## EXECUTIVE SUMMARY

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---

### System resilience and recent improvements
- Italy’s financial system remains broadly sound and has demonstrated resilience in a challenging macrofinancial and geopolitical environment.
- Key supporting factors:
  - Solid capital and liquidity buffers, strong bank profitability, and improved sovereign market sentiment.
  - Banking sector: benefited from the interest-rate cycle; sustained improvements in asset quality; declining reliance on central bank funding.
  - Sovereign upgrades and compressed spreads moderated the sovereign‑bank nexus.
  - Insurance and broader non-bank sectors remain broadly stable.

### Progress since the 2020 FSAP
- Meaningful progress on key vulnerabilities:
  - NPL ratios declined to historically low levels, aided by active secondary markets, supervisory pressure, and government‑guaranteed securitizations.
  - Capital positions strengthened across SIs and LSIs reflecting robust profitability and enhanced supervisory expectations.
  - Supervisory practices—especially for LSIs—more intrusive and risk focused; greater use of horizontal analysis and supervisory technology.
  - Macroprudential advances: establishment of a macroprudential authority (CMP) and activation of the SyRB.

### Persisting structural vulnerabilities and elevated risks
- Structural constraints:
  - Public debt remains high; potential growth subdued; adverse demographic trends constraining policy space.
- Sovereign‑bank nexus:
  - Moderated but remains sizeable relative to peers; LSIs particularly exposed to domestic government securities, loans to public entities, and public guarantees.
- Legacy NPLs:
  - Large stock transferred off bank balance sheets remains unresolved due to slow debt resolution processes, delaying restructuring and credit restoration.
- Elevated external risks:
  - Heightened geopolitical tensions (including the war in the Middle East) risk trade and energy channels.
  - Climate and cyber risks intensifying as shocks become more frequent and severe.

### Stress testing and sectoral risk findings
- FSAP timing note: analysis predates the war in the Middle East but indicates resilience to severe shocks.
- Banks — solvency:
  - Top‑down solvency stress test covered 31 banks representing 98 percent of system assets.
  - Geopolitical scenario (G): aggregate total capital ratio declines to 16.5 percent by end‑2027 (decline of 3.5 pp from starting point; 4.0 pp relative to baseline). Four banks fall below minimum capital requirements; three additional banks fail to fully comply with the CCoB.
  - Recessionary scenario (R): aggregate total capital ratio declines to 18 percent by end‑2027. Only one LSI falls below minimum capital requirement.
  - SI capital declines more pronounced (3.6 pp from starting point) than LSIs (2.2 pp).
- Banks — liquidity:
  - All banks meet LCR and NSFR requirements with substantial buffers; deposits constitute almost 70 percent of total liabilities.
  - Cash‑flow tests (overnight to six months):
    - SIs preserve positive NLP under severe shock; idiosyncratic scenario causes some two‑day shortfalls and seven banks with six‑month shortfalls; aggregate shortfall < 2 percent of SI sample assets.
    - LSIs more vulnerable but broadly resilient; two specialized banks show shortfalls across scenarios; two traditional banks negative overnight under idiosyncratic scenario.
  - LCR reverse stress test: among SIs, one bank falls below 100 percent LCR at a 50 percent increase in deposit outflow rates; six banks at 75 percent. LSIs: two breach at 75 percent; eight breach at 125 percent.
- Liquidity‑to‑solvency interaction:
  - Forced liquidation of amortized cost (AC) bonds to cover liquidity shortfalls could reduce aggregate capital ratios by up to 2.5 pp for SIs and 3.7 pp for LSIs; additional breaches among LSIs in this tail scenario.
- Household and corporate vulnerability:
  - Households: aggregate indebtedness moderate; pockets of vulnerability among lower‑income households and borrowers with variable‑rate mortgages. Adjustable‑rate mortgages are 26 percent of outstanding loans in 2025.
  - In the geopolitical scenario, share of vulnerable indebted households could exceed 17 percent; bank debt at risk could exceed 18 percent.
  - PDs: household average PDs increase by 129 basis points (G) and 111 basis points (R) relative to 2025 levels.
  - Corporates: leverage moderate, improved balance sheets; default probabilities rise under adverse scenarios (more sharply in G) but remain below EA sovereign crisis levels; stress concentrated among SMEs, southern regions, and sectors like construction, transport, agriculture, and services.
- Interconnectedness:
  - Indirect contagion driven mainly by common sovereign exposures; general government is the main net borrower.
  - Financial linkages: bank liabilities to OFIs = 14.5 percent of GDP; banks’ credit exposures and holdings of OFI‑issued securities ≈ 12.4 percent of GDP.
  - Total consolidated foreign claims of Italian banks: €958 billion in 2025.
- Climate physical risk (flood analysis):
  - Banks broadly resilient to severe flood scenarios (1‑in‑100 and 1‑in‑200 return periods), with moderate capital impacts initially from sovereign valuation losses and later from credit risk; LSIs more affected when sovereign exposures are higher.
  - Stronger post‑disaster fiscal support mitigates short‑term bank impacts but can increase medium‑term sovereign yields and capital losses.

### Macroeconomic scenarios and key projections (selected)
- Real GDP growth: 0.5 percent in 2025 (slowed from 0.8 percent in 2024) and projected 0.5 percent in 2026.
- Stress-test GDP impacts (selected):
  - Real GDP growth contracts by 5.3 percent (R) and 4.3 percent (G) in 2026.
  - Two‑year cumulative GDP decline: 9.4 percent (R) and 7.6 percent (G).
  - Unemployment peaks at 14.3 percent (R).
- Inflation: falls to 0.4 percent (R) in 2026; rises to 4.5 percent (G) in 2026.
- Long‑term interest rates: spike to 7.2 percent (R) and 6.4 percent (G).
- Short‑term interest rates: drop to 0.3 (R) and increase to 3.6 percent (G).
- Oil price: decreases by 36 percent (R) by end‑2028; increases by 17 percent (G) by end‑2028.
- Scenario severity: implied two‑year cumulative GDP shocks correspond to 2.7 standard deviations (R) and 2.3 standard deviations (G) of historical distribution.

### Policy priorities and recommendations
- Broad direction:
  - Preserve system resilience through sustained, proactive policy action: greater supervisory agility; broader, forward‑looking use of macroprudential tools; policy efforts to support efficient intermediation and resolve crisis‑era legacies.
- Macroprudential framework:
  - Strengthen use of available tools; formalize a macroprudential strategy and enhance transparency and external engagement.
  - Extend SyRB beyond domestic credit and counterparty exposures to cover all residual systemic risks—including the sovereign‑bank nexus—with regular reassessment; SyRB currently covers around 60 percent of total RWAs.
  - Adopt a more proactive approach to borrower‑based measures (BBMs); revise regulations to allow earlier activation; integrate stress testing and granular household data into BBM calibration.
  - Systematically use stress‑test results in SyRB calibration; build analytic capacity for geopolitical, cyber, and climate risks; address cross‑border data gaps.
- Prudential oversight and supervision (cross‑cutting):
  - Scale back prolonged use of government guarantees on corporate lending toward pre‑Covid levels to avoid prudential distortions and reduce sovereign‑bank linkages.
  - Strengthen legal protection for supervisory and resolution staff, including full coverage of legal defense costs.
  - Increase targeted and thematic on‑site inspections; formalize escalation ladder and systematic use of corrective and sanctioning powers for LSIs.
- LSIs:
  - Reinforce governance oversight, credit and operational risk supervision, and monitoring of business model vulnerabilities.
  - Grant BdI explicit authority to require asset reclassification and additional provisioning for prudential purposes.
  - Consider a Pillar 2 add‑on to address sovereign concentration risks while avoiding double counting.
- Insurance sector:
  - Complete full integration of IVASS into BdI to address resource constraints or, if separate, increase IVASS staffing to statutory headcount limit of 400.
  - Harmonize internal model oversight; consider capital floors and consistent sovereign risk treatment; fully implement IRRD; extend Life Guarantee Scheme coverage; consider extending IFRS use to all insurers.
- FMIs:
  - Enhance governance at ES‑MIL: staffing, independent risk management, conflict‑of‑interest safeguards, board evaluations, and crisis preparedness at ES‑MIL and ENXC.
- Cybersecurity:
  - Strengthen cyber resilience given AI‑enabled threats and third‑party reliance; use DORA implementation to bolster cyber governance, supervisory capacity, and board accountability.
  - Expand system‑wide cyber stress testing, particularly for critical third‑party disruptions, and apply enforcement where deficiencies exist.
- Financial safety net and crisis preparedness:
  - Reconsider repeated use of DGS resources for preventive recapitalizations and remove active bankers from DGS governance.
  - Establish a cross‑authority forum for crisis coordination; enhance transparency of DGS valuation methodologies.
  - Clarify BdI’s role as liquidity provider of last resort in resolution; continue judicial and legal reforms to improve insolvency and debt enforcement efficiency.

### Key recommendations (summarized)
- Systemic risk monitoring and macroprudential policies:
  - Extend SyRB scope; deploy targeted tools for sovereign concentration (Pillar 2 add‑ons and SyRB); formalize macroprudential institutional framework; revise regulations for earlier BBM deployment; integrate analytical tools into calibration.
- Cross‑cutting:
  - Time‑bound plan to significantly reduce public guarantees on bank lending; strengthen legal protection for supervisory/resolution staff; prioritize risk‑based on‑site inspections.
- Banking sector:
  - Grant BdI power to require LSIs to adjust asset classification and provisioning; prioritize corporate governance supervision; strengthen IT and cyber risk supervisory capacity; use corrective powers earlier.
- Insurance, FMIs, Cybersecurity, Financial integrity and safety net:
  - Complete IVASS integration; internal model capital floors; ensure ES‑MIL independence and staffing; update national cyber strategy; strengthen AML/CFT supervision; reinforce DGS governance and transparency; incorporate indicators for BdI’s FOLTF assessments; strengthen inter‑agency crisis coordination.

### Banking sector structure, capital, liquidity, and profitability (selected figures)
- System size and structure:
  - Financial system represents about 280 percent of GDP as of 2024.
  - As of June 2025, banking sector comprised 12 SIs, five subsidiaries of foreign SIs, and over a hundred LSIs.
  - SIs hold 88 percent of total assets—slightly above the EA average of 84 percent.
- Capital and liquidity (as of December 2025):
  - CET1 ratios: 15.9 percent for SIs and 18.6 percent for LSIs.
  - High LCR and NSFR metrics; declining reliance on ECB funding following TLTRO phase‑out.
- Profitability:
  - Record levels in 2025 driven by elevated net interest income, cost‑efficiency gains, and strong fee revenues.
- LSIs (Q1 2025 metrics, percent):
  - Joint stock companies: # LSI 57 | Assets 77.3 | CET1 18.0 | NPL ratio 7.4 | ROE 11.0
  - Popolari banks: # LSI 16 | Assets 14.5 | CET1 22.0 | NPL ratio 4.5 | ROE 9.2
  - Cooperative banks: # LSI 39* | Assets 4.9 | CET1 31.8 | NPL ratio 3.7 | ROE 9.8
  - Business Model — Traditional banking: # LSI 81 | Assets 62.1 | CET1 19.9 | NPL ratio 3.9 | ROE 9.9
  - Business Model — Specialized lending**: # LSI 16 | Assets 22.3 | CET1 14.9 | NPL ratio 18.4 | ROE 9.6
  - Business Model — Asset Management: # LSI 15 | Assets 12.2 | CET1 19.5 | NPL ratio 2.5 | ROE 16.6
  - Third‑country branches: # LSI 6 | Assets 3.3
  - Total: # LSI 118 | Assets 100.0 | CET1 18.7 | NPL ratio 6.6 | ROE 10.7
  - Notes: * All are part of Raiffeisen Institutional Protection Scheme. ** Includes LSI specialized in NPL acquisition and management.

