the Bank of Italy – as a consequence of the detection of an anomaly.
The criteria on the basis of which the bank carries out this detection are now harmonised at the European level on the basis of EBA technical standards and are designed to make the detection objective and complicate any operation of concealment of the seriousness of the seriousness of the situation. Naturally, the criteria cover both the recognition of non-performing loans and the recognition of “probable defaults” (“UTPs”), for which the bank’s discretion is more substantial. The moment of transition of exposure from “performing” to impaired cannot be questioned here; however, this moment opens a series of questions that can be traced mainly to two issues.
The first issue concerns how the bank treats impaired exposures: does it do so through an internal management operation, through a mandate given to a specialised entity or, finally, through the transfer of the position to a third party that assumes economic ownership of the transferred exposure?
There are significant differences between these alternatives: in the case of a mandate from the bank, in which the bank remains the owner of the impaired exposure, there is outsourcing of an important operational function, which makes the bank responsible for the results of the servicer’s activities and, consequently, requires the bank to be careful in its choice of the servicer, from the point of view of the adequacy of the procedures followed, compliance with deadlines and, more generally, expected performance.
On the other hand, if the bank sells the exposure, the bank loses interest in the fate of the exposure, as its interest is almost exclusively in receiving the highest price obtainable.
The focus of our research group is on how the portfolio is managed and the ability of the credit servicer to extract value from the portfolio. The two ways lead to different results; in both cases, management through a specialised entity can create economies of scale. For example, if a bank has exposure to a shipowner, the latter may have considerable difficulty understanding the industry. Conversely, a credit servicer that has assembled exposures from multiple entities to numerous shipowners may be able to build expertise that can better assess not only the prospects for recovery but also the active ways of managing the positions through intervention in their restructuring. The credit servicer might be more inclined to use external professionalism to support its employees in making critical choices about specific business sectors or concerning decisions with a high degree of specialisation.
On the other hand, when it comes to disposal, the effect, from the bank’s point of view, is, only in this case, that of a reduction in the bank’s assets through the removal of impaired exposures which, as is known, have a considerable weight in various aspects. Described in this way, it would appear to be a situation in which all are winners: (i) the banks when they decide to lighten the balance sheet or when they choose to entrust the management to a specialised entity that maximises recovery, (ii) the same specialised entity if it is also the assignee and, finally, (iii) the system as the value of the impaired loan is maximised. However, this is not exactly the case. Therefore, a space for research also opens up under these profiles. One of the premises that we feel like making is that the massive operations on impaired credit have increasingly involved – starting from the resolution of the four banks in November 2015 and the consequent separation of the good banks from the bad banks and then following with the crisis of the Veneto banks – also portfolios of UTP, i.e. portfolios of impaired exposures that, however, are still “alive” (unlike non-performing loans, which see only a bilateral debit-credit relationship between the bank, or assignee, and the company).
The fact that impaired exposures that are still alive are the subject of assignments creates a significant problem because how that relationship is managed can have an impact not only on recovery rates from the point of view of the holder of the economic interest but also from the point of view of the company, which would like to continue its business, perhaps following a restructuring, and therefore needs to find an appropriate interlocutor.
There are, therefore, consequences in four directions, to which as many research questions correspond. The first consequence is that the bank’s situation affects the choice of concrete management methods. In essence, the choice may be affected by the need to relieve the bank of impaired exposures, and thus a bank with stronger capital ratios is freer to choose portfolio management arrangements that maximise its values. Thus, better capital ratios can be expected to be matched by fewer divestitures, retention of economic interest in the divested position, and a greater focus on management by the credit servicer. It could therefore be examined whether the pressure to sell the impaired portfolios may not only have resulted in lower prices than would have been the case in the absence of adequate pressure but that the impaired exposures were sold to entities that, having paid little, do not adequately value the acquired exposures.
This brings us to the second point: to the extent that impaired exposures also include UTPs, i.e., living relationships, the situation described above also becomes a problem for companies. Indeed, when faced with an interlocutor who has paid little for the exposure, companies may not be able to find suitable interlocutors when they try to restructure and emerge from a crisis situation that has affected them but has not yet led to their bankruptcy.
The third aspect of the research concerns regulation on the banks’ side. An initial analysis I conducted in 2018 showed that prudential rules – which undoubtedly have sound reasons – nevertheless create significant rigidities in the management and restructuring of impaired loans, and, above all, of UTPs. It is overly complicated to grant new interim finance, i.e., emergency finance, which keeps the company alive during the time in which it is perfecting a restructuring instrument: if the interlocutor is inattentive or does not have the technical or legal possibility of granting new finance, there is a problem. There is another aspect that concerns banking regulation: the granting of concessions, the so-called forbearances, creates a difficulty not only at the time they have to be made but also stiffens the relationship after they have been made. Basically, an exposure remains impaired and subject to concessions for quite a significant period of time, and this fact prevents a return to ordinary management, even in the presence of a restructuring agreement approved by the judge, for a period that can be critical for the company. The problems are amplified in the case of transfer to securitisation vehicles which have difficulty in managing live relationships; if this were the case, companies that are still recoverable could find themselves without interlocutors with whom to proceed to restructure.
