Abstract

The Italian banking system emerged almost unscathed from the global financial crisis of 2007-2008 due to its limited exposure to complex structured securities. It was subsequently weakened by the sovereign debt crisis and two economic recessions that have so far had two main effects: the loss of cheap and easily available funding and a sharp deterioration in the quality of credit. Both effects have caused a sharp reduction in profitability and made it more difficult to complete the adjustment towards the capital and liquidity standards required by the new Basel 3 regulations and by investors. However, thanks to the support of the ECB Italian banks have been able to bridge their funding gap and mitigate the increase in their cost of funding due to their higher perceived risk. But this means they are now required to make strategic and managerial choices that must lead to significant changes in their business model in order to achieve a return to levels of profitability that are consistent with the strengthening of their capital base as required by regulators and investors.