### NPLs, asset quality, and sovereign‑financial nexus
- NPLs and legacy stock:
  - Aggregate NPL ratio: 2.4 percent at end‑2025 (from peak > 16 percent in 2014).
  - Gross nonperforming exposures remaining in the economy: about €287 billion (≈ 75 percent of the 2015 peak).
  - GACS supported 46 transactions covering €117.8 billion gross book value (≈ one‑third of Italy’s peak NPL stock).
  - AMCO manages €29.4 billion in assets.
- Sovereign exposures and guarantees:
  - Banks’ holdings of domestic government securities declined to 8.6 percent of total assets in September 2025 (from 10 percent in 2020); cooperative banks hold about 23 percent of assets in domestic government securities.
  - Direct lending to the public sector: around 6 percent of total assets.
  - Convertible DTAs: fell to 6 percent of CET1 in 2025 (from 23 percent peak in 2016).
  - GACS securities outstanding: roughly €8 billion in 2024 (down from €21.5 billion at issuance).
  - Government guarantees: as of June 2025 cover about 23 percent of total performing corporate loans; stock of public guarantees ≈ 13 percent of GDP.
- Risks and recommendation:
  - Extensive government guarantees amplify sovereign‑bank linkages and create prudential distortions (including zero risk weighting); recommended time‑bound, well‑communicated phase‑out toward at least pre‑pandemic levels with BdI assessing institution‑specific impacts.

### Non‑bank financial institutions (NBFIs) and market infrastructure
- NBFI size and exposures:
  - Insurance assets ≈ 50 percent of GDP.
  - Life insurance penetration: 5.5 percent; non‑life penetration: 1.9 percent.
  - Investment fund sector: about 66 percent of GDP at end‑2024; dominated by foreign funds domiciled in Luxembourg and Ireland.
  - Domestic closed‑end real estate funds: 67 percent exposure to real estate.
  - Insurance sector domestic sovereign exposure: about 29 percent of assets.
  - Payment‑fraud losses in 2024: €246 million.
  - Major cyberattacks rose from 10 to 35 between 2020 and 2024.
- FMIs:
  - Governance and supervision of ES‑MIL and ENXC need strengthening: staffing, independent risk management, conflict‑of‑interest safeguards, board evaluations, and crisis preparedness.

### Crisis management, DGS, FITD interventions, and insolvency
- Crisis management and RCMU:
  - RCMU operationally independent within BdI; resolution plans completed for all LSIs.
  - Recommendation: formalize cross‑authority coordination forum, define clear roles, develop independent FOLTF indicators, and improve LSI resolvability engagement with FMIs and third parties.
- Private DGS and FITD:
  - DGSs remain private law consortia; recommendation to remove active bankers from governance and consider transition to public sector to reduce conflicts of interest.
  - FITD interventions (2019–2026Q1) examples and costs:
    - Banca Progetto — 2026 — Preventive — Cost: 750 + guarantees (€ million)
    - Banca Carige — 2022 — Preventive — Cost: 530 (€ million)
    - Aigis Banca — 2021 — Alternative in Liquidation — Cost: 48,8 (€ million)
    - Banca Popolare di Bari — 2020 — Preventive — Cost: 1170 (€ million)
    - Banca Carige — 2019 — Preventive — Cost: 301 (€ million)
    - Banca del Fucino — 2019 — Preventive — Cost: 30* (€ million; guarantee ultimately not activated)
  - Notable: January 2026 FITD preventive recapitalization of Banca Progetto (digital bank with €7.7 billion in assets): €750 million capital injection and guarantees costing €550 million; FITD retained 9.9 percent stake.
- Insolvency framework:
  - New Insolvency Code in force since mid‑2022 and amended in 2024; processing times remain lengthy for pre‑reform cases (≈ 7.5 years for judicial liquidations; ≈ 5 years for foreclosures).
  - Applications for concordato preventive: 762 in 2024 (from 678 in 2023); negotiated workout procedures > 1,000 in 2024 and nearly doubled in first half of 2025.
  - Ufficio per il Processo has about 12,000 professionals.

### Authorities’ views
- Authorities welcomed FSAP findings; broadly agreed on systemic risk assessment and banking system resilience.
- Emphases and disagreements:
  - Supported gradual rollback of public guarantees; agreed vulnerabilities concentrated in limited LSIs but cautioned top‑down tests may miss specific business‑model features (e.g., NPL management).
  - Viewed idiosyncratic funding shock as useful tail‑risk diagnostic rather than system‑wide.
  - Endorsed strengthening supervisory effectiveness and IVASS integration into BdI.
  - Did not support extending SyRB beyond current perimeter; argued current scope captures main systemic channels and supports EU reciprocity.
  - Disagreed on restricting DGS preventive interventions, noting they are standard under EU/national law and applied parsimoniously.

### Risk assessment highlights (selected entries)
- Geopolitical tensions and intensification of conflicts — Relative Likelihood: High — Impact If Realized: High
- Commodity price volatility — Relative Likelihood: High — Impact If Realized: High
- Fiscal vulnerabilities and higher interest rates — Relative Likelihood: High — Impact If Realized: High
- Cyberthreats — Relative Likelihood: High — Impact If Realized: High/Medium
- Climate change — Relative Likelihood: Medium — Impact If Realized: Medium
- Domestic risk: Failure to put public debt firmly on a downward path — Relative Likelihood: Medium — Impact If Realized: High

_Italic: Source: EXECUTIVE SUMMARY (content unit 1itaea2026003) from the provided PDF content._

### EXECUTIVE SUMMARY __________________________________________________________________________ 7

### EXECUTIVE SUMMARY

### Major sections and analytical focus
- Background
- A. Macrofinancial Context
- B. Financial Sector Structure and Developments
- C. Key Systemic Vulnerabilities and Risks
- SYSTEMIC RISK ANALYSIS
  - A. Household and Corporate Vulnerability Assessment
  - B. Bank Stress Tests
  - C. Interconnectedness and Large Exposure Analysis
  - D. Climate Risk Analysis
- FINANCIAL SECTOR OVERSIGHT
  - A. Macroprudential Framework and Policy
  - B. Cross-cutting Issues
  - C. Banking Sector
  - D. Insurance
  - E. Financial Market Infrastructures
  - F. Cybersecurity
  - G. Financial Integrity
- FINANCIAL SAFETY NET
- AUTHORITIES’ VIEWS
- APPENDIX
  - I. Implementation Status of Key Recommendations in the 2020 Italy FSAP

### Glossary and key terms (selected, preserved exactly as in source)
- AML/CFT Anti-Money Laundering/Combating the Financing of Terrorism
- ACA amortized cost
- BBM Borrower-Based Measure
- BdI Banca d’Italia
- CAR Capital Adequacy Ratio
- CBC Counterbalancing Capacity
- CCb Capital Conservation Buffer
- CCyB Counter-cyclical Capital Buffer
- CCP Central Counterparty
- CET1 Common Equity Tier 1
- CISO Chief Information Security Officer
- CMDI European Union Crisis Management Deposit Insurance framework
- CMP Committee for Macroprudential Policies
- CONSOB National Commission for Companies and the Stock Exchange
- COVIP Pension Fund Supervisory Commission
- DGS Deposit Guarantee Schemes
- DORA European Union Digital Operational Resilience Act
- DTA Deferred tax assets
- DTI Debt-to-Income
- DSECTI Debt Service plus Essential Consumption to Income ratio
- DSTI Debt Service-to-Income ratio
- EA Euro Area
- EBA European Banking Authority
- EC European Commission
- ECB European Central Bank
- ELA Emergency Liquidity Assistance
- ENX C Euronext Clearing
- ES-MI Euronext Securities Milan
- EU European Union
- FITD Interbank Deposit Protection Fund
- FMI Financial Market Infrastructures
- FOLTF Failing or likely to fail
- FSAP Financial Sector Assessment Program
- FSR Financial Stability Report
- GACS State Guarantee on NPL Securitization
- IRRBB Interest Rate Risk in the Banking Book
- IRR D European Union Insurance Recovery and Resolution Directive
- IFRS International Financial Reporting Standards
- IVASS Institute for the Supervision of Insurance
- LCR Liquidity Coverage Ratio
- LE Large exposures
- LGD Loss Given Default
- LSI Less Significant Institution
- MEF Ministry of Economy and Finance
- ML/TF Money Laundering/Terrorist Financing
- MPS Monte dei Paschi di Siena
- MoU Memorandum of Understanding
- NBFI Non-bank Financial Institutions
- NFC Non-financial Corporate
- NII Net interest income
- NLP Net Liquidity Position
- NPL Non-performing Loans
- NRRP National Recovery and Resilience Plan
- ROE Return on equity
- RCMU Resolution and Crisis Management Unit
- RWA Risk-weighted assets
- SI Significant Institution
- SSM Single Supervisory Mechanism
- SyRB Systemic Risk Buffer
- TLTRO Targeted Longer-Term Refinancing Operations
- USD United States dollars
- UTI Unlikely to Pay
- WEO World Economic Outlook
- pp Percentage points

### Figures and Tables (structure indicated in source)
- The document includes numbered figures and tables covering: macroeconomic context and financial market indicators; credit, corporate and household indebtedness; financial system structure; financial sector developments; non-performing loans; sovereign-bank nexus; stress test scenarios; household and corporate vulnerability assessments; solvency and liquidity stress test results; interconnectedness and large exposure analysis; climate physical risk analysis; macroprudential policies across jurisdictions; and a set of tables including key FSAP recommendations, less significant institutions, interventions by the Interbank Deposit Protection Fund, selected economic indicators, financial system structure, financial soundness indicators, a risk assessment matrix, and a Stress Testing Matrix (STeM).

