Summary Test

• The Italian economy contracted by 6% in 2008-2009, before partially recovering from 2010-2011. Following the emergence of the sovereign debt crisis, GDP fell by another 5% in 2012-2013. Subsequent growth was slow, and as of the onset of the COVID pandemic GDP remained below 2007 levels (IMF 2024, 18).

• Credit provision by Italian banks fell by 4% in response to the onset of the GFC before beginning to recover in mid-2010. The onset of the sovereign debt crisis caused credit provision to fall by a further 30%, with full recovery not occurring until the first quarter of 2020 (IMF 2024, 18). That said, the decline in lending to
small- and medium-sized enterprises was less severe among the four banks that received Tremonti bonds (Hoyos 2021, 237).

• As of 2020, the average capital ratio of Italian banks was below the euro area average (IMF 2020, 7). Italian banks’ exposure to domestic sovereign bonds remained high at over 10.5% of total assets in 2020 (IMF 2020, 16).

• Italian banks’ NPL levels peaked at around 16% in 2015 (IMF 2024, 22). Despite improvement, they remained among the highest in the EU in 2020 (IMF 2020, 7).

• The largest recipient of Tremonti bonds, Banca Monte dei Paschi di Siena (MPS), receiving EUR 1.9 billion of the EUR 4.1 billion total, was unable to successfully exit from the program and went on to receive an additional recapitalization in 2013 and a final one in 2017 (Hoffner 2024; IMF 2013, 21).

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• In its 2013 Financial System Stability Assessment, the IMF found that the measures announced by Italian authorities in October-November 2008 helped promote depositor confidence and financial stability without entailing significant costs (IMF 2013b, 44). 

• A 2024 IMF assessment concluded that during the GFC and subsequent sovereign debt crisis, Italian authorities succeeded in avoiding a widespread banking crisis but endured a “prolonged and costly cleanup” (IMF 2024, 22).

• Italy’s weak sovereign credit status hampered the effectiveness of the Italian Guarantee Scheme for bank debt. Italian authorities set fees consistent with guidance from the ECB, calling for uniform fee structure across the EU. Authorities believed that high fees relative to Italy’s weaker sovereign credit status, in addition to Italian bank’s relatively strong credit profiles, contributed to a lack of interest in participation (Engbith 2020, 763).

• In the Tremonti recapitalization program, there was speculation that the two largest Italian banks, Unicredit and Intesa Sanpaolo, would participate in the program. These banks chose instead to raise private capital, apparently to avoid the program’s ethics demands on lending to SMEs and households. By September 2009, Unicredit and Intesa Sanpaolo posted core Tier 1 capital ratios of 7.5% and 7.2%, respectively (Hoyos 2021, 235–236).

• Italy’s NPL problem was exacerbated by the inability of the judicial system to enforce creditor rights and conduct insolvency proceedings in a timely manner (IMF 2020, 36).

• Timing, Combinations] Italy’s initial liquidity measures helped prevent a banking crisis, but did not include the entire range of interventions necessary to fully address conditions in the banking system, resulting in a cleanup process that was “prolonged and costly.” 18).

• [Preparation] The lack of adequate judicial resources and processes hindered efforts to address the NPL problem in the Italian banking system.

• [Combinations] The failure to address continued high levels of domestic sovereign debt exposure left Italian banks vulnerable to a sovereign shock feedback loop.

In analyzing the interventions that are the focus of this summary, we used a color-coded system to highlight certain particularly noteworthy design features.

This highlighting is not intended to be dispositive. The fact that a design feature is not highlighted or is highlighted yellow does not mean that it should not be considered or that it will never be effective under any circumstances. Similarly, the fact that a design feature is not highlighted or is highlighted blue does not mean that it should always be considered or will be effective under all circumstances. The highlighting is our subjective attempt to guide readers toward certain design features that (1) may not be obvious but are worth considering or (2) require caution.