The Italian banking sector remains dependent on one indicator: the yield curve. Here’s how to use it to interpret market movements in the banking sector.
Remember way back in 2008, or 2012? Dark times for Europe and, especially, for Italy, which remains a strongly bank-centric market. In those years, bank stocks were hit by crashes that left deep scars, so much so that many institutions have not yet fully recovered from those crises.
And today, after some banks have returned to shine on the stock market, the fear is still the same. If I reinvest, are we sure I won’t run dry again this time?
The answer doesn’t lie solely in balance sheets, often full of technicalities that discourage even the most willing. There is a much simpler and more powerful indicator: the yeld curve.
The Yield Curve
“But what? You said simpler,” you might be thinking. Yet there’s nothing more direct to understanding the health of the banking sector.
The basic model of a commercial bank works like this: it collects short-term fundings (deposits, current accounts) and lends it long-term (mortgages, loans, bonds). This means it pays the short rates and collects the long rates.
The difference between the two values represents the basis of the profit margin, i.e., the Net Interest Margin (NIM), which determines Net Interest Income (NII).
In simple terms: the wider the gap between the long rates and the short rates, the more the banks earn.
Steepening
Many investors have always believed that when the ECB lowered rates, banks would earn less. In reality, this isn’t quite the case. When short rates fall, banks pay less on deposits. If, at the same time, long rates remain higher, the yield curve remains sloped (positive), and bank margins not only hold up, but often improve.
This has happened several times in Europe and, more recently, also in the USA. This is called steepening of the curve, when the spread between the short and long term widens.
The problem arises when the opposite happens, that is, when the curve flattens. Historically, in the most difficult times for banks, such as 2008, 2012, and 2022, the 10Y/2Y spread fell below zero. This signal, also known as a yield curve inversion, heralded severe difficulties for the banking industry and, frequently, for the entire market.
Conclusions
This is not a prophecy of doom, but a call for awareness. Especially since today in Europe, the indicator is turning positive.
Of course, it’s not about avoiding the sector altogether, nor anxiously chasing every spread change. Rather, it’s about understanding that behind the numbers lies a clear mechanism, which can help prevent unpleasant surprises.
And the next time you see bank stocks suddenly boom or crash, try looking at the yield curve.
Original article published on Money.it Italy 2025-09-01 07:52:00. Original title: Questo indicatore anticipa il crollo del settore bancario italiano
