The risk of a new recession in Europe, the end of Quantitative Easing by the ECB, and the spread of populism and Euroscepticism has put Italy back in the spotlight. The Eurozone’s third-largest economy is in a fragile position compared to other peripheral countries such as Spain, Portugal and Greece, which have largely recovered since the outbreak of the sovereign debt crisis. The sentiment is still feeble, economic growth is at the lower end of the range of EU countries and government bond yields have risen since March, when the elections resulted in a new government led by the populist Five Stars Movement and the League. The transmission channel of a possible new crisis is still the banking sector, mainly because of the sovereign-bank link, which has effectively remained in place since the last crisis.

We take a bird’s-eye view of the banking problems in Italy, which started mostly as a fall-out from the sovereign debt crisis and the deep economic recession that followed. Policymakers and bank managers underestimated the consequences of the crisis, and the policy response was slow. New banking regulations did not pay much attention to Italy’s specificities, and thus worsened the situation. The crisis exposed the banks’ weaknesses, especially the governance aspect. The next recession may arise even before Italy adequately addresses its remaining vulnerabilities.

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