Increasing macroprudential space in Italy by activating a systemic risk buffer

This paper studies how to increase macroprudential buffers that can be released in Italy to counter adverse shocks affecting the banking system (i.e. the macroprudential space) by activating a dedicated capital buffer. As required by European and Italian regulations, the Bank of Italy, as the designated macroprudential authority for the Italian banking sector, can activate the systemic risk buffer (SyRB) to prevent any systemic, cyclical or structural risk not already addressed by other prudential instruments. The paper analyses the structural risks in the Italian banking system and presents analyses conducted using two complementary approaches to identify the appropriate level for the SyRB and the best ways to introduce it. The first approach, based on the study of bank losses observed from 2006 to 2022, suggests that a macroprudential buffer of at least 1 per cent of domestic credit and counterparty risk-weighted assets would be needed to absorb the losses not already covered by other micro- or macroprudential requirements. The second approach identifies the appropriate buffer level through a cost-benefit analysis, estimating the cost of introducing the buffer, in terms of lower economic growth, and comparing it with the benefits of releasing the buffer when a shock hits the banking system. This second analysis indicates that the net benefits (i.e. the difference between benefits and costs) associated with activating the SyRB would be maximized for buffer values between 1 and 2 per cent. The impact analysis also shows that the introduction of a SyRB of 1 per cent would only marginally reduce the free capital currently available to the banking system.