*Source: EXECUTIVE SUMMARY (content unit 1itaea2026003) from the provided PDF content.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### System resilience and recent improvements
- Italy’s financial system remains broadly sound and has demonstrated resilience in a challenging macrofinancial and geopolitical environment.
- Resilience is supported by solid capital and liquidity buffers, strong bank profitability, and improved sovereign market sentiment.
- Banking sector benefits:
  - Has benefited from the interest-rate cycle and sustained improvements in asset quality.
  - Reliance on central bank funding has declined.
- Sovereign developments:
  - Upgrades to the sovereign credit profile and compressed spreads have supported market confidence and facilitated some easing of the sovereign-bank nexus.
- Non-bank sectors:
  - The insurance and the broader non-bank sectors remain broadly stable.

### Progress since the 2020 FSAP
- Meaningful progress on key vulnerabilities:
  - Banks’ nonperforming loan (NPL) ratios have declined to historically low levels, supported by active secondary markets, supervisory pressure, and the use of government-guaranteed securitizations.
  - Capital positions have strengthened across both significant institutions (SIs) and less significant institutions (LSIs), reflecting robust profitability and enhanced supervisory expectations.
  - Supervisory practices—particularly for LSIs—have become more intrusive and risk focused, with greater use of horizontal analysis and supervisory technology.
  - Macroprudential advances include establishment of a macroprudential authority and activation of the systemic risk buffer (SyRB).

### Persisting structural vulnerabilities and risks
- Structural constraints:
  - Public debt remains high.
  - Potential growth is subdued.
  - Demographic trends are adverse, constraining policy space.
- Sovereign-bank nexus:
  - Has moderated but remains sizeable relative to peers.
  - LSIs particularly exposed to domestic government securities, loans to public entities, and public guarantees.
- Legacy NPLs:
  - A large stock of NPLs transferred off bank balance sheets remains unresolved, reflecting slow debt resolution processes that delay corporate restructuring, credit restoration, and efficient reallocation of capital.
- Elevated risks:
  - Heightened geopolitical tensions—including the war in the Middle East—pose risks to a trade-oriented, energy-importing economy.
  - Climate and cyber risks are intensifying as shocks become more frequent and severe.

### Stress testing and sectoral risk findings
- Overall system resilience:
  - FSAP analysis predates the war in the Middle East, but indicates the Italian financial system can withstand severe shocks, supported by strong capital and liquidity buffers and low private sector leverage.
- Banks:
  - Solvency stress tests indicate banks could absorb severe adverse macrofinancial shocks under two adverse scenarios, underpinned by strong initial capital positions.
  - Liquidity risk analysis shows ample buffers but highlights sensitivity to idiosyncratic funding shocks and confidence effects at selected institutions.
  - Vulnerabilities remain contained and affect few entities, more pronounced among some LSIs with specialized business models (e.g., consumer credit or NPL management) or greater reliance on higher-cost funding sources.
- Nonfinancial corporates and households:
  - Household balance sheets remain strong, reflecting low indebtedness and high net financial wealth, though vulnerabilities exist among lower-income households and borrowers with variable-rate mortgages.
  - Corporate leverage is moderate; default probabilities increase under adverse scenarios but remain well below Euro Area (EA) sovereign crisis levels and are concentrated among SMEs and selected regions and sectors.
- Interconnectedness:
  - Financial interlinkages remain significant, though direct contagion risks appear contained.
  - General government remains the primary net borrower, increasingly financed by households and foreign investors.
  - Indirect linkages between banks and domestic non-bank financial institutions (NBFIs)—particularly insurers through common sovereign exposures—leave the system exposed to correlated shocks.
  - Direct bank exposure to NBFIs has grown but remains modest in absolute terms.
- Climate risk:
  - Banks appear broadly resilient to severe flood scenarios, with moderate capital impacts driven initially by sovereign valuation losses and subsequently by credit risk.
  - Stronger post-disaster fiscal support would mitigate short-term bank impacts but could worsen medium-term outcomes through higher public debt and sovereign yields.
  - Emphasizes importance of reducing reliance on fiscal measures through early adaptation, resilience investment, and greater use of insurance.

### Policy priorities and recommendations
- Broad direction:
  - Preserving system resilience requires sustained and proactive policy action: greater supervisory agility, broader and more proactive use of macroprudential tools, and further policy efforts to support efficient financial intermediation and address crisis-era legacies.
- Macroprudential framework:
  - Strengthen through a more proactive, formalized, and forward-looking use of available tools.
  - Extend the SyRB beyond domestic credit and counterparty exposures to cover all residual systemic risks—including the sovereign-bank nexus—with regular reassessment to preserve flexibility.
  - Adopt a more proactive approach to borrower-based measures (BBMs), address regulatory constraints that delay activation, and systematically integrate stress testing and granular data into policy calibration.
  - Formalize a macroprudential strategy, enhance transparency and communication, and strengthen external engagement.
- Prudential oversight and supervision (cross-cutting):
  - Scale back prolonged use of government guarantees on corporate lending toward pre‑Covid levels to avoid distorting prudential oversight and credit allocation and to reduce sovereign–bank linkages.
  - Strengthen legal protection for supervisory and resolution staff, including legal defense costs coverage.
  - Increase targeted and thematic on‑site inspections for more frequent engagement across entities.
- Less Significant Institutions (LSIs):
  - Reinforce governance oversight, credit and operational risk supervision, and monitoring of business model vulnerabilities.
  - Support early and decisive intervention via systematic use of corrective and sanctioning powers and a formalized escalation ladder process.
  - Grant Banca d’Italia (BdI) explicit authority to require asset reclassification and additional provisioning for prudential purposes.
  - Consider a Pillar 2 add‑on to address sovereign concentration risks while avoiding double counting with existing requirements.
- Insurance sector:
  - Complete full integration of the Institute for the Supervision of Insurance (IVASS) into BdI to address resource constraints.
  - Harmonize internal model oversight through consistent treatment of sovereign risk and adoption of capital floors.
  - Close remaining gaps in the insurance resolution framework via timely implementation of the Insurance Recovery and Resolution European Union Directive (IRRD) and broader Life Guarantee Scheme coverage.
- Financial Market Infrastructures (FMIs):
  - Enhance governance of Euronext Securities Milan (ES-MIL): ensure adequate staffing, strengthen independent risk management and conflict-of-interest safeguards, improve board performance evaluations, and strengthen crisis preparedness at ES-MIL and Euronext Clearing (ENXC).
- Cybersecurity:
  - Strengthen cyber resilience in light of AI-enabled threats, digitalization, and third‑party reliance.
  - Use implementation of the EU Digital Operational Resilience Act (DORA) to strengthen cyber governance, supervisory capacity, and board-level accountability.
  - Expand system‑wide cyber stress testing—particularly for critical third-party disruptions—and apply enforcement where deficiencies are identified.
- Financial safety net and crisis preparedness:
  - Reconsider repeated use of deposit guarantee schemes (DGS) resources for preventive recapitalizations and remove active bankers from DGS governance.
  - Establish a cross-authority forum for crisis coordination and enhance transparency of DGS valuation methodologies.
  - Clarify BdI’s role as liquidity provider of last resort for banks in resolution.
  - Continue judicial and legal reforms to improve efficiency of insolvency and debt enforcement processes.

### Key recommendations (summary from Table 1)
- Systemic Risk Monitoring and Macroprudential Policies:
  - Extend SyRB scope; deploy targeted tools for sovereign concentration (Pillar 2 add-ons and SyRB); formalize macroprudential institutional framework; revise regulations for earlier deployment of BBMs; integrate analytical tools into policy calibration.
  - Authorities: BdI, CMP, ST designations as shown in Table 1.
- Cross-Cutting:
  - Time-bound plan to significantly reduce public guarantees on bank lending; strengthen legal protection for supervisory/resolution staff; prioritize risk-based on-site inspections.
- Banking Sector Regulation and Supervision:
  - Grant BdI power to require LSIs to adjust asset classification and provisioning; prioritize corporate governance supervision; strengthen IT and cyber risk supervisory capacity; use corrective powers earlier.
- Insurance Sector:
  - Complete IVASS integration into BdI; introduce internal model capital floors and consistent sovereign risk treatment; fully implement IRRD; extend Life Insurance Guarantee Scheme; extend IFRS use to all insurers.
- FMIs:
  - Ensure ES-MIL independence and staffing; improve board evaluations; require Chief Risk Officer direct reporting to non-executive director.
- Cybersecurity:
  - Update national cybersecurity strategy for financial sector; strengthen cyber governance and board accountability; expand cyber stress tests.
- Financial integrity and safety net:
  - Strengthen AML/CFT supervision; enhance geographic ML/TF risk analysis; reinforce DGS governance and transparency; incorporate indicators for BdI’s assessment of failing or likely to fail (FOLTF); strengthen inter-agency crisis coordination; improve disclosure of central bank role as lender of last resort; continue insolvency and enforcement reforms.

### Macroeconomic and structural context (selected figures)
- Real GDP growth:
  - Slowed to 0.5 percent in 2025, from 0.8 percent in 2024, and projected to remain at 0.5 percent in 2026.
- Primary balance:
  - Turned positive in 2024 and strengthened to 0.8 percent of GDP in 2025.
- Public debt:
  - 137.1 percent of GDP in 2025.
- Energy imports:
  - Imported fossil fuels account for more than 70 percent of energy consumption.
- Private sector indebtedness:
  - Household debt: 36 percent of GDP.
  - Corporate leverage: 58 percent of GDP.
- Financial system size and structure:
  - System represents about 280 percent of GDP as of 2024.
  - As of June 2025, banking sector comprised 12 significant institutions (SIs), five subsidiaries of foreign SIs, and over a hundred less significant institutions (LSIs).
  - SIs hold 88 percent of total assets—slightly above the EA average of 84 percent.

*Source: IMF — Italy: Executive Summary (FSAP).*

### 6. The LSI sector is heterogeneous, shaped by differences in legal form, business models,

### 6. The LSI sector is heterogeneous, shaped by differences in legal form, business models, and regional footprint.

### Sector heterogeneity and regional disparities
- LSIs in northern and central regions (higher per capita income) account for a larger share of lending and deposit activity and tend to benefit from stronger credit demand and lower NPL ratios.
- The LSI sector exhibits different risk profiles, funding structures, and supervisory priorities driven by legal form, business model, and regional footprint.

### Less Significant Institutions — key metrics (Q1 2025, in percent)
- Table 2 summary (columns: # LSI | Assets | CET 1 | NPL ratio | ROE)
  - Joint stock companies: 57 | 77.3 | 18.0 | 7.4 | 11.0
  - Popolari banks: 16 | 14.5 | 22.0 | 4.5 | 9.2
  - Cooperative banks: 39* | 4.9 | 31.8 | 3.7 | 9.8
  - Business Model — Traditional banking: 81 | 62.1 | 19.9 | 3.9 | 9.9
  - Business Model — Specialized lending**: 16 | 22.3 | 14.9 | 18.4 | 9.6
  - Business Model — Asset Management: 15 | 12.2 | 19.5 | 2.5 | 16.6
  - Third-country branches: 6 | 3.3
  - Total: 118 | 100.0 | 18.7 | 6.6 | 10.7
- Notes: * All are part of Raiffeisen Institutional Protection Scheme. ** It includes LSI specialized in NPL acquisition and management.

