Restructure or Cyclical Adjustment? Italy's Banking System Postcrisis

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