The fifth edition of the annual National Conference on the Italian banking system sought to offer a forum for a wide-ranging discussion with a view to giving the participants the opportunity to reflect on the consequences of developments in the banking sector on the economy and society. In this regard, banks were acknowledged as the very lifeblood of economies, linking those who save with those who invest. Hence, on the one hand, they are an indispensable factor for growth, while on the other, excesses and difficulties within the sector have repercussions not only on the economic system, but also on society at large.
It was noted that the disconnect between the financial system, the real economy, and society has become greater since the financial crisis of 2008. Many questions were said to still hang over the fate of the banking system, the eventual course of which will profoundly impact on the future shape of the capitalist system. The conference discussions covered a wide gamut of issues, including the advisability or otherwise of bank bailouts, the welcome and unwelcome effects of regulation, the ramifications of the current economic situation, shifts in business and governance models within the industry, and new trends currently unfolding. Questions were posed as to whether it would be better to let banks fail or intervene to save them with taxpayers’ money. While on the one hand it was acknowledged that the disappearance of weak and unstable institutions could strengthen the system in the medium term, it was also felt that, more so than for other types of businesses, the prospect of banks failing is seriously destabilizing for economic systems, with often devastating consequences from an economic and social standpoint.
It was thus considered unsurprising that the path taken in the wake of the crisis both in the US and in Europe was that of rescuing banks. Yet while the US has proceeded rapidly and efficiently, the European approach was characterized as slow and fragmented. Following the various bailouts by individual national governments, the European Union has made the bail-in principle one of the cornerstones of the Banking Union. However, while the idea of making investors (rather than taxpayers) carry the burden of business risk would seem to be reasonable, it is also true that many doubts have emerged regarding the timing and manner of the implementation of this principle.
At a global level, the response adopted by the G20 post-crisis was a tight regulatory squeeze aimed at making the system more stable and robust. However, it was stressed that this regulatory onslaught cannot as yet be said to have ended, thus making the full spectrum of possible side effects uncertain. Alongside the desired consequences, for instance, a greater capitalization of the system, there are also unwelcome outcomes, such as a reduction in lending capacity, especially towards small and medium-sized firms. Nor – it was suggested – does the macroeconomic situation help: low interest rates are squeezing bank margins and an economy struggling to recover is contributing to the accumulation of bad debts.
It was observed that these exogenous considerations are also accompanied by endogenous factors, including excess capacity in the banking industry and the progression of new trends such as disintermediation and regulatory arbitrage towards the shadow banking sector. The result can be gauged not only in terms of lower profitability, but also a greater reluctance on the part of investors to take chances on the sector and a consequent rise in the cost of capital. The reduced lending capacity to the real economy also has serious implications for economic recovery, with no simple solutions being envisaged to such a complex scenario. While it was conceded that a greater disintermediation of credit provision in favor of market mechanisms could help to liberate the production sector from the banking industry, there was also a perceived need to devise new business and governance models for the banks of tomorrow. It was further urged that the importance of improved financial literacy should not be underestimated either, especially in a country like Italy, which, in this regard, ranks worse than other developed countries. Finally, the participants also recognized the need for greater capitalization of the Italian and European production systems, while urging increased efforts to maintain confidence, which was characterized as both an essential element for any banking system as well as a key pillar of a capitalist economy. Indeed, it was felt that only by starting afresh with renewed confidence in the banking system on the part of citizens and investors alike will it be possible for banks to resume their role as a key factor of growth and prosperity for the economy.