### Non-bank Financial Institutions (NBFIs)
- Insurance companies hold assets equivalent to 50 percent of GDP.
- Life insurance penetration: 5.5 percent.
- Non-life insurance penetration: 1.9 percent.
- Investment fund sector size: about 66 percent of GDP at end-2024; dominated by foreign funds domiciled primarily in Luxembourg and Ireland.
- Domestic closed-end funds concentrated on real estate: 67 percent (exposure to real estate risks).
- Leverage in asset management remains low; funds most vulnerable for redemption pressures account for less than 2 percent of total assets.
- Insurance sector exposure to domestic sovereign debt: about 29 percent of assets.
- Payment-fraud losses in 2024: €246 million.
- Major cyberattacks increased from 10 to 35 between 2020 and 2024.

### Consolidation, governance, and government actions
- A consolidation wave since late 2024: five of the six largest banks entered merger discussions.
- The government invoked “golden power” to impose conditions in six transactions between 2020 and 2025.
- Monte dei Paschi di Siena (MPS) obtained control of another SI, creating Italy’s third-largest banking group and acquiring a strategic stake in the largest insurer.
- In June 2026, Italy's largest bank launched a takeover bid for MPS (noted as a development in the narrative).

### Capital, liquidity, and profitability
- As of December 2025:
  - CET1 ratios: 15.9 percent for SIs and 18.6 percent for LSIs.
  - Liquidity metrics: high Liquidity Coverage Ratios (LCR) and Net Stable Funding Ratios (NSFR); declining reliance on ECB funding following TLTRO phase-out.
- Profitability:
  - Record levels in 2025 driven by still-elevated net interest income, earlier cost-efficiency gains, and strong fee-based revenues.
- Fiscal and tax environment:
  - Deferral of the use of convertible deferred tax assets (DTAs) for 2025–2026 to 2029.
  - Increase in taxes on banks and insurers in the 2026 Budget.

### Asset quality, NPLs, and NPL servicing
- Aggregate NPL developments:
  - NPL ratio declined to 2.4 percent at end-2025 from a peak above 16 percent in 2014.
  - About €287 billion in gross nonperforming exposures remain in the economy — around 75 percent of the 2015 peak.
  - GACS securitization scheme supported 46 transactions covering €117.8 billion in gross book value (about one-third of Italy’s peak NPL stock).
  - AMCO currently manages €29.4 billion in assets.
- Residual issues:
  - Some LSIs face idiosyncratic challenges: higher NPL ratios (averaging 6 percent), lower coverage, weaker profitability, and operational inefficiencies.
  - Final resolution of remaining NPL stock hindered by inefficiency in insolvency, restructuring and enforcement procedures.
- Supervisory focus shifted to the NPL servicing industry and NPL specialized banks facing higher funding costs, a declining pipeline of NPLs, and a changing regulatory framework including EU Directive 2021/2167.

### Sovereign–financial sector nexus
- Banks’ holdings of domestic government securities:
  - Declined to 8.6 percent of total assets in September 2025 from 10 percent in 2020.
  - Heavily concentrated among cooperative banks (about 23 percent of assets).
- Direct lending to the public sector: around 6 percent of total assets (markedly concentrated).
- Convertible DTAs: fell from the peak of 23 percent of CET1 in 2016 to 6 percent in 2025.
- GACS securities outstanding: roughly €8 billion in 2024, down from €21.5 billion at issuance (2017–2022).
- Government guarantees:
  - As of June 2025, guarantees cover about 23 percent of total performing corporate loans.
  - The stock of public guarantees is elevated at about 13 percent of GDP.
- Risks:
  - Extensive use of government guarantees amplifies sovereign–bank linkages and creates prudential distortions (including zero risk weighting).
  - Recommendation (as stated): a time-bound and well-communicated phase-out strategy toward at least pre-pandemic levels, and BdI assessment of institution-specific impacts, particularly among LSIs.

### Systemic vulnerabilities, climate and digital risks
- Macroeconomic and geopolitical environment could amplify financial sector stresses due to:
  - sizeable sovereign exposures, sensitivity to global trade and energy conditions, elevated public debt, and limited policy space.
- Climate risks:
  - Floods, storms, and extreme temperatures increasing in intensity.
  - Sizeable insurance protection gap persists despite mandatory natural catastrophe coverage under the 2024 Budget Law.
  - Non-life insurers face rising climate-related claims; impacts contained through pricing and underwriting adjustments.
- Digitalization risks:
  - Digital payments exceeded cash since 2022; widespread cloud adoption across banks and NBFIs.
  - Efficiency gains accompanied by heightened cyber and operational risks (noted increase in major cyberattacks and payment-fraud losses).

### Systemic risk analysis and stress-test scenarios
- Two adverse scenarios assessed:
  - Geopolitical scenario (G): further escalation of geopolitical conflicts, heightened commodity price volatility, large adverse trade/price/tariff shocks, negative demand shocks.
  - Recessionary scenario (R): synchronized global slowdown amplified by sovereign debt distress in the EA, widening credit spreads, term premium decompression, and confidence effects weighing on aggregate demand.
- Scenario severity and benchmarks:
  - The implied GDP shock — cumulative growth over the first two years — corresponds to 2.3 and 2.7 standard deviations of the historical distribution under the geopolitical and recessionary scenarios, respectively.
  - Although specified prior to the outbreak of the Middle East war in March 2026, the scenarios remain relevant and are considerably more severe than recent forecast downgrades.
- Selected stress-test outcome numbers (Figure 7):
  - Real GDP growth contracts by 5.3 (R) and 4.3 (G) percent in 2026.
  - Two-year cumulative GDP decline: 9.4 (R) and 7.6 (G) percent.
  - Unemployment rises, peaking at 14.3 percent (R).

*Source: IMF staff summary of chapter 6 from the Italy FSAP content unit provided.*

### 11.6 percent (G)

### 1itaea2026003 - 11.6 percent (G)

### Macroeconomic scenarios and key projections
- Inflation:
  - Falls to 0.4 percent (R) in the recessionary scenario in 2026.
  - Rises to 4.5 percent (G) in the geopolitical scenario in 2026.
- Long-term interest rates:
  - Spike to 7.2 percent (R).
  - Spike to 6.4 percent (G).
- Short-term interest rates:
  - Drop to 0.3 (R).
  - Increase to 3.6 percent (G).
- Oil price:
  - Decreases by 36 percent (R) by the end of 2028.
  - Increases by 17 percent (G) by the end of 2028.
- Sources cited: IMF, World Economic Outlook database and IMF staff estimates.
- Scenario legend:
  - R = Recessionary scenario.
  - G = Geopolitical scenario.

### Household vulnerability assessment
- Aggregate and composition:
  - Italian households show moderate aggregate indebtedness, but pockets of vulnerability persist, particularly among lower-income households.
  - A smaller share of households is indebted than in the EA, but indebted households tend to be more financially stretched.
- Key indicators versus EA peers:
  - Median Debt-to-Income (DTI) is higher than EA peers, particularly for middle income households.
  - Median Debt Service-to-Income ratio (DSTI) is higher than EA peers, particularly for lower-income households.
- Adjustable-rate mortgages:
  - 26 percent of outstanding loans in 2025 are adjustable-rate mortgages.
- Vulnerability under adverse scenarios:
  - In the geopolitical scenario, the share of vulnerable households among indebted households could exceed 17 percent.
  - In the geopolitical scenario, bank debt at risk could exceed 18 percent.
  - Around 45 percent of low-income households are at risk, compared with 8 percent of median-income and 1 percent of high-income households.
  - Vulnerability among renters rises by about 10 percentage points (pp) compared with 7 pp for mortgage holders.
- Definitions:
  - Vulnerable households are defined as those with a Debt Service plus Essential Consumption to Income ratio (DSECTI) above 70 percent.
  - Debt at risk is defined as the outstanding debt held by these households.
- Probability of Default (PD) projections:
  - Household model projects PDs relative to 2021 levels (2.6 percent), which are higher than those observed in 2025 (1.8 percent).
  - Relative to 2025 levels, average household PDs increase by 129 basis points in the geopolitical scenario.
  - Relative to 2025 levels, average household PDs increase by 111 basis points in the recessionary scenario.
- Debt at risk composition (2026, FSAP geopolitical scenario):
  - High-income households account for 37 percent of total debt at risk.
  - Median-income households account for 30 percent of total debt at risk.
  - Debt at risk by income tercile broken down graphically (percent) across income percentiles: Bottom 20%; 20-40%; 40-60%; 60-80%; 80-90%; 90-100%.

### Corporate vulnerability assessment
- Aggregate condition:
  - Italian non-financial corporates (NFCs) are in a solid financial position with improved balance sheets since the sovereign debt crisis.
  - Gains include sustained profitability, declining leverage, and stronger liquidity buffers.
- Stress scenario outcomes:
  - Under adverse scenarios, default probabilities rise, more sharply in the geopolitical scenario where higher interest rates weigh on earnings.
  - Default probabilities remain below levels observed during the sovereign debt crisis.
- Distribution of stress:
  - Stress is concentrated among SMEs and firms in southern regions.
  - More affected industries include construction, transport, agriculture, and other services.
- Corporate PD results (model outputs):
  - Average PD falls markedly after the sovereign debt crisis and remains low since Covid.
  - Average corporate PD increases much more under the geopolitical scenario than under the recessionary scenario.
  - Average PD is higher for SMEs than large firms under the baseline and adverse scenarios.
  - Average PD is higher for firms in Southern Italy than Northern Italy under the baseline and adverse scenarios.
  - Under adverse scenarios, average PDs are substantially higher for construction, transport, agriculture, administration and support, entertainment, and other services.

### Bank stress tests — solvency assessment
- Coverage and framework:
  - Top-down solvency stress test covered 31 banks representing 98 percent of total system assets.
  - Sample included 12 significant institutions (86 percent of assets), two subsidiaries of foreign SIs (6 percent), and 17 less significant institutions (6 percent).
  - The test captured credit, market, and income risks; credit losses projected using household and corporate micro-models.
- Aggregate capital outcomes:
  - Under the geopolitical scenario, the aggregate total capital ratio declines to 16.5 percent by end‑2027.
    - This corresponds to a decline of 3.5 pp relative to the starting point.
    - This corresponds to a decline of 4.0 pp relative to the baseline.
  - Capital depletion is more pronounced for SIs: decline of 3.6 pp from the starting point.
  - LSIs experience a decline of 2.2 pp from the starting point.
- Bank-level outcomes under the geopolitical scenario:
  - Four banks (one foreign subsidiary and three specialized LSIs) fall below minimum capital requirements.
  - Three additional banks—two SIs and one LSI—meet minimum requirements but do not fully comply with the capital conservation buffer (CCoB).
- Bank-level outcomes under the recessionary scenario:
  - Aggregate total capital ratio declines to 18 percent by end‑2027.
  - Only one LSI falls below the minimum capital requirement.
- Modeling notes:
  - Market risk reflects interest-rate and equity shocks on fair-value portfolios.
  - Net interest income is modeled through a granular structural model.
  - Other profit-and-loss components are estimated using satellite models linked to macroeconomic conditions and historical relationships.

