Italian banking

«The Economist», 28 aprile 1934, pp. 928-929

The Italian banking system has many features similar to those of the French system, which was described in the Economist of February 3^rd. Among these are the limited use of cheques and the greater use of notes as a means of payment, and the general preference for bearer bonds and shares. In Italy, as in France, it is not always easy to define a bank in practice, but if all intermediaries between the savers and investors of capital and the users thereof be included, it is possible to discern three main groups. These groups, which are surveyed below by our Turin correspondent, consist of banks proper, savings banks, and public institutes.

The Bank of Italy was made the sole bank of issue by the Fascist Government, when Signor De Stefani was Finance Minister, but it is not a purely central bank in the British or American sense of the term. It really springs from the Banks of Genoa and Turin, which were both founded by Cavour in the ‘fifties at a time when few banks existed in Italy and deposits were hardly known. From its inception it undertook the duty of issuing notes as a means of providing industry and trade with credit, and as other banks came into existence it also began to rediscount for them; but it did not relinquish its direct connections with its customers. Today it resembles the Banque de France, in that it operates 91 branches in Italy and 6 in the colonies, and enters into direct competition with the commercial banks. For this last reason its control over credit conditions is less effective than if its operations were restricted to rediscounting for the other banks.

Nevertheless, the Bank of Italy is endowed with certain legal powers of control. It supervises all banks on behalf of the Treasury. It makes regular inspections, and advises the Treasury on such matters as the foundation of new banks, the amalgamation of existing banks, the opening of new branches, and even the giving of authority to a bank to extend credit to an individual customer in excess of the maximum proportion of the bank’s resources, as laid down by law. On the other hand, its powers of credit control by the use of its rediscount rate or through open-market operations are, as already stated, very limited, and in normal times the commercial banks are able to remain independent of the Bank of Italy. It does, however, intervene in times of crisis as “the lender of last resort”, and in 1893, in 1920, and again in recent years it took over from the commercial banks certain of their frozen assets.

The banks proper or commercial banks, which had relations with the Bank of Italy, comprised at the end of 1932 336 joint-stock companies and 223 private firms. Until recently they did not restrict themselves to purely deposit banking business as defined in England. In fact, during the decade immediately preceding the recent crisis they became more and more inclined to provide industry and trade with finance for building and equipment purposes and to engage in the underwriting of bond and share issues. In justification of this departure from strict banking practice, it may be said that there is in Italy no group of strong issuing houses with their attached underwriters, but that all introductions of new issues on to the Stock Exchanges have to be made through the banks. Nor is it easy to deduce from their balance sheets how deeply the banks became involved in this less desirable kind of business.

The position of the banks at the end of 1932 is summarised in the following composite table. All figures represent milliards of lire:

Prima facie, the liquidity of the banks, as measured by their cash, was not very pronounced. If discounts are included in reserves, the liquidity is greater, but it is difficult to say what proportion of the discounts related to commercial self-liquidating transactions and what proportion to business of a more indefinite financial character. In any case, the position has gready changed for the better during the past two years. Frozen assets have now been transferred to the new public institutes, such as the Istituto di Ricostruzione industriale (I.R.I.), and the banks are now confined to strictly banking business. The main difficulty at the moment lies in the low level of discount rates. The average rate payable on deposits is 2 per cent., to which a further 2 per cent, must be added to cover working expenses. Against this, fine trade bills today only yield 3 per cent., so that it appears that the banks must discount a certain number of finance bills and grant a certain quantity of unsecured advances at rates of 5 to 7 per cent., in order to pay their way. Still, within limits, such business should be safe enough.

The total number of savings banks amounted to 129 at the end of 1932. Their deposits then amounted to 17.7 milliard lire, but have since risen to 20.6 milliards at the end of 1933. This capital came to 1.3 milliards and their remaining resources to 1.8 milliards. Correspondents and current accounts, both debtor and creditor, which loom so large in the accounts of the commercial banks, are conspicuously lacking, and the savings banks’ resources consist almost entirely of time deposits. Hence their assets can take a less liquid form. At the end of 1932 they included gilt-edged securities, 6.9 milliards; loans guaranteed by mortgage or other collateral, 5.2 milliards; and discounts, only 2.2 milliards.

Allied to savings banks are a host of small local co-operative institutions (popular banks, rural banks, agricultural credit institutes) numbering 2,532 at the end of 1932. Their capital and reserves then amounted to 800 million lire, their deposits to 5.2 milliards, and their remaining resources to 2.7 milliards. Their function is to finance farmers, peasants and the smaller manufacturers. In the main this kind of business is very sound, and there are comparatively few failures. Some of the banks in this group are quite large institutions, representative of the best traditions of commercial banking. At the other end of the scale, where the mortality is greatest, come a number of small rural banks, often operated by inexperienced and credulous priests. Taking the group as a whole, the biggest item on the assets side is 2.9 milliard lire of discounts. Investments, mainly gilt-edged, come next with a total of 1.8 milliards.

The third main banking group comprises the public institutes. First there is the Deposits and Loans Bank (Cassa Depositi e Prestiti) with liabilities of about 25 milliard lire, of which 18.7 milliards are postal savings deposits. It is primarily a State Bank, and 9.8 milliards of its assets consist of loans on current account to the Treasury. These are a useful substitute for the former Treasury bills, whose issue was suspended in 1926. Long-term loans, amounting to about 6 milliards, are also granted to local authorities, provinces, municipalities and other public bodies. Its remaining assets consist of State securities and miscellaneous investments.

Other public institutes comprise the Istituto Mobiliare Italiano (I.M.I.), the Istituto di Ricostruzione Industriale (I.R.I.), and other and more specialised institutes such as the Istituti di Credito Fondiario (for real and agricultural estate financing), and the Institutes for Naval Credit and Credit for Public Works. There must also be included here the two former banks of issue, the Banks of Naples and Sicily. All these institutions are concerned primarily with the long-term financing of land, agriculture and industry, and the I.M.I, also holds, directly or through subsidiaries such as Sofindit, the frozen assets recently taken over from the commercial banks. They obtain their own finance directly from the Cassa Depositi e Prestiti and the social insurance funds. Through this chain of finance the Treasury is able to maintain strict control over a large part of private industry.

The Italian banking system is clearly of a diversified character, but much of it is now of well-established growth. Its total resources now amount to about 100 milliard lire, of which about 40 per cent, are in the hands of the commercial banks, 25 per cent, in the hands of the savings banks, and about 35 per cent, in the hands of public bodies. The public character of credit thus predominates, but whereas in Germany this public control was the outcome of the war and subsequent troubles, in Italy it was only intensified by the recent crisis. In some degree public control has been in existence since many years before the war. Moreover, the Italian banking system is not of mushroom growth. It has survived the crises of 1893, 1914 and onwards, and 1929-33, it is now guided by men of experience, and in its present variety may lie much of its strenght.