The final problem is regulation on the business side, which will also be the subject of analysis. The insolvency rules – rules on composition with creditors, restructuring agreements, even recovery plans, which are the final boundary of a company in difficulty but heading towards recovery – are designed for active, attentive and competent interlocutors: they essentially presuppose that bank and financial creditors (the banks or their successors in the management of impaired credit) pay attention to companies’ requests for restructuring. The restructuring agreement is based on the express consent of the majority of creditors or all creditors. A composition agreement presupposes the express vote of a majority of creditors. If this attention of creditors is not forthcoming, a company that deserves restructuring may end up being ‘condemned’. Therefore, from the point of view of regulation, the research hypothesis is that it may be necessary to think of different rules, relying more on automatisms: that is to say, rules which, without depriving creditors of their right to express themselves, can do without the express consent of creditors, in order to allow restructuring processes to take place within a timeframe compatible with the reality of businesses.
It may also be necessary to make the banks and the agents and assignees of credits responsible for the need to equip themselves with an organisational structure capable of responding promptly to companies’ requests for restructuring, with a duty not so much to consent to restructure as to participate actively in it. Lastly, it may be necessary to devise rules to reduce information asymmetries between the company in difficulty and the creditor: negotiations always take place in the shadow of the law but, above all, in the shadow of a huge information asymmetry. The company in crisis has more information about the value of its assets and often approaches the crisis with excessive optimism; creditors, on the other hand, do not have the same information and are, rightly, sceptical. it is conceivable that, in an emergency situation such as the one we are facing, it is necessary to identify places where independent experts – not with a policeman’s or court commissioner’s attitude – can help companies and creditors find an agreement.
Luciano Panzani: Thank you Professor. I leave the floor to Pier Carlo Padoan, who has held many positions and roles, such as that of the OECD, the Ministry of the Economy and, today, the presidency of Unicredit, a large Italian banking institution. He needs no further introduction, and we are particularly grateful to him for having found a way to dedicate some of his time to us.
Pier Carlo Padoan, Chairman of Unicredit:
Thank you for this welcome invitation. I have been entrusted with the conclusions of this interesting webinar but, since it is a debate on a research project that is about to be launched, and which I consider extremely important, I prefer not to make them and instead to take advantage of some untidy reflections on the theme that my friend Marcello Messori has rightly decided not to touch upon, namely: where are we today, thinking about the years 2020, 2021, 2022. Why am I making this reflection? Because I am aware of all the difficulties in dealing with a transitional situation – since we are in a phase of profound evolution, from a pandemic crisis to a growth different from the past – in this phase, it is important that all the players give their best in efficiency, including the banking sector. It is useful to recall a few numbers concerning where the banking sector is today, which is going through a complex phase. In recent years, after the most acute phase of the financial crisis, Italian banks have taken significant steps to reduce impaired loans through asset sales. In the last five years, banks have more than halved the total stock of non-performing exposures, from EUR 341 billion in 2015 to EUR 115 billion in 2020. Let me say that Unicredit has played an active and leading role in the reduction of NPLs, recording between 2015 and 2020 a reduction in impaired loans of about EUR 60 billion. Other banks also followed this path, and during 2020, there were massive NPL divestments at a system level, amounting to more than EUR 13 billion if we limit ourselves to the main banks. The Italian banking system has emerged strengthened from the phase just described thanks to the substantial deleveraging carried out in recent years and to the excellent know-how acquired in this area, which will be especially useful in the near future when it will have to face a series of important challenges arising from the effects of the pandemic, but also from the impact of new regulations introduced at European levels, such as the new definition of default or calendar provisioning. In fact, these elements have reshuffled expectations regarding the evolution that NPLs will take in the medium term in the Italian banking system. I recall, among other things, that thanks to the credit moratoria and public guarantee measures put in place by the Government in 2020, the portfolios of impaired loans remained frozen, postponing the effects of the pandemic on new NPL flows and possible changes in the classifications of impaired loans. Government mitigation measures are expected to end in the current year, so in 2021-2022, a new flow of about EUR 80 billion of loans is estimated to move from performing to impaired loans. Within impaired loans, some €55 billion is expected to move from unlikely to pay to bad loans over the same two-year period. Some estimates indicate an expected increase in the stock of NPEs, at the level of the Italian system, from €115 billion in 2020 to €129 billion in 2021, to €149 billion in 2022, and a relative worsening of credit indicators. In other words, despite the improvement in past years, one hypothesis that I offer here as a starting point for discussion is that we should expect a progressive deterioration of the situation. This can also be inferred from the projections of certain coefficients indicating the degree of deterioration, the deterioration rate (positions migrated from