*Source: IMF staff calculations and data as presented in the chapter.*

### 2.5 pp (15.1 to 12.6) in the EBA and by 3.0 pp (16 to 12.9) in the FSAP geopolitical scenario.

### 1itaea2026003 - 2.5 pp (15.1 to 12.6) in the EBA and by 3.0 pp (16 to 12.9) in the FSAP geopolitical scenario.

### Solvency stress test results
- Total capital and CET1 capital of the banking system sufficiently cover losses under adverse scenarios.
- Capital declines:
  - SI banks show more pronounced declines relative to LSIs, but SI banks start with higher capital buffer.
  - In the geopolitical scenario, four banks fall below minimum capital requirements, while three additional banks fail to comply with the CCoB.
- System leverage:
  - Leverage ratio is on a downward trajectory, but the system remains well above the hurdle rate of 3 percent.
- Key drivers of profitability and capital:
  - Geopolitical scenario: credit impairments are the key factor underpinning profitability decline.
  - Recessionary scenario: market risk due to higher sovereign spreads is the main driver.
- Banks that fail to meet the minimum requirements and/or the CCoB account for 9 percent of total assets in the Italian banking system.

### Sensitivity analyses and geopolitical shock assessment
- Higher-loss-given-default (LGD) sensitivity:
  - Applying additional LGD rates ranging from an additional 10 pp to 30 pp for government and NFC exposures results in limited impact for SIs, whereas LSIs are more adversely affected.
- Tariff-exposed and household vulnerability shocks:
  - Larger shocks to tariff-exposed sectors and combined household vulnerability shocks generate only limited additional depletion.
- Middle East war near-term impact (April WEO severe scenario):
  - Share of vulnerable households increases by 12 pp to about 29 percent.
  - Bank debt-at-risk increases by 3 pp to about 31 percent.
  - CET1 capital depletion for Italian banks amounts to 97 basis points, compared to 127 basis points for the EA average.
- Historical evidence:
  - BdI analysis indicates asset quality did not deteriorate broadly following the war in Ukraine; NPL ratios in energy-intensive sectors remained stable despite significant increase in NFC costs.

### Liquidity risk analysis and stress testing
- Structural liquidity indicators:
  - All banks meet LCR requirements, and most banks have substantial buffers above the 100 percent minimum.
  - All banks meet NSFR requirement; LSIs tend to have even larger buffers against the minimum.
  - Deposits constitute almost 70 percent of banks’ total liabilities.
  - Asset encumbrance ratio declined from pandemic-era levels and now stands below the EA average.
- Cash-flow-based stress test (overnight to six months horizon), scenarios: Mild (general risk aversion), Severe (market sovereign distress), Idiosyncratic (idiosyncratic funding shock):
  - SIs:
    - Preserve positive net liquidity position (NLP) even under the severe shock.
    - Under the idiosyncratic scenario, a few banks experience liquidity shortfalls within a two-day period.
    - Over a six-month horizon, seven banks would have shortfalls; aggregate shortfall remains below 2 percent of SI sample assets.
  - LSIs:
    - Appear more vulnerable but broadly resilient.
    - Two specialized banks show liquidity shortfalls across all three scenarios.
    - Two traditional banks would experience negative liquidity position overnight under the idiosyncratic scenario.
  - Mitigants:
    - Rolling over half of retail and corporate loans for SIs would leave only two banks with overnight shortfalls.
    - For LSIs, loan inflows mitigate stress under mild scenario but may remain insufficient under idiosyncratic scenario.
- Identified vulnerabilities:
  - High share of Italian sovereign bonds in liquidity buffers could be a contagion channel.
  - Reliance on liabilities with open maturity and non-operational deposits; readily available CBC low relative to liabilities withdrawable overnight or subject to significant haircuts.
  - For some SIs, contingent commitments could represent a material source of liquidity drains.
- USD liquidity for SIs:
  - Cash flow tests for three SIs show positive USD liquidity positions beyond six months under mild and severe scenarios.
  - Two banks experience shortfalls within two months under the idiosyncratic scenario.
  - Reliance on runnable liabilities: about 50 percent in overnight non-operational deposits.
  - Funding concentration: around 11 percent sourced from the top three counterparties.
- LCR-based reverse stress test:
  - Among SIs, only one bank would fall below 100 percent LCR if deposit outflow rates increased by 50 percent relative to Basel parameters, rising to six banks under a 75 percent increase.
  - LSIs start from higher average LCR levels; two banks breach at 75 percent increase; eight LSIs fall below the threshold at a 125 percent increase.

### Liquidity-to-solvency interactions
- Tail-risk scenario where banks with liquidity shortfalls cannot access central bank funding and must liquidate bonds held at amortized cost (AC):
  - Potential reduction in aggregate capital ratios by up to 2.5 pp for SIs and 3.7 pp for LSIs.
  - LSIs more exposed to market losses from bond sales under stress: two additional banks fall below minimum capital requirements and three others breach the CCoB.
- Selling AC bonds to cover liquidity shortfalls (percent of RWA):
  - SI estimated impacts range up to -2.5 pp under certain horizons/scenarios.
  - LSI estimated impacts range up to -3.7 pp under certain horizons/scenarios.
- Note on methodology:
  - Analysis assumes full liquidation of the AC portfolio and uses duration‑based approach combined with instantaneous market risk shocks.
  - Lack of data on portfolio-level hedging positions prevented incorporation into FSAP methodology; team relied on informed assumptions about bank-level hedging ratios.

### Interconnectedness, cross-border linkages, and large exposures
- Domestic and cross-border interconnectedness:
  - Indirect contagion risks driven primarily by common sovereign exposures rather than direct funding links.
  - Financial system is bank-centric; insurers serve as key intermediaries; investment funds increasingly connected.
  - General government is main net borrower; investor base shifted since 2023 with households and foreign investors partly replacing banks, NBFIs and BdI purchases.
  - Bank liabilities to OFIs amount to 14.5 percent of GDP; banks’ credit exposures and holdings of OFIs-issued securities total around 12.4 percent of GDP.
- Cross-border linkages:
  - Total consolidated foreign claims of Italian banks reached €958 billion in 2025.
  - Expansion driven by rising exposures to foreign official sectors.
  - Exposures to NBFIs have risen rapidly in hubs such as Ireland and Luxembourg.
  - Foreign banks’ claims on Italian banks increased sharply since 2022, with significant contribution from Spain.
- Large exposures (LE) analysis:
  - Total LE after exemptions and credit risk mitigation (CRM) measures amount to about 40 percent of assets for SIs and 56 percent for LSIs.
  - Post-CRM exposures stand at about 50 percent of banks’ Tier1 capital.
  - Nearly half of NFC exposures (after CRM) are to Italian counterparties; manufacturing and professional services account for over 45 percent of these exposures, followed by energy and utilities.
  - Material exposures reported to the United States, Germany, and France.

### Climate physical risk analysis (flood-related)
- Scope and calibration:
  - Integrated micro-macro approach using World Resources Institute projections for 2030.
  - Simultaneous shocks across Italy’s main river basins; return periods of 1-in-100 and 1-in-200 years in terms of affected total real estate value.
  - Focus on medium-term (2026-2030); covers 9 SIs and 78 LSIs.
- Banking sector resilience:
  - Banking system appears broadly resilient to severe flood shocks; events lead to moderate but non-negligible deterioration in capital ratios with heterogeneous impacts.
  - First-year impacts primarily from market valuation losses on sovereign exposures; subsequent years see more credit risk channel effects.
  - Mortgage credit risk remains limited due to relatively low loan-to-value ratios and probabilities of default (PDs).
  - Larger effects observed for LSIs with higher sovereign exposures.
- Post-disaster government support sensitivity:
  - Stronger public support mitigates short-term economic contraction impact on banks’ capital but raises public debt and induces more persistent rise in sovereign yields, resulting in larger capital losses over the medium term.
  - Government compensation policy in scenarios: compensates firms for 10%-90% of the capital stock destroyed by the flood.
- Drivers of capital impacts:
  - Market risk from sovereign valuation losses is the main driver, followed by sovereign credit risk.
  - Mortgage LGD changes generally small but can be significant in the Po river basin.
  - Sovereign PDs increase in response to higher government support and public debt.

### Macroprudential framework, recommendations, and supervisory issues
- Institutional developments:
  - Committee for Macroprudential Policies (CMP) began meeting twice a year in 2024; chaired by BdI Governor and includes IVASS, CONSOB, COVIP, and Treasury (without voting rights).
  - SyRB fully phased in at 1 percent in June 2025; BdI confirmed 1 percent level in April 2026.
  - CCyB remains at zero.
  - Borrower-based measures (BBMs) incorporated in legal framework but not activated.
- Recommendations to strengthen framework:
  - Formalize practices: regularly update an ex-ante macroprudential policy strategy; increase minimum frequency of CMP and Financial Stability Coordination Committee meetings; set standard agenda items focused on systemic risk and policy options.
  - Strengthen public communication: dedicated policy framework documents for individual tools and reciprocity decisions; more accessible explanations of rationale; press conference accompanying CMP Annual Report.
  - Broaden external engagement: involve independent experts to enrich analytical debate.
  - Operational enhancements: more systemic use of stress-test results in SyRB calibration; integrate household analytical frameworks into BBM design; build analytical capacity for geopolitical, cyber, and climate risks; address cross-border data gaps.
  - Extend scope of SyRB beyond domestic credit and counterparty risk-weighted exposures (currently covering around 60 percent of total RWAs) to all residual systemic risks, including operational and market risks, and capture systemic dimension of common sovereign exposures.
  - Amend regulatory framework to allow earlier activation of BBMs even when real estate vulnerabilities are moderate.
- Supervisory and legal issues:
  - Legal protection framework for supervision and resolution staff should be strengthened to ensure full and timely coverage of defense costs; current arrangements only partially mitigate risks and similar arrangements are absent in IVASS.
  - Increase use of targeted on-site inspections, with thematic and risk-based approaches and streamlined processes to improve frequency and focus.
  - For LSIs: grant BdI explicit power to require asset classification and provisioning adjustments for prudential purposes; incorporate concentration risk under Pillar 2 and consider explicit Pillar 2 add-on for bank-specific sovereign concentration exposures.
  - Enhance corporate governance and operational risk oversight for LSIs; continue targeted on-site inspections and horizontal off-site reviews.
  - BdI should formalize an escalation ladder to expedite decision-making and use corrective and sanctioning powers; intensify forward-looking intervention for vulnerable LSI business models (e.g., NPL-specialized LSIs, those relying on public guarantees or online deposit platforms).

