The phase of Quantitative Easing (QE3) announced last March by the European Central Bank (ECB), and the linked new series of targeted longer-term refinancing operations (T-LTRO II), have reduced liquidity risks for euro area banks. Vice versa, the Italian banking sector has gross non-performing loans (NPL) exceeding €360bn, and the book values of these loans–on average–are more than double the corresponding market prices potential international buyers are willing to pay in the short term. Moreover, the Italian banks declaring higher incidences of NPL are often those with capital-to-asset ratios close to the minimum required by European regulatory authorities; therefore, if they offload a significant proportion of their NPL at short-term market prices, they would record losses at a level requiring significant recapitalization, a difficult market challenge at this time. This is hindering the launch of an efficient market for securitizations in Italy.

At the end of June 2016, the European Commission approved the Italian government’s request to guarantee some types of new bonds issued by solvent national banks and ECB’s liquidity provision for these banks. As also shown by the reaction of the stock market in the following days, this agreement is not an adequate solution for the ongoing problems of the Italian banking sector since it only covers liquidity risks. It does, however, send important signals and opens up the possibility for progress.

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