The Italian banking system has undergone profound transformation during the past ten years. Following deregulation and the state’s partial withdrawal from banking business, groups of banks with strong earnings power have emerged from the previously separate sectors of the Italian banking industry. Larger units and keener competition have led to a wider range of banking products geared to customers’ needs and a growing number of branches.
In recent years, Italy’s banking market has proved remarkably dynamic in both the organisational structure of banks and the range of products and services on offer. The internationalisation of production systems and globalisation have, in addition, triggered a streamlining process within the Italian financial sector marked by rapid changes in shareholdings and a sharp drop in the number of independent banks.
The Situation in 1990
In 1990, there were 1,064 institutions operating in the Italian financial sector. These comprised six public-sector banks1, three banks of national interest2 and 84 savings banks and institutions of the first or second category, i.e. banks that were directly or indirectly publicly owned. These groups had a combined market share, measured in terms of total assets, of around 60 per cent. If the specialist banks, which were predominantly public institutions, are included, almost 70 per cent of the financial sector was in fact under public control. In addition, there were 106 private commercial banks, 108 credit unions (cooperatives), 715 agricultural and craft credit cooperatives, 37 branches of foreign banks and five group-specific central institutions3. There were 17,723 banking offices.
Interest income accounted for 80 per cent of the combined total earnings of all banks, with only 20 per cent of earnings coming from commissions. In 1990, net interest income, as a percentage of total assets, stood at 3.46 per cent for the private commercial banks and at 2.02 per cent for the specialist banks, while the figures for net commission income were 1.17 per cent and 0.05 per cent respectively. The overall return on equity (ROE) was close to 0.45 per cent.
Evolution of the Legal Framework
The “Amato-Carli” and “Ciampi” reforms: One of the factors that undoubtedly fostered the modernisation of the Italian banking system was the reform of existing banking legislation. The new laws and regulations removed the institutional obstacles to an efficiently functioning Italian financial market. Particularly towards the end of the 1980s and at the beginning of the following decade, a number of laws were passed in Italy that can be regarded as the basis for future changes. These changes include in particular:
- the emergence of the multi-activity banking group in response to the universal (one-stop) bank encountered in other jurisdictions,
- the introduction of banking supervision based on consolidated accounts,
- the further easing of restrictions, completed in March 1990, on moving existing bank branches and opening new ones,
- the introduction of binding solvency ratios geared to the risk of banking business.
The most important step taken towards reorganising the Italian banking sector was, without doubt, the Amato-Carli legislation4, which had far-reaching structural implications. Until then, the banking system had been dominated by specialist banks which, subdivided into different legal forms, either operated at the short end of the market (private commercial banks) or at the medium-to-long end of the market (special banks).
The key feature of this new legislation was that it made it possible for all public banks to convert to stock corporations. It enabled savings banks in particular to do so by putting their banking division into such a stock corporation. This change meant that two units emerged from the savings bank originally run as a public-law corporation:
- a “foundation”, representing the original legal entity, and
- the “stock corporation”, entrusted with the task of conducting banking business.
The foundation, which assigned the actual banking division to the stock corporation, held the stock5.
During the general process of privatisation in the Italian economy, it became clear that it was easier to make progress if bank restructuring was facilitated. The “Dini Directive” (of 18 November 1994) therefore introduced tax incentives for undertakings to shed their bank shareholdings over the next five years (1994-1999) and in this way spread their assets6. These incentives also applied to banking foundations.
Overall, the Amato-Carli legislation, together with the tax-based structural intervention, created the tools needed to kick-start the Italian banking system’s adjustment to the sweeping changes brought about by European Monetary Union and financial market integration.
This legislation went a long way towards giving the Italian banking system a suitable organisational structure, which was an essential condition for improving its performance in an increasingly competitive international environment. It allowed public banks to develop along the lines of stock corporations and created incentives for a broad restructuring of banks as a whole. One result was a rapid increase in the size of banks, which were in this way able to adapt more easily to the changed market conditions. Another was the emergence of structures (universal bank and/or banking groups) that could stand up better to the growing competitive pressure in the marketplace.
