IMF asks San Marino to restore banking sector soundness
The IMF's Executive Board during an assessment based on the preliminary findings of this mission for Europe's small republic San Marino says maintaining financial stability and restoring banking sector soundness remain key priorities.
Public support of the banking sector needs to come with improvements in accountability and oversight. Fiscal adjustments are envisaged but public debt prospects will depend on the final fiscal costs of banking system repair. Continued structural reforms, including reducing red tape, will help reorganize the economy. The reform agenda is demanding and requires strong commitment of all stakeholders.
The economy rebounded in 2016 but momentum is slowing amid banking sector uncertainties with a sizable loss reported by the largest bank and a closure of a small bank in 2017. The economy grew at around 2 percent in 2016, supported by a buoyant external environment, but high frequency indicators, including decelerating employment growth, suggest that economic growth slowed somewhat in 2017, to around 1.5 percent. Despite improved economic activity, banking sector deleveraging continues, and credit to the domestic economy declined further in 2017.
Moderate growth is expected in the near- and medium-term. Under the baseline scenario, the economy is expected to grow at slightly above 1 percent in 2018 and beyond, driven by private consumption benefitting from past employment gains. However, investment remains weak, lacking support from the deleveraging banking sector.
This baseline scenario is subject to downside risks. An incomplete domestic banking sector reform, including delays or a failure to properly restructure the largest bank, could lead to a further loss of confidence in the system and hinder provision of credit to the economy. An increase in fiscal costs from the banking sector repair, through realization of contingent liabilities such as conversion of tax credits into government bonds, could put further pressure on public finances. A coherent strategy is needed to restore confidence and soundness of the banking system. Lingering banking sector problems, built up over the last decade, have incurred high costs for the state. The authorities' recent efforts to identify the problems are welcome, and they understand the need to decisively address them. A new strategy for the banking sector with permanent solutions is urgently needed to minimize costs to taxpayers, safeguard financial stability, and ensure that the banking system is viable and contributes to the economy. This should include upfront loss recognition, prompt bank recapitalization, and non-performing loans (NPLs) resolution, supported by measures to improve transparency and accountability, and enhance the financial sector infrastructure.
Decisively addressing banking sector problems requires the following immediate actions: The turnover of central bank management led to a significant delay in the post-Asset Quality Review (AQR) process, and an AQR update is now necessary to identify and address capital shortfalls. Recapitalization should follow within a short timeframe. Market-based solutions should be sought, and public capital support should be limited to only viable, systematically important banks, following burden sharing. Bank governance also needs to be strengthened, including risk management, and making new and existing management subject to rigorous fit and proper tests.
Deep restructuring of Cassa di Risparmio della Repubblica di San Marino (CRSM). Upfront loss recognition and fresh capital are needed. CRSM needs to be restructured to return to viability, including by changing its business model, reducing high operating costs, and ensuring prudent lending.