beginning and 6.1% at the end of the period [11]. This indicates both weak stability of
the banking system and its ability to withstand negative factors.
The ratio of non-performing loans (or gross loan loss provisions) to total loans
shows a negative trend: in the second quarter of 2016, this figure amounted to 16.4%
of all loans, compared with 5.1% in 2008. Bad in 2016 amounted to 9.8% of all loans,
which is 4 times bigger than the pre-crisis 2.5%. The sector continues to increase
coverage rates, which are currently higher than the EU average, although there are
significant differences between banks [9].
According to a country report by the European Commission, the confidence in
the banking sector in Italy fell in 2016, which is reflected in a significant drop of Italian
banks’ share prices. The main reasons for this trend are the high stock of non-
performing loans, the weak growth forecasts, depressing banks’ profitability, and
structural weaknesses in the system, such as high operational costs and corporate
governance flaws [9]. As a result, Italian banks are continiously vulnerable to shocks,
which could be a potential source of economic spillover for other countries in the
Eurozone.
The capitalization of the Italian banking sector in 2008-2016 has gradually
improved: in 2016, due to retained earnings and an increase in equity, the average
common equity tier 1 was 12.4% versus 7.1% in 2008, the total capital ratio was 15,3%.
However, the Italian banking sector is still lagging behind other Eurozone banking
systems and is in the last place in the ratings of Eurozone solvency indicators [9]. Low
profitability and unfavorable market conditions hold back the further strengthening of
capital reserves.
In 2008-2016 the profitability of the Italian banking sector was low: the average
return on equity (ROE) was 4.5% in 2008, -9.3% in 2011, -7.8% in 2013, and improved
to 2.5% in 2016. Currently, it ranks close to the bottom among all the Eurozone banking
systems. The low profitability of Italian banks is due to several factors:
1) a low interest rate environment in the EU and price competition for the most
creditworthy borrowers, which reduces the net interest margin that is key to the
traditional business models of Italian banks;
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