### Insurance, FMIs, cybersecurity, financial integrity, and safety net highlights
- Insurance:
  - IVASS delivers high-quality supervision but faces resource constraints; increase staffing to statutory headcount limit of 400 if remaining separate from BdI.
  - Improve internal model supervision harmonization and consider implementing a floor to internal model calculations of capital.
  - Extend IFRS to all Italian insurers to align reporting with Solvency II.
  - Life Guarantee Scheme pre-funded and compulsory for life insurers and intermediaries with annual premiums above EUR 50 million; consider mandatory participation for all entities offering life insurance products in Italy.
- Financial Market Infrastructures (FMI):
  - BdI and CONSOB intensified monitoring of ES-MIL and ENXC following Euronext Group’s acquisition.
  - Strengthen governance at ES-MIL and advance ENXC’s supervision and resolution arrangements, including board evaluations, reporting lines for Chief Risk Officer, participant information sharing, and completion of resolution plans.
- Cybersecurity:
  - Italy’s framework anchored in DORA and evolving; priorities include updating sector-wide cyber strategy, strengthening governance and independence of cyber-risk oversight (e.g., appointing senior cybersecurity officers), and expanding simulations and cyber stress tests.
- Financial integrity (AML/CFT):
  - Authorities strengthened ML/TF risk assessment; continue enhancing risk-based supervision and consistent application of enforcement actions.
  - Focus supervisory attention on small and foreign institutions in payment and electronic money sectors.
  - Enhance cross-border cooperation and regional ML/TF risk assessments; prepare for supervision by European Anti-Money Laundering Authority.
- Financial safety net:
  - BdI serves as operationally independent resolution authority through the Resolution and Crisis Management Unit (RCMU), adequately resourced and reporting to the BdI Board.
  - Since 2019, authorities increased use of early-intervention and crisis-management tools to address LSI weaknesses and facilitate orderly market exits; crisis readiness strengthened through closer coordination and updated internal protocols.

*Sources: ECB and BdI supervisory data, IMF staff calculations.*

### 2024. Loss-absorption capacity has increased significantly, resolution plans have been completed for

### 2024. Loss-absorption capacity has increased significantly, resolution plans have been completed for

### Crisis management and decision-making: targeted refinements
- Recommendation to formalize cooperation among financial safety net authorities via a permanent, yet flexible, coordination forum (without decision-making powers) involving RCMU, sectoral supervisors, and both DGS.
- Establish clear roles and interaction modalities through internal rules (such as Terms of Reference or amendments to the BdI’s Statute), reflecting BdI’s multiple functions and coordination needs with private DGS during preventive measures, resolution actions, and liquidation transfers.
- RCMU should develop an independent set of well-defined indicators—including metrics linked to minimum capital adequacy and other regulatory ratios—to support assessments of when institutions are “failing or likely to fail.”
- To enhance LSI resolvability, RCMU should clarify expectations and facilitate engagement with FMIs and other critical third-parties to help entities address operational constraints beyond their direct control.

### Private DGS: role, governance, and public involvement
- Private DGS are a core component of Italy’s crisis‑management framework and merit stronger public involvement.
- 2020 FSAP recommendations remain relevant: improve fund adequacy to handle multiple LSI failures, establish a public backstop, integrate DGSs into crisis contingency planning.
- As DGS resources are expected to play a greater role under the emerging European Crisis Management Deposit Insurance framework (CMDI), effective public governance becomes increasingly important.
- Authorities should:
  - Remove active bankers from DGS governance.
  - Consider eventual transition of the DGSs to the public sector to eliminate conflicts of interest, enhance information exchange and inter-agency coordination, facilitate resolution funding, and ensure appropriate legal protection for DGS actions.

### Interbank Deposit Protection Fund (FITD) interventions (2019 – 2026Q1)
- Table 3: Italy: Interventions by Interbank Deposit Protection Fund (2019 – 2026Q1)
  - Banca Progetto — 2026 — Preventive — Cost in € million: 750 + guarantees
  - Banca Carige — 2022 — Preventive — Cost in € million: 530
  - Aigis Banca — 2021 — Alternative in Liquidation — Cost in € million: 48,8
  - Banca Popolare di Bari — 2020 — Preventive — Cost in € million: 1170
  - Banca Carige — 2019 — Preventive — Cost in € million: 301
  - Banca del Fucino — 2019 — Preventive — Cost in € million: 30*
  - Sources: BdI and Interbank Deposit Protection Fund (FITD)
  - * Guarantee was ultimately not activated
- Since 2019, BdI addressed bank weaknesses proactively through market-based solutions, notably consolidation.
  - Number of LSIs declined by 22 due to market consolidation (excluding one voluntary withdrawal and one compulsory liquidation).
  - 10 cases involved troubled or crisis banks.
  - Nine fragile banks underwent major business‑model changes linked to capital injections or ownership changes, and early‑intervention measures (e.g., temporary administration) were applied in nine cases.
- DGS resources have been used for compulsory administrative liquidation in one case and more frequently to preserve banks as going concerns via “preventive interventions” applied to three LSIs and one SI.
- Risks and recommendations:
  - DGS-funded preventive recapitalizations can lead to sizable recapitalizations of small, severely undercapitalized institutions—an open-bank assistance form the DGS should avoid.
  - For such cases, DGS‑supported liquidation is recommended to ensure appropriate loss allocation to unsecured creditors, rely on clearer BdI execution powers, and reduce moral hazard and second‑round losses.
  - DGS should, under RCMU supervision, publish clear valuation methodologies specifying how economic and liquidation values are determined and how these valuations inform the least-cost tests.

- Notable case detail (footnote material preserved):
  - In January 2026, the FITD implemented the preventive recapitalization of Banca Progetto, a digital bank with €7.7 billion in assets. The bank received a €750 million capital injection and guarantees costing €550 million. It was sold to five banks, with FITD retaining a 9.9 percent stake.

### Emergency Liquidity Assistance (ELA)
- BdI’s ELA framework is well developed with internal arrangements under the Eurosystem Agreement on ELA providing processes for eligibility, oversight, and risk management, supported by internal MoUs for timely information sharing and analysis.
- Progress on prior FSAP recommendations: standardizing contractual and IT arrangements, strengthening liquidity and collateral monitoring, and advancing Eurosystem work on disclosure and cross-border risk sharing.
- Further actions recommended:
  - Review lending capabilities and procedures to ensure full operational readiness for providing liquidity in resolution, subject to safeguards (viability assessments, close cooperation between supervision and resolution authorities, and ex-ante agreement on a government indemnity to the central bank).
  - Enhance public disclosure of BdI’s arrangements for liquidity in resolution.
  - Establish testing arrangements to confirm operational capacities for counterparty collateral pledging and related reporting requirements.

### Enforcement and insolvency frameworks
- Ongoing reforms centered on the new Insolvency Code (in force since mid-2022 and amended in 2024), increased use of out-of-court mechanisms, and NRRP-backed measures to enhance court resourcing and digitalization.
- Processing times remain lengthy for cases initiated prior to reforms:
  - Averaging about 7.5 years for judicial liquidations.
  - Averaging five years for foreclosures.
- Sustained implementation is critical to fully operationalize the reforms and secure durable gains for the financial sector.
- Additional statistics (footnote material preserved):
  - Applications for concordato preventive rose to 762 in 2024 (from 678 in 2023).
  - Negotiated workout procedures exceeded 1,000 cases in 2024 and nearly doubled again in the first half of 2025.
  - The new Ufficio per il Processo has about 12,000 professionals.

### Authorities’ views
- Authorities welcomed the FSAP, considering it valuable and broadly consistent with their own view of key risks and vulnerabilities.
- They broadly agreed with the systemic risk assessment and FSAP stress test results indicating banking system resilience to severe but plausible macrofinancial shocks from solvency and liquidity perspectives.
- Noted points of emphasis and disagreement:
  - Highlighted shift in sovereign investor base away from banks toward households and foreign investors; supported gradual rollback of public guarantees to rebuild policy space.
  - Agreed remaining vulnerabilities are concentrated in a limited number of LSIs; argued top-down stress tests may not fully capture features of specific business models (e.g., NPL management).
  - Viewed idiosyncratic funding shock as a tail risk more useful for identifying vulnerabilities in specific funding structures than for system-wide assessment.
  - Welcomed finding of broad resilience to flood-related physical risks, noting IMF analysis assumed extreme simultaneous flooding across Italy’s main river basins.
  - Endorsed recommendations to strengthen supervisory effectiveness and acknowledged IVASS integration into BdI.
  - Considered explicit prudential power to require reclassification and additional provisioning of limited practical relevance given existing supervisory tools.
  - Did not support extending the SyRB beyond its current perimeter; argued existing scope captures main systemic channels and supports EU reciprocity.
  - Disagreed on the need to restrict DGS-funded preventive interventions, noting they are standard under EU and national law and applied proportionally and parsimoniously (three LSIs involved out of 19 crisis related cases since 2019).
  - Emphasized such interventions typically entail full shareholder loss absorption and governance changes, mitigating moral hazard concerns, and that the new CMDI eases DGS interventions other than payouts.

### Risk assessment highlights and stress-testing overview
- Risk Assessment Matrix identifies global and domestic risks with relative likelihood and impact assessments; selected excerpts:
  - Geopolitical tensions and intensification of conflicts — Relative Likelihood: High — Impact If Realized: High
  - Commodity price volatility — Relative Likelihood: High — Impact If Realized: High
  - Trade-related risks — Relative Likelihood: High — Impact If Realized: Low/Medium (noted mixed outcomes)
  - Fiscal vulnerabilities and higher interest rates — Relative Likelihood: High — Impact If Realized: High
  - Policy uncertainty — Relative Likelihood: High — Impact If Realized: High
  - Disorderly AI correction — Relative Likelihood: High — Impact If Realized: Medium
  - Labor shortages and remittances (structural) — Relative Likelihood: High — Impact If Realized: Medium
  - Cyberthreats — Relative Likelihood: High — Impact If Realized: High/Medium
  - Climate change — Relative Likelihood: Medium — Impact If Realized: Medium
  - AI acceleration — Relative Likelihood: Medium — Impact If Realized: Medium
  - Domestic risk: Lack of a post‑NRRP reform strategy — Relative Likelihood: Medium — Impact If Realized: High
  - Domestic risk: Ineffective tax reform — Relative Likelihood: High — Impact If Realized: High
  - Domestic risk: Failure to put public debt firmly on a downward path — Relative Likelihood: Medium — Impact If Realized: High
  - Domestic upside: Stronger spillovers from European infrastructure and defense spending — Relative Likelihood: Low — Impact If Realized: High
- Stress testing matrix (STeM) domain listing begins with Top-down by FSAP team — Banking Sector: Solvency Stress Test (further details follow in the source).

