Bank control in Italy

«The Economist», 11 settembre 1926, pp. 417-418

The attention of financial circles is centred at present on the problem of control of banks. Political and economic reasons have contributed to give prominence to the problem. Through the creation of corporations of employers and employed, Fascism is endeavouring to give unity to industry and commerce, and to subordinate all economic life to Government direction. Banks, to which are entrusted the savings of the people, could not hope to maintain their independence from the all-pervading spirit of governmental control. It is contended that banks should not do business only for the sake of profits, but should always consider the “national” scope of every business proposition, and prefer to the most profitable the most conducive to approved national ends. This point of view should be especially paramount in all those cases which have a connection with the state of foreign exchanges. In some political circles there is a feeling that the big private banks are not keen in sustaining the public policy of devaluation of the lira, and there is some impression of undue interference of what is called “international finance” to the detriment of the lira. Strictly economic circumstances add emphasis to the general political ones. Several failures of banks – among which the most sensational was the failure of the Agricultural Bank of Parma – gave the impression of gross mismanagement which could and should have been prevented by timely control of competent supervisors. Old objections were repeated against the multiplication of small banks with insufficient capital, which are successfully catering for deposits among ill-educated people, mainly by the promise of high rates of interest.

At first the idea of “control of the banks” took the following shape: 1) The creation of a body of State officials who should periodically inspect banks, and report to the Government on all unsound or otherwise (politi cally or economically) objectionable business done by them; 2) the appointment of a Government representative on the boards of directors (consiglio di amminstrazione) of the banks, eventually with the right of veto against objectionable operations. It was soon discovered that control by these means would probably be ineffective, and certainly risky. The first method of public official inspection of the banks was tried in the old days before the enactment of the present Commercial Code (1884), and is at present operative for savings banks and kindred semi-public institutions. It did not, and does not, prevent occasional banking failures. When a bank is badly run, books are in perfect order, and inspectors seldom discover anything objectionable. Even Government representatives sitting on boards of directors would not be able to get real knowledge of the inside of the bank’s business. Important things are managed outside directors’ boards by the president and the general manager (amministratore delegato). Boards are frequently called on to approve accomplished facts. Nor could it perhaps be otherwise, owing to the urgency and secrecy of the most important decisions.

The control by public inspectors or representatives, too, was seen to be apt to get the State into trouble. Control by the State would by the great mass of depositors be interpreted as a guarantee by the State of the soundness of the bank’s direction. Morally, if not legally, the State would be considered by the public as responsible for deposits. In case of failure, depositors would complain if the State did not make up the deficiency.

Full weight has been given to these considerations in the decrees approved today by the Cabinet, according to which the control of the banks will run on the following lines: 1) There will be some regulation as to the minimum proportion between the capital and deposits; 2) no new bank and no new branch of existing banks can be opened without the Government authorisation, which will be given only after investigation and advice of the Bank of Italy; 3) banks accepting deposits will be obliged to put 10 per cent, of annual profits to a special reserve, up to 40 per cent, of the capital of the bank; 4) lastly, and most important of all, the situation of the Bank of Italy is to be strengthened. This bank, which, from July 1, 1926, is the only bank of issue in our country, is to be put in the same position as the Bank of England or the Federal Reserve Bank of the United States. The Bank of Italy, before accepting for rediscount commercial bills from other banks, is to require stringent information about assets, investments, &c. Banks are to be obliged to send periodical statements to the Bank of Italy, and officials of the Bank of Italy are to have the right of checking the statements by examination of books. This is certainly a legitimate and effective control, in so far as other banks need to have recourse to the Bank of Italy for rediscount.

Supervision of the Central Bank of Issue is effective if other banks are dependent on it. It is doubtful if in our country this dependence does at present largely exist, and the money market is not so organised in Italy as to concede to the Central Bank a paramount influence. It may be, however, that by and by a system will grow in our country comparable to British or American practice.

Perhaps the most important problem of the present day is not how to protect savings, but how to make them expand. I reproduce in millions of lire figure of deposits at various dates:

The “six ordinary big banks” are the Banca Commerciale, Credito Italiano, Banco di Roma, Banca Nazionale di Credito, Banca Agricola Italiana, and the Banca d’America e d’ltalia; the three big “people’s” banks are the Banca Popolare Cooperativa Anonima di Novara, Banca Popolare di Milano, and the Banca Popolare di Cremona.

The figures are not complete, as many “people’s” banks, the rural banks, and all private banks, are excluded; but they give an impression of stationary savings. Probably the causes of the disquieting phenomenon are various, but one is too evident to be overlooked. In all countries with unstable money new savings were, or are, lacking. So it was in Germany and in Austria, and Italy cannot be an exception to the universal rule. The return to stable money is therefore an ideal aimed at by everyone in Italy, from Signor Mussolini, who proclaimed at Pesaro that every necessary effort will be made to sustain the lira, down to every small saver, who is anxious to invest safely his hard-won money.

Today Cabinet’s deliberations gave a clear meaning to the general aims embodied in the words “batde of the lira”: 1) the proceeds of the Morgan loan will be transferred completely on September 1st to the Bank of Italy. The gold reserves of the bank will thus be increased by 90 million dollars, or 455 millions gold lire, to a total of 2,400 millions gold lire. The bank will in return cancel 2,500 millions paper-lire of their advances to the Treasury; 2) the issue of Treasury notes (small notes of 5, 10, 25 lire) will be reduced from 2,100 to 1,700 millions lire, owing to withdrawal and cancellation of 400 millions lire of 25-lire notes. The remaining 1,700 millions lire of 5 and 10 notes will be replaced by a corresponding sum in coins; 3) in the successive State budgets, beginning with the 1926-27 Budget, a yearly sum of 500 millions lire will be included for the withdrawal and cancellation of a corresponding sum of bank notes issued on State accounts. In the course of about eight years all the note issue on State account should disappear; 4) the special section of the Consortium created to conduct the salvage of the Banca Italiana di Sconto and the Banco di Roma will be liquidated as soon as possible, 5) a maximum limit is fixed to note issues of the Bank of Italy on commerce account. Where the limit is fixed, today’s official communique does not disclose.

In consequence of the above decisions, the next balance sheet statements of the Bank of Italy for September 30th and October 31st will be watched with the utmost interest, as they will bear traces of the vigorous deflationist policy today inaugurated. It would be very desirable that great care should be bestowed on the comparability of the figures before and after unification of the issue privilege. This should be one of the tasks entrusted to the newly appointed vice-director general of the Bank of Italy. The appointment of Signor D’Aroma to the vice-directorship of the Bank of Italy marks the end of many rumours current about the retirement, after 25 years, of the present director general, Signor Stringher. Stringher will remain at the head of the enlarged Bank of Issue, but he is strengthened by the appointment of Signor D’Aroma as vice-director, a very close friend of his, and a young, energetic man. For seven years (October, 1919, to August, 1926) D’Aroma was director general at the Finance Department, and to him is to be chiefly – not to say entirely – attributed the merit of the reorganisation of the direct taxation system. He is by far the strongest man discovered in the public services in the last decade, and his co-operation with Stringher will, it is hoped, be successful in solving the monetary problem – the most momentous of Italy’s problems today.