Italian banks are burdened with high levels of non-performing loans, the cleanup of which depends in important part on the efficiency of insolvency and enforcement processes. Traditionally, these processes in Italy have taken very long, hampering the timely cleanup of balance sheets. In response, the authorities have legislated a number of measures. This paper explores the recent insolvency and enforcement reforms and the remaining challenges. These reforms introduce important positive changes that are expected to yield full benefits over the medium to long term. The efficacy of the reforms, including dealing with the current stock of high nonperforming loans, can be enhanced by introducing effective out-of-court enforcement mechanisms, supplemented by more intensive use of informal and hybrid debt-restructuring solutions. Moreover, there is an urgent need to rationalize the system, which over the years has become very complex and intricate. High levels of nonperforming loans in the Italian banking sector are connected to the situation of distress in the corporate sector. The crisis has resulted in an increase in the indebtedness of enterprises (including also micro-enterprises and SMEs). This has led to record numbers of insolvency procedures in Italy, with a historic peak being achieved in 2014. The distressed situation of Italian enterprises is largely responsible for the high levels of nonperforming loans (NPLs) on banks’ balance sheets. To address the NPL problem, the reform of the insolvency and enforcement regime has become a priority for the government. Addressing the high levels of NPLs requires a comprehensive strategy that includes supervisory, tax and legal measures (IMF, 2015a; IMF, 2015b; and Aiyar and others, 2015).

The reform of the insolvency system—and also of the enforcement mechanisms available to creditors represents a fundamental part of their strategy. The Italian authorities have undertaken successive reforms of the insolvency and enforcement framework in the last few years, although the full effect of these reforms is expected to be realized only over the medium to long term. The objective of the reforms has been to achieve a faster resolution of insolvency and swifter enforcement that could lead to efficient outcomes for creditors and all interested parties. However, the changes to the insolvency framework have generally been piecemeal, raising the need for a systematic reform, as the government indeed recognized when appointing the Rordorf Commission in 2015 that was aimed at rationalizing and simplifying the insolvency framework.