*Source: IMF staff report text (excerpts as provided).*

### 1. Institutional

### 1. Institutional

### Perimeter — Institutions included and market share
- Stress tests cover 31 banks, including:
  - All Italian Significant Institutions (SIs): 12 banks accounting for 86 percent of total banking assets, of which seven SIs are identified by the Bank of Italy (BdI) as Other Systemically Important Institutions.
  - Foreign subsidiaries of SI banks: 2 banks accounting for 6 percent of total banking assets.
  - Less Significant Institutions (LSIs): 17 banks accounting for an additional 6 percent of banking assets.
- Market share: About 98 percent of banking system assets and 53 percent of total financial system assets.
- Data sources and starting date:
  - Balance sheet and supervisory returns (COREP and FINREP), supervisory data from Bank of Italy including the credit registry and Cerved data for corporate sector analysis, and publicly available data (ECB statistical data and household survey data such as HFCS and EU-SILC micro data for households analysis).
  - Baseline date: Balance sheets as of June 2025.
  - Scope of consolidation: Consolidate basis for domestic SIs (banks with their headquarters in Italy) and individual basis for other banks (LSIs and foreign SI banks).

### Methodology — Overall framework and satellite models
- Overall framework:
  - Credit risk assessed with scenario-based, top-down, bank-level stress test model complemented with sensitivity analysis.
  - Credit portfolio in four main categories: households, corporate, financial institutions, and government.
- Satellite models for macro-financial linkages:
  - Credit risk: Satellite models linking bank-specific probability of defaults (PDs) for each credit type to macro variables comprising GDP growth, interest rates, unemployment, and other macro variables. Alternatively, micro-models for households (projection of household DSTI ratios and PDs), and corporates (projection of PDs linked to key financial indicators from the corporate stress test) will be used as credit risk parameters.
  - Market risk: Valuation losses/gains due to the impact of interest rate shocks on banks’ investment portfolio at fair value.
  - Net interest income: Interest-rate projections for new business on assets and liabilities linked to macroeconomic scenarios.
- Stress test horizon: 3-years (2025Q2-2028Q2).
- Balance-sheet assumptions:
  - (i) static balance-sheet assumption in line with the very low or negative credit growth rates in the last five years;
  - (ii) the composition of banks’ assets remains constant throughout the stress test horizon;
  - (iii) banks build capital only through retained earnings, no new capital injections are assumed; and
  - (iv) bank deposits adjust as needed to close the accounting identity.
- Tax, dividends, and payout assumptions:
  - The tax rate is set at the bank-specific median effective tax rate across the past five years for the stress testing horizon in case of positive net income and zero otherwise.
  - Dividends are assumed to be paid out of each period net income after taxes in compliance with supervisory capital requirements. The payout ratio is based on the bank’s median dividend payout over the past five years. Banks that are not well-capitalized or have negative income are assumed to pay no dividends.

### Type of analyses — Scenario and sensitivity analysis
- Scenario analysis:
  - Scenario-based stress tests focus on the impact of macroeconomic variables on credit, market, and interest rate risks.
  - Three macroeconomic scenarios simulated with yearly frequency: a baseline scenario and two adverse scenarios consistent with those used in the 2025 Euro Area FSAP. The adverse scenarios rely on the GFM, a structural macro-econometric model of the world economy, disaggregated into forty national economies, documented in Vitek (2018).
  - Baseline scenario: In line with the World Economic Outlook (WEO) projections of the global economy and financial conditions for the October 2025 publication. The scenario considers the dynamics of GDP growth, unemployment, headline inflation, housing prices, labor costs, and oil price.
  - Geopolitical scenario: Materialization of a further escalation of geopolitical conflicts, heightening commodity price volatility and disrupting global production chains, with large adverse trade, price, and tariff shocks (“trade wars”) slowing growth; inflationary impact would lead to monetary policy tightening.
  - Recessionary scenario: Synchronized global slowdown amplified by sovereign debt distress in the EA, widening of credit spreads, term premium decompression, and confidence losses impacting aggregate demand; accommodative monetary policy would mitigate the adverse impact on aggregate demand.
- Sensitivity analysis:
  - Credit risk assessed with additional scenarios in the household and corporate micro-models, focusing on economic sectors vulnerable to tariffs.
  - Concentration risk assessed via separate assessment of individual bank exposures to their 10 largest borrowers.
  - Liquidity-solvency interaction assessed to capture effects if banks cannot pledge bonds with the central bank and need to sell AC bonds at depressed prices to cover liquidity shortfalls.

### Risks and Buffers
- Risks assessed:
  - Credit risk and sovereign risk: IFRS approach.
  - Market risks in the trading book: valuation losses/gains due to the impact of interest rate shocks on banks’ investment portfolio at fair value.
  - Interest rate risk in the banking book: structural model to estimate the impact of interest rates shocks on interest income and expenses using the repricing ladder structure and projected interest rates on new/repriced assets and liabilities.
- Buffers:
  - Existing loan loss provisions and capital buffers.
  - Internal capital generation (i.e., income after taxes).

### Regulatory Standards and reporting
- Regulatory standards:
  - Bank-specific (STA/IRB).
  - Hurdle rates consistent with the Italian capital regulatory standards that reflect Basel III capital requirements. The hurdle rate applied in the stress test accounts for Common Equity Tier 1 (CET1) regulatory minimum of a 4.5 percent Pillar 1 requirement, bank-specific Pillar 2 requirements, the Capital Conservation Buffer (CCoB) of 2.5 percent and the bank specific O-SII buffers. For the leverage ratio the hurdle rate of Pillar 1 requirement was considered, corresponding to 3 percent.
- Output presentation:
  - System-wide capital shortfalls from a macroprudential perspective.
  - Number of banks and percentage of banking system assets below hurdle rates.
  - Impact of shocks on key P&L components.

---

### Banking Sector: Liquidity Stress Test

### Perimeter, market share, and data
- Institutions included: All Italian SIs (12 banks, 86 percent of total banking assets) and biggest LSIs (17 banks, 6 percent of banking assets).
- Market share: About 92 percent of the banking system assets.
- Data and starting position:
  - Cut-off date: June 2025.
  - Data Source: supervisory data from FINREP and COREP (LCR, NSFR, and ALMM Maturity Ladder template).

### Methodology and framework
- Overall framework:
  - Cash-flow-based liquidity stress test: Assess ability of banks to withstand a sequence of liquidity shocks in different maturity buckets (from one day to one year), incorporating both contractual and behavioral assumptions (where available).
  - LCR-based (30-day horizon) reverse stress tests: Identify the size of shocks that would lead individual banks to fall below 100 percent LCR requirement.
  - Currency: euro.

### Scenario analysis and assumptions
- Scenarios:
  - Various stress scenarios with varying intensity of adverse liquidity conditions. Main risks: tightening of market liquidity conditions (linked to solvency adverse scenario, where possible), deposit run-offs and outflows from top funding sources.
  - Run-off rates calibrated to reflect system-wide deposit runs and a dry-up of unsecured wholesale and retail funding, following historical events, recent international experience in liquidity crises and IMF expert judgment.
  - Outflow/inflow weights and haircuts of high-quality liquid assets (HQLA) are aligned with EA 2025 FSAPs.
  - Additional sensitivity analysis assesses the impact of higher outflows from term deposits based on Italian historical data.

### Risks, buffers, and reporting
- Risks: Funding liquidity and market liquidity.
- Buffers: Counterbalancing capacity including liquidity obtained from markets and/or the central bank’s facilities; expected cash inflows included in cash-flow based and LCR analyses.
- Regulatory standards: Consistent with Basel III regulatory framework and domestic regulation.
- Output presentation:
  - System-wide liquidity ratios and liquidity shortfall by groups of banks.
  - Number of institutions with LCR below regulatory limits.
  - Net Liquidity Position and the survival period for cashflow based analysis.

---

### Corporate Stress Test

### Perimeter and data coverage
- Entities included: All firms with available financial information in CERVED data source, including small and medium-sized enterprises (SMEs). Sample period covers 2000-2023, with about 500 thousand firms per year.
- Cerved database composition:
  - By number of firms: 68 percent are micro, 25 percent are small, 6 percent are medium, and 1.5 percent are large.
  - By turnover: micro firms account for 6 percent, small firms for 15 percent, medium firms for 19 percent, and large firms for 61 percent.
- Time horizon:
  - Corporate-level data in 2024 will be used as a starting point. Firms without 2024 data will be imputed by using growth rate of other firms with the same sector and firm size. The data will be projected to 2026 using the bank solvency stress test scenarios.

### Framework, scenarios, and sensitivities
- Overall framework:
  - Liquidity and solvency of companies tested based on four indicators: Return on Asset (ROA), Interest Coverage Ratio (ICR), cash balance, and leverage (debt to assets, D/A), conditional on the baseline and adverse scenarios applied to the bank stress tests.
  - Individual firms classified by economic activities and subject to adverse scenarios used in bank solvency stress tests. Shocks include an increase in interest expenses on short-term debt, a drop in turnover, and an increase in costs.
- Scenarios:
  - Uses same baseline and distressed scenarios as bank stress tests. Sectoral estimated scenarios and shocks to interest rates apply firm-specific shocks consistent with bank stress tests.
  - Sensitivity analysis: additional negative shocks to sectors vulnerable to tariffs (manufacturing, machinery, and transport equipment) and CRE-related sectors (construction & real estate activities).

### Risks, buffers, and reporting
- Risks: Insolvency risk.
- Buffers: EBIT (earnings before interest and taxes) and capital.
- Output presentation:
  - Total debt, and number of risker firms (such as firms with ROA below 0 percent, ICR below 100 percent, negative cash balance, and negative equity).
  - Default probability by economic sectors, firm sizes, and macro region, under baseline and adverse scenarios.

---

### Climate Risk Analysis

### Perimeter, data, and institutions included
- Institutions included: 9 SIs and 78 LSIs.
- Data:
  - Bank of Italy Credit Register Data on banks’ mortgages exposures: stock of outstanding mortgages by bank and by municipality in which the bank branch which granted the loan is located as of end 2024.
  - Domestic sovereign loans and bonds data from Bank of Italy.
  - Osservatorio del Mercato Immobiliare dell’ Agenzia delle Entrate (OMI) real estate price data.
  - Stock of residential real estate in Italy from the Italian National Institute of Statistics (Istat).
  - Flood risk maps from the Italian Istituto Superiore per la Protezione e la Ricerca Ambientale (ISPRA).
  - Flood depth maps under the RCP 4.5 climate scenario in 2030 from WRI.
  - NGFS short-term physical risk (floods) scenarios.

### Methodology, risks, and reporting
- Methodology:
  - Estimated flood damages to residential real estate by municipality will be mapped to banks’ mortgages issued by a branch in the same municipality.
  - The macrofinancial EIRIN model will be used to calibrate macro financial scenarios accounting for the impact of floods.
- Risks assessed:
  - Credit risk on domestic mortgages and sovereign loans.
  - Market risk on domestic sovereign bonds.
- Output presentation:
  - Maps of banks’ exposures to flood risks.
  - Credit risk losses on domestic mortgages and sovereign loans.
  - Market risk losses on domestic sovereign bonds.

