Italy: Financial System Stability Assessment

Abstract

Context. Iceland has made solid progress since the 2008 crisis and the last FSAP update in restructuring banks and implementing important financial sector reforms. It has transposed many EU Directives and Regulations into national law, improving the regulatory, supervisory, and crisis management frameworks. Despite global headwinds, Iceland is exiting the pandemic with strong economic growth and highly capitalized banks. Rising inflation has prompted appropriate policy rate hikes, and macroprudential policies related to real estate exposures have been tightened. Payment systems are dependent on international connectivity of debit and credit card providers. Findings. Banks are resilient to solvency stress under the adverse scenario but are sensitive to interest rate changes. Liquidity stress can generally be handled but there are vulnerabilities. The value of pension funds' assets declines substantially in the adverse scenario, reducing future pension values materially. Withdrawals from Pillar III have a noticeable impact on pension funds' cashflows. Policy advice. Despite important progress, further reforms are needed. Regulatory agencies should be adequately resourced to be able to monitor and address emerging risks and challenges; gaps identified in the policy framework should be closed; and collaboration/allocation of tasks between the CBI and MoFEA further clarified. Key recommendations include: continue monitoring real estate risks and take further macroprudential measures if vulnerabilities persist or intensify; enhance monitoring of liquidity coverage ratio for each individual significant currency; strengthen pension fund oversight; establish a repo market and ELA; improve the legal protection of supervisors; remove MoFEA staff from CBI's FMEN and implement internal delegation of powers within CBI; develop and implement a streamlined and independent budgetary process for supervision; strengthen recovery and resolution planning; adopt EU deadline for deposit insurance disbursements; refine emergency alternative domestic retail payment solutions; strengthen the AML/CTF risk-based supervision of banks and virtual asset service providers and ensure the accuracy of basic and beneficial ownership information of legal persons; and implement an oversight strategy for climate-related financial risks. May 25, 2023 ICELAND 2 INTERNATIONAL MONETARY FUND