The range of products and services on offer has also undergone profound transformation, having been extended considerably to meet customers’ varied needs. Diversification appears to go hand in hand with the growth in the size of banks. This process can be demonstrated empirically by an analysis of Italian banks’ earnings performance during the past few years, which shows a noticeable increase in commission income. This underlines the substantial efforts made by banks to offer an increasingly customised range of services.
The new “uniform legal regime” in the banking sector: The legal framework for banking was later completed by the adoption of the “uniform legal regime” in the banking and credit sector7, which forms the connecting link between national and European legislation. Generally speaking, the rules and regulations in the banking sector were revised along five main lines:
- The choice of institutional framework for uniformly conducting banking business and other activities, i.e. a banking group or universal bank or any combination of these, was made “endogenous”. It was placed entirely under the strategic and organisational control of each bank or banking group.
- Institutional, operational or temporal specialisation by banks is no longer stipulated. This enables providers of financial services in the wider sense to create completely new, competitive market segments, thus spurring the further development of the single European market for financial services.
- Direct intervention in banking business was abandoned in favour of regulation and supervision of the banking sector focused firmly on limiting risks (asset, credit and liquidity criteria). The powers of state supervisors were reorganised so that these are no longer authorised to justify their intervention by reference to the “economic interests of the market”. This decision was necessary to achieve the “mutual recognition” that is an institutional cornerstone of the single European market for financial services.
- The legal form for entities conducting banking business was, with the exception of the credit cooperatives, harmonised along stock corporation lines. This triggered a process of sweeping restructuring of the banking system that was reflected in mergers between financial service providers and their privatisation.
- The principle of separation between banks and industry was rolled back by allowing banks, within fixed limits, to acquire for financing purposes securities holdings in companies outside the financial sector8. This was a radical innovation, as it opened up the possibility of permanent ties between banks and companies on terms that would have been unthinkable under the old regime.
The New Banking System: The Situation in 2002
Following the Amato Act of 1990 and the new “uniform legal regime” in the banking sector, which firmly cemented the principle of institutional, operational and temporal non-specialisation and thus overcame the separation of banks into legal categories, there now exist – branches of foreign banks apart – only two types of bank, namely stock corporations and credit cooperatives.
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1990
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2002
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1) National independent banks 2)Principal bank in the group 3) BCC: Credit cooperatives
In 2002, the number of banks operating in Italy had dropped by 23.9 per cent to 814. At the same time, the liberalisation of branching saw the number of branches jump: at the end of 2002, there were 29,926 branches, an increase of around 70 per cent compared with the end of 1990. Since 1993, banking groups have also been created at the same time. Of the 814 banks operating in 2002, only 150 can be regarded as independent banks. There has also been an indirect increase in the average size of banks, both at individual and group level.
In 1993, the average total assets of the three leading Italian banks amounted to E80.1bn. By 2002, this figure had virtually doubled, to E159.3bn. Even bigger – well over double – was the increase recorded by the three largest banking groups, whose average total assets grew over the same period from E95.9bn to E232.6bn. The picture is the same for the 10 leading banks, whose average total assets climbed between 1993 and 2002 from E56.7bn to E95.3bn, or for the 10 leading banking groups, which posted an increase from E65bn to E122.8bn.
The market value of Italy’s listed banks also increased at the same time: whereas in 1993 the 21 banks listed on the mercato restritto (restricted market) and the 20 banks listed on the mercato ufficiale (official market) had a book value of E29.7bn, the market capitalisation of the six banks listed on the former and the 35 banks listed on the latter was E78.95bn at the end of 2002. This represented an increase of 165.3 per cent. At the end of the period under review, the total assets of listed banks amounted to 60 per cent of the combined total assets of all banks, compared with 37.5 per cent nine years earlier. The banking sector’s overall capitalisation of E98bn already accounted at the end of 2002 for just under a quarter (22 per cent) of the market capitalisation of all listed companies.