---

### Interconnectedness Analysis

### Perimeter and data
- Institutions included: BdI and IVASS.
- Data:
  - Eurostat counterparty sectorial exposure through financial accounts (whom-to-whom) information.
  - Inter-sectoral exposures and interconnectedness analysis covering Banks, NBFIs (insurance and investment funds), general government, non-financial corporations, households, and the Rest of the World (USA, EU, and others).
  - Financial instruments: loans, debt securities, listed shares, investment fund shares, transferable deposits, and other deposits.
  - To assess contagion risks from the global financial system, the analysis will include VIX, policy uncertainty indicator, geopolitical fragmentation.

### Methodology, risks, and reporting
- Methodology:
  - First analysis maps the network topology of the Italian financial system using Eurostat data to identify systemic risks and vulnerabilities.
  - Second analysis empirically assesses spillovers of credit and lending risks across the network, and contagion effects from outside the Italian economy.
- Risks:
  - Direct risks (domestic credit and lending risks) and indirect risks (common exposure to sovereign risks).
- Output presentation:
  - Map the network topology of the Italian economy consisting of sectoral direct and indirect exposure.
  - Identify system-wide risks through direct interconnectedness.
  - Construct a dynamic measure of interconnectedness to evaluate changes in the network topology over time.

---

### Appendix I — Implementation Status of Key Recommendations in the 2020 Italy FSAP

- Enhance banks’ capital levels to ensure all banks maintain adequate capital ratios under stress scenarios.
  - Status: Implemented. Recent profitability of the LSI sector has reached its highest historical value and has supported a sizeable increase in capital ratios.
  - BdI introduced a new approach for determination of the Pillar 2 Guidance (P2G) for LSIs; over 2020–2022, the P2G more than doubled. Following the SREP 2024, the average P2G continued to increase, aligning LSIs with significant banks.
  - Agencies: BdI, SSMST.
- Consider more timely escalation of corrective measures for weak banks to effect improvement or orderly wind-downs.
  - Status: Implemented. BdI increased use of sanctioning and early intervention measures for fragile and troubled banks; LSI sector consolidation implied restructuring and transformation of 30 percent of LSIs. Use of temporary administrators and enhancement of independent directors; special administration regime used in severe situations. BdI achieved compliance with EBA GL 2021/11 in February 2022. Revamping of the Schema Volontario d’Intervento (SVI) could support timely escalation.
  - Agency: BdI.
- Perform more periodic deep dives and thematic and targeted inspections on key LSI weaknesses (governance, credit risk, business models).
  - Status: Partially implemented. BdI increased horizontal off-site reviews, but full-scope on-site inspections remain predominant. Only a few targeted and thematic prudential inspections carried out recently. Further efforts needed to increase frequency and deepen risk-based on-site inspections.
  - Agency: BdI, IST.
- Continue scrutinizing banks’ credit risk and loan classification and provisioning practices, particularly of UTP portfolios, and challenge NPL reduction plans.
  - Status: Implemented. BdI continued scrutiny of loan classification and provisioning and monitoring of NPL management strategies via horizontal and bank-specific analyses. OSI methodology improved in 2022 to better reflect best practices in IFRS9 and securitization services. In 2023 BdI sent a letter to LSIs on potential impacts from economic and geopolitical situation; in 2024 BdI required LSIs to assess processes relating to state-guaranteed loans.
  - Agencies: BdI, SSMC.
- Consider extending the SSM approach on gradual path to full provisioning on existing NPL stocks to LSIs and update LSIs’ NPL management guidance.
  - Status: Partially implemented. EBA Guidelines (GL) on NPE management (EBA/GL/2018/06) have been adopted, replacing previous national GL issued in 2018. ECB’s SSM launched a public consultation on a new initiative aimed at harmonizing supervisory approach to coverage of non-performing exposures held by LSIs that originated before April 26.

*Source: 1. Institutional (PDF chapter) — Italy FSAP stress testing matrices and Appendix I implementation status.*

### 2019. Currently, BdI is preparing to focus on the implementation of NPL

### 1itaea2026003 - 2019. Currently, BdI is preparing to focus on the implementation of NPL

### Governance of Banks and Insurers
- Recommendation: Amend relevant laws to confer BdI and IVASS authority on removal of authorization and winding-up of banks and insurers, respectively.
  - Status: Not implemented.
  - Key points:
    - No legislative initiatives aimed at modifying the current legislative framework.
    - Authorities consider MEF’s involvement in decision-making for initiation of resolution or liquidation does not affect BdI’s operational independence or timeliness.
    - Authorities support shared ownership of decisions with significant implications for creditors’ property rights and broader socio-economic context.
  - Responsible agencies: MEF, MISE
  - Timeframe: ST

- Recommendation: Address gaps in governance regulations of banks and insurance companies by issuing the draft MEF and MISE decrees.
  - Status: Partially implemented.
  - Banking sector progress:
    - Decree setting suitability requirements for banks’ board members and key function holders entered into force in 2020 (ministerial decree no. 169/2020).
    - Suitability assessment procedure included in the Consolidated Law on Banking and complemented by an ad hoc Regulation of the Banca d’Italia adopted on May 4, 2021.
    - Draft regulation reviewing suitability of major shareholders underwent public consultation in 2022; finalization pending ongoing revision of the Criminal Code.
  - Insurance sector progress:
    - IVASS provided technical input to MISE for regulation concerning fit-and-proper requirements implementing Article 76 of the Italian Insurance Code.
    - IVASS proposed establishment of a coordinated working group with MEF to draft regulation for qualified shareholders in insurance companies, implementing art. 77 of the Italian Insurance Code.
  - Responsible agencies: MEF, MISE, IVASS
  - Timeframe: I

### Macroprudential Policies and Framework
- Recommendation: Establishing a macroprudential policy authority.
  - Status: Implemented.
  - Key points:
    - Committee for Macroprudential Policies (CMP) designated by Legislative Decree 207/2023 as the independent authority to conduct macroprudential policies in Italy, pursuant to Recommendation 2011/3 of the European Systemic Risk Board (ESRB).
    - CMP met semi-annually since 2024.
  - Responsible agencies: MEF, BdI, IVASS, CONSOB, COVIP
  - Timeframe: ST

- Recommendation: Incorporate the CRD IV Systemic Risk Buffer and borrower-based tools into the regulation and macroprudential toolkit.
  - Status: Implemented.
  - Key points:
    - February 2022: Systemic Risk Buffer and borrower-based measures incorporated into BdI’s macroprudential toolkit via revision of Circular n. 285.
    - April 26, 2024: BdI announced decision to gradually phase-in a systemic risk buffer equal to 1.0 per cent of domestic exposures weighted for credit and counterparty credit risks, for all banks and banking groups authorized in Italy.
    - Full phase-in completed in June 2025.
  - Responsible agency: BdI
  - Timeframe: ST

- Recommendation: Consider implementing prudential policies to moderate the sovereign-bank nexus with an appropriate phase in period to avoid possible market disruptions.
  - Status: Not implemented.
  - Key point: No actions planned beyond close monitoring.
  - Responsible agency: BdI
  - Timeframe: MT

- Recommendation: Evaluate the adequacy of O-SII buffers and if deemed necessary consider raising them with an adequate phase-in period.
  - Status: Implemented.
  - Key point: O-SII framework updated in 2023, including lower identification thresholds and more granular buffer buckets (each bucket implies a 25 basis points increase in the buffer).
  - Responsible agency: BdI
  - Timeframe: ST

### Insolvency Framework
- Recommendation: Enhance the enforcement and insolvency framework and ensure courts have sufficient resources and specialization to timely handle insolvency cases.
  - Status: Partially implemented—ongoing.
  - Key points:
    - New Insolvency Code fully in force since mid-2022 and further amended in 2024; aims to create a more unified system, strengthen early warning tools, streamline creditor agreements, and introduce simplified fast track restructuring options.
    - EU funded investments under the National Recovery and Resilience Plan support digitalization and rollout of the Ufficio per il Processo, a support unit that improves case preparation and already counts around 12,000 professionals.
    - Insolvency and foreclosure cases initiated under the previous regime remain lengthy—about 7.5 years for judicial liquidations and 5 years for foreclosures—although forward-looking indicators suggest improvements, with estimated processing times now roughly half their levels a decade ago and further gains expected as reforms take root.
  - Responsible agencies: MoJ, NJC
  - Timeframe: ST

### Reinforcing Crisis Management and Safety Nets
- Recommendation: Establish additional loss absorbing capacity to enable greater loss allocation to unsecured and uninsured creditors in resolution and liquidation, notably for LSIs for which a resolution strategy is foreseen; and strictly limit the use of public funds [in resolution] to exceptional events that could undermine system-wide financial stability.
  - Status: Implemented.
  - Key points:
    - Resolution plans drafted for all Italian LSIs and periodically updated.
    - One additional LSI designated for resolution; MREL add-ons reaffirmed for previously assigned institutions.
    - For LSIs under resolution, MREL targets cover loss absorption, recapitalization, and a market confidence charge.
    - For LSIs earmarked for liquidation, BdI sets MREL targets based on loss absorption plus either the full or half of the CBR, depending on the methodology.
    - LSIs slated for liquidation without an MREL add-on are exempt from MREL targets, in line with EU Directive 2024/1174 (“Daisy Chain Act”).
  - Responsible agencies: BdI, MEF
  - Timeframe: ST

- Recommendation: Reinforce the DGS by removing active bankers from their boards; assessing the adequacy of funding targets; strengthening backstops; and avoiding the use of DGS resources for failure prevention outside of resolution or liquidation as much as possible, only using it in exceptional cases with strong prospects for successful rehabilitation and restoring long-term viability.
  - Status: Not implemented.
  - Key points:
    - Some governance changes made but Italian DGSs remain private law consortia led by bankers.
    - FITD by-laws amended to streamline and strengthen the Chair’s independence and introduce an independent Board member; further changes under discussion.
    - Preserving private nature of DGS seen as critical to avoid applying EU State aid rules.
    - No significant changes to DGS funding target and use cases.
    - FITD has a €3.5 billion funding agreement with major banks for interventions if resources are insufficient.
    - FGDCC secured a credit line with the two cooperative banking groups’ parent companies and the Institutional Protection Scheme (IPS) to strengthen financing capacity and adequacy.
    - No progress on establishing a public sector backstop between DGS and MEF since the last FSAP.
    - Recourse to DGS resources to recapitalize weak institutions continues as a routine crisis management tool rather than an exceptional measure.
    - January 2026: Interbank Deposit Protection Fund approved a €750 million recapitalization of Banca Progetto, to be followed by its sale to a group of five banks with loss guarantee support.
  - Responsible agencies: DGS, BdI, MEF
  - Timeframe: ST

*Source: IMF staff summary of chapter content from 1itaea2026003 - 2019. Currently, BdI is preparing to focus on the implementation of NPL*

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_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1itaea2026003.pdf_