Attendees at this National Conference examining the Italian banking sector noted that, according to economic theory, the financial system has a fundamental role to play in intermediating savings, allowing an efficient allocation of capital with consequent gains in productivity and wellbeing for the entire economy. In the recent past, however, this primary function has been compounded by others that have contributed to a distortion of the financial sector’s role and its relationship with the real economy.
The participants felt that, five years out from the worst financial crisis of the postwar period, some reflection was warranted on the role played today by banks in the European and Italian economies. Europe – it was observed – is a bank-centric system. The asset holdings of European banks are worth almost four times the continent’s GDP, and indeed have grown more rapidly in recent times than the latter. Massive public resources have been sapped to support the bailout of troubled financial institutions. Yet far from pulling together, the financial system has – as a result of the crisis and the ensuing credit crunch – become further fragmented along national lines. In order to avoid the risk of further fragmentation, the participants were of the view that the response of the European legislator can only be that of pursuing greater integration within the single market, with an emphasis on regulatory harmonization at European and global level in addition to giving concrete substance to the proposed banking union.
The Italian system was also characterized as bank-centric, with banks (especially commercial ones) playing a pivotal role in the country’s economy. This was seen as being amply demonstrated by the fact that bank loans account for 67% of all liabilities of Italian firms, and that the contribution by national banks to supporting the country in the form of government bond purchases has in recent years increased from 7% to 22%, effectively tripling. Today, however, these banks face a series of monumental challenges. Despite having coped well with the post-Lehman financial woes, the onset of a crisis in the real economy – which in Italy took on a severity unprecedented in recent history – weakened the country’s economic and production system, stifling domestic demand in the process.
The sovereign debt crisis in the eurozone, it was observed, exacerbated the drying up of credit supply, which became reflected in excessively high spreads and pushed the Italian financial system away from the transmission mechanisms of the European Central Bank’s expansionary monetary policy. Italian banks are consequently penalized by higher funding costs and a worse creditworthiness assessment by rating agencies. An overly expensive distributive system, which increases costs and reduces productivity per employee, was singled out as further aggravating the situation. To complete the picture, the financial fragility of the Italian production system, characterized by firms that are highly leveraged and poorly capitalized, has led to an alarming increase in non-performing loans, which are above the European average. In this scenario, the divide has deepened between healthy and competitive firms that export abroad, and firms – especially those that are small or very small – which depend on now weak domestic demand. While the former manage to raise capital, sometimes even turning to the international financial markets, for the latter raising such resources – albeit essential for their survival – has become extremely difficult. As regards these latter firms, the participants stressed the crucial importance of the ability of credit providers to distinguish between those experiencing a temporary liquidity shortfall and those which in contrast are to all intents and purposes insolvent.
The Conference discussion then turned to the question of how to go about strengthening the Italian banking system. Many proposals were put forward, ranging from boosting guarantee mechanisms to the improvement of tax incentive policies by providing for the deductibility of loan losses. It was also suggested that the Cassa Depositi e Prestiti (a specialized lender to the Italian public sector) be brought more into line with Germany’s KfW, in the sense of being state-guaranteed, while at the same time the guarantee should not be accounted for in the debt-to-GDP ratio. Export credit should also be granted by private firms provided they are backed by a state guarantee. Medium- to long-term credit facilities were considered worthwhile cultivating for their role in supporting infrastructure growth. Also deemed vital were efforts to foster a renewed balance between stability and financial innovation, as well as a culture of specialization, ensuring that every financial institution concentrates on doing on what they do best. Lastly, the participants called for attention to be focused on regulation, a crucial issue for the sector, with the accent being on better rather than more regulation. In this regard, it was noted that over the past 5 years, Italian banks have had to adapt to over 500 regulatory measures. It was thus stressed that regulation must be consistent at European level and avoid penalizing an Italian banking system already subject to more restrictive rules than elsewhere.
In conclusion, it was highlighted that Italian banks have played and continue to play a key role in supporting the country’s economy, not just its private sector, but also its public-sector component. Today, however, they have lost much of the goodwill they previously enjoyed. Since trust is the cornerstone of any financial system, restoring the image of the Italian banking system is a matter of priority. The challenge ahead is critical and calls for a rethink of the sector’s entire business model, putting the focus back on the industry’s traditional function of intermediating capital, as well as an emphasis on regulation that both facilitates this role whilst being consistent at the European and global levels.