These figures are mainly the result of a process of mergers and acquisitions among banks that, measured in terms of the number of institutions, reached its peak in the course of the 1990s. Between 1990 and 2002, 583 mergers were recorded, affecting more than half of the banks existing in 1990 and more than 70 per cent of those existing in 2002. Seen from a different angle, this meant that, measured in terms of banks’ combined total assets during the period in question, more than half of the Italian banking sector was affected by the wave of mergers and acquisitions. These developments were accompanied by an improvement in profitability.
The return on equity (ROE) improved from 1.2 per cent in 1994 to 6.4 per cent in 2002 (in 2000, it was almost 13 per cent), meaning that banks managed to narrow the gap substantially on the European average to only 3.8 percentage points in 2002. This was less than a third of the gap of 11.9 percentage points in 1997.
The performance of the two gross earnings components (net interest income and net commission income) was one of sharp contrasts: Net interest income, i.e. banks’ net proceeds from traditional business, dropped between 1990 and 2002 from more than 3 per cent to 1.9 per cent of total assets. Net commission income, on the other hand, which makes up that part of a bank’s earnings derived from other business, increased noticeably over the same period, from around 1 per cent to 1.5 per cent (1.8 per cent in 2002).
The refocusing of activities – away from traditional business to higher value-added services – has thus enabled Italy’s banks to regain some of their old growth potential. By the end of 2002, the share of aggregate earnings accounted for by net interest income had dropped to around 55 per cent, whereas in 1990 it was over 80 per cent. During the same period, net commission income moved in the opposite direction, climbing sharply from less than 20 per cent in 1990 to over 40 per cent in 2002.
At the same time, there were also noticeable improvements in efficiency, which can be captured in figures by two indicators: the trend in the ratio of labour costs to earnings and the trend in the ratio of aggregate costs to earnings. Both trends are positive, i.e. these costs fell in relation to earnings, so that the healthier ratios recorded in the rest of Europe are now well within the reach of Italian banks.
An analysis of a random sample of 150 banking groups shows that the productivity index gap between the big Italian groups and their major European competitors narrowed from 11 percentage points in 1996 to 5.8 percentage points in 2002. A look at the ratio of labour costs to earnings shows that Italy’s figure of 37.4 per cent already puts it near the top of the eurozone rankings, along with France (36.5 per cent) and Spain (33.5 per cent).
Another performance indicator also saw the gap between Italy and the rest of Europe close significantly. In 2002, taking the same random sample as a basis, the ratio of operating costs to earnings (cost-to-income ratio) at Italian banks stood at 60.1 per cent. This was only 2.6 percentage points higher than the European average, compared with 8.3 percentage points in 1996.
1 Banks classified as belonging to the public sector are, according to Section 25 of the 1936 Banking Act, Banco di Napoli, Banco di Sicilia, Banca Nazionale del Lavoro, Istituto Bancaria San Paolo, Monte dei Paschi di Siena and, according to Regulation No. 417 of 28.12.1944, Banco di Sardegna.
2 Banks owned by the IRI (Institute for Industrial Reconstruction), namely Banca Commerciale Italiana, Credito Italiano and Banca di Roma.
3 Institutions set up within a homogeneous banking group to promote the development of individual banks within the group and to offer certain banking services centrally in their name (Iccrea, Iccri, etc.)
4 Act No. 218 of 30.7.1990 and Regulation No. 356 of 20.11.1990 (the so-called Amati-Carli legislation).
5 The foundation was barred from conducting banking business, so that it could pursue aims of public and national interest, mainly in the fields of scientific research, education, art and health.
6 The following legislation (the so-called “Ciampi Regulation”: Regulation No. 153 of 17.5.1999) also underlined the principle that foundations had to shed their controlling interest in banking institutions. An exception was foundations with assets not exceeding ? 200 million, as well as those based in special-status regions.
7 Regulation No. 385 of 1.9.1993.
8 Limits (tighter than those covered by Directive 2000/12/EC) were also set with regard to the ban on commercial entities that operate in areas outside the banking sector or the financial sector obtaining authorisation from the Bank of Italy to acquire a stake of more than 15 per cent in a bank or, as the case may be, control of the bank itself.
Originally published on www.die-bank.de in January 2005