Bank of Italy Wants to Boost Banks’ Liquidity With New Rules

The Bank of Italy will implement measures to boost the liquidity of lenders in the country as part of an effort by European regulators to spur the supply of loans to the economy.

The central bank plans to increase the range of loans that lenders can use as collateral for Eurosystem refinancing, Governor Ignazio Visco said in a speech today in Rome at the central bank’s annual meeting.

“Innovations in the characteristics of contracts will enable banks to pledge new types of loans such as current account overdrafts that are widespread among small firms,” Visco said. “Banks will be allowed to use loan portfolios with more flexible collateral management and with lower haircuts; it will be possible to include mortgage loans to households.”

The Bank of Italy’s move comes after the European Central Bank indicated it’s focusing on liquidity measures it could deploy to help free up lending to companies and households. Officials have said they’re working on a package of measures for their next meeting in June, including rate cuts and liquidity injections.

Credit Risk

“The actions announced by the Bank of Italy are positive for banks and are part of a broader picture to help lenders and spur lending,” said Fabrizio Bernardi, a Milan-based analyst at Fidentiis Equities. Bernardi said while the measures boost liquidity, they don’t eliminate the main obstacle for lending to small and medium-size companies: the credit risk.

While bank lending in the euro area showed some signs of improvement in April, with lending rising 0.2 percent from a month earlier, in Italy loans to the private sector fell 3.1 percent compared to a year earlier.

The ECB is looking for ways to spur lending to small and medium enterprises through a revival of the market in asset-backet securities. The Frankfurt-based institute and the Bank of England published a joint paper today outlining the principles for high-quality securities that could help reduce firms’ reliance on bank funding.

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