performing to NPE): it should rise from 1.1% in 2020 to 2.6% in 2021, to 3% in 2022. Positions migrated from unlikely to pay to bad loans would increase from 21.1 in 2020 to 43.8 in 2021, to 38.1 in 2022. Non-performing exposure as a percentage of total loans would increase from 4.1% in 2020 to about 7% in 2021 and 8% in 2022. As a result of the economic situation, which has deteriorated a lot in the past years (and is only now improving), due to the lag effect that we know applies in most cases between the economic cycle and the trend in non-performing loans, all this translates into a general worsening of the situation, as shown by the expectations of the credit indicators. The effect of the new regulations that European regulators have decided to introduce – and it seems that they will continue in this direction – despite the fact that the crisis situation is triggered by this picture. While in Europe, we have succeeded in suspending the Stability Pact, introducing the Next Generation EU, and weakening state aid discipline, from the point of view of banking regulation, the direction of travel has been to proceed as if there had been no crisis. We have to expect two sources of regulation, changing regulations of impacts on the situation. The new definition of default, adopted by most Italian banks between 2020 and 2021, will lead to a technical increase in the stock of NPEs due to the simple application of the new criteria. The calendar provisioning could lead to an increase in capital requirements for banks that is out of step with the timing of Italian legal proceedings and which are the cause of the high average duration of positions classified as NPEs. Also, because of this almost mechanical fact, there will be a deterioration of positions. Should we then be worried? My answer is that we should be partly worried. Thanks to the strong reduction in the stock of NPEs recorded by Italian banks in the recent past, the impact of the application of calendar provisioning, for example, on the stock of NPEs could be moderate, since the NPE portfolios in the future will consist mainly of new positions, whose classifications will be more consistent with the new regulatory requirements. So, this impact effect will trivially fade, but in the meantime, it is coming. Despite the effects of Covid, which are reflected in the deterioration indicators, and the new regulations, the expectations of the banking system, at least as far as we are aware, are better than the values reached in 2013 when the deterioration rate reached 4.5, and the danger rate reached 44.2, thus values higher than those I mentioned earlier. But if the situation remains problematic – and above all requires monitoring in this transitional phase – what should be done? The message I would like to share is that by improving asset quality, there will be a credit system able to face the post-pandemic scenario from a position of strength. Moreover, let us not forget that banks, compared to the past, have learned to better manage large stocks of NPEs, and the market itself appears better equipped to deal with waves of non-performing loans, with a depth that was not there in the past. Compared to the situation prevailing in the crisis years of the past decade, the market for impaired positions in Italy has learned to be larger, more liquid and more efficient. Looking ahead, however, it is necessary – in order to deal effectively with the increase in impaired loans – for banks to equip themselves at least from two points of view. First, they need to improve their ability to identify early signs of credit deterioration, customers and riskier sectors. Technology plays an important role, and it must be exploited to the full. In fact, this goal can be achieved through the development of increasingly efficient score systems, thanks to the application of machine learning techniques that more effectively preserve performing customers from those destined to end up in the riskiest classifications. Here there is an opportunity but also a need for investment in technologies that are awfully expensive, but that will not only improve banks’ allocation efficiency but also increase the resilience of banking systems. Secondly, banks will have to improve their ability to choose performance optimisation by choosing the most appropriate strategies, which are diversified. It will be a matter of improving the mechanisms that lead to the analysis of impaired credit portfolios both in terms of capital absorption and in terms of their impact on economic cost. The Italian and European economies are in a phase of transition: from that of managing the very violent crisis triggered by Covid to one in which economic policy can devote itself to growth-related issues, of which the NRP is a fundamental element. In this context, the banking system will have to play an important role in allocating resources, both public – through guarantee mechanisms linked to long-term prospects – and private – towards sectors from which greater growth is expected, those of new technologies, but also those of environmental and social sustainability. In this context, an improvement in the economic cycle is to be expected, and we can already see this in the growth forecast for next year and the year after, although it is probably linked to the so-called ‘rebound effect’. Past experience tells us that as growth improves, as the cycle strengthens, the incidence of NPLs decreases. So, in the future, beyond the fact that there will be reclassification issues, once short-term support operations are taken out of the system, we should expect a general improvement in resilience in crisis management. Putting these things together, even if my observations are necessarily linked to a high degree of uncertainty, the message is that, thanks to the past crisis, we are learning how to manage a possible future crisis with various tools and with various attitudes. I hope this will be something that the new research project will consider. Thank you for your attention.
Luciano Panzani: Thank you, Professor, for these words of hope. I hope they will also apply to the results of our research project.