Sources of finance for Industry

The Industries in Italy are very much developed and modernized.

These are also one of the main sources for the GDP of Italy. Also

they provide the highest employment opportunities. The main

sources of finance for the industry are the subsidized loans,

medium term loans. These loans are provided by the govt. as well

as the different banks at variable and fixed rates.

 Evolution of Banking in Italy

The first banks were probably the religious temples of the

ancient world, and were probably established in the third

millennium B.C. Banks probably predated the invention of money.

Deposits initially consisted of grain and later other goods

including cattle, agricultural implements, and eventually precious

metals such as gold, in the form of easy-to-carry compressed

plates.

Ancient Rome perfected the administrative aspect of banking

and saw greater regulation of financial institutions and financial

practices. Charging interest on loans and paying interest on

deposits became more highly developed and competitive. The

development of Roman banks was limited, however, by the

Roman preference for cash transactions. During the reign of the

Roman emperor Gallienus (260-268 AD), there was a temporary

breakdown of the Roman banking system after the banks

rejected the flakes of copper produced by his mints. After the fall

of Rome, banking was abandoned in Western Europe and did not

revive until the time of the crusades.

Banking in the modern sense of the word can be traced to

medieval and early Renaissance Italy, to the rich cities in the

north like Florence, Venice and Genoa.

The Bardi and Peruzzi families dominated banking in 14th century

Florence, establishing branches in many other parts of Europe.

Perhaps the most famous Italian bank was the Medici Bank, set

up by Giovanni Medici in 1397.

For the history of the Bank of Italy we can

conclude the following points:

• The Bank of Italy was constituted in 1893.

• Was given the authority of note issue.

• In 1926 the essentially public position of the bank was

accorded significant recognition, as it becomes the

only/sole institution authorized to issue bank notes.

• The Bank of Italy was given powers of banking supervision

that would be broadened and strengthened by the 1936

Banking Law, which also formally recognized the Banks

status as a public law institution.

• The 1936 Banking Law was remained the legislation of the

Bank.

• A difficult time in the Italian banking history was the

stabilization of the lira in 1947.

• The postwar surge of inflation was broken and the

monetary conditions for the “economic miracle” of the

1950s were established.

• The Constitution of 1948 came with the principle of the

“protection of savings.”1970s to the international monetary

system and the lira, Italian the independency of the Central

Bank was polished.

• The re-establishment of the stability of the currency and the

start made on the adjustment of the public finances

enabled Italy to comply with the standards set by the

Treaty of Maastricht (1992) and qualify for the lead group of

countries adopting the euro as their currency in 1999.

• Euro banknotes and coins went into circulation in 2002.

 Categories & Activities of Banks in Italy

The Banking sector in Italy is undergoing a period of reform.

Italy has localized the banking system traditionally. The small

popular banks occupy 40% of the total banking market in Italy.

The government is now encouraging small banks to amalgamate

and create larger and more modern banking institutions. An

example of this step is the amalgamation of two banks “Banca

Intesa” and “Sanpaolo” and became the Europe’s largest 4th bank

in August, 2006.

The different types of banks which are working in Italy are as

under:

1. Ordinary Commercial/Credit Banks

2. Co-Operative Banks

3. Co-Operative credit Banks

Ordinary Commercial Banks:

These are the typical commercial

banks. These banks work by receiving deposits and advancing

loans and the difference in the interest rates makes the profit of

the bank.
CO-Operative Banks:
The Co-operative banks are established to

provide loans on lower interests to their customers. These banks

specially provide loans for house building or home loans. These

banks are provincial based. Co-operative banks are also

supervised by the Bank of Italy.

Co-Operative Credit Banks:

The co-operative credit banks are owned

and funded by the farmers themselves. These are the saving

banks formed by the farmers in rural areas. The size of the

deposits is very less as the farmers are not so rich but in terms

of banks, these banks are the largest reaching to 500 banks in

Italy. But as the deposits are tiny and small their share in the

total deposits is very minor.

Banca d’Italia:
This is the 4th type of bank found in Italy. It is the

Central Bank of the Country having the authority of note issue.

It is owned by the Public sector banks.

Post Offices Banks:
Post office banks are the saving banks for the

residents (nationals) and foreign residents. Although, Non-

residents aren’t permitted to open post office account.

Other Activities:
The Italian banks are now competing by engaging

in new activities other than the above activities. Following are

some new activities taken out by the banks:

• Merchant Banking

• Leasing

• Factoring

• Management and Investments Portfolios

• Payment Services and Information Technology

 Banks Operating in Italy

There are a large number of banks operating in Italy. Most of

these banks are small scale based (co-operative credit banks)

but the amount of deposits is less as low income farmers are the

owners and the customers of theses banks. Below mentioned are

the top 10 banks of Italy which are arranged according to their

investment or Market Capitalization:

1. Unicredit – Capitalia (81.39 billion euros)

2. Intesa Sanpaolo (69.2 billion euros)

3. Mediobanca (12.38 billion euros)

4. Ubi Banca (11.5 billion euros)

5. Banco Popolare (11.34 billion euros)

6. B Monte Paschi Siena (11.32 billion euros)

7. B Carifirenze (5.3 billion euros)

8. Banca Pop Milano (4.3 billion euros)

9. Banca Carige (3.9 billion euros)

10. Crdito Emiliano (2.8 billion euros)

The total asset value of the entire Italian Banking Market is

approx. € 2,560 billlion. This maeks Italy the largest 4th market in

Europe. If we talk about the overall assets contribution of Italy in

Europe it is 8%. An estimated 43% expansion in the total asset

value of Italian banking was found.

Analysis of the Assets of Top 5 Banks in

Italy

Here we have analyzed the assets of top five banks of Italy in

Comparison to their total assets.

Unicredit – Captalia:

Total Assets € 136 billion

Banking System Assets € 2,560 billion

Share in Percentage 5.3125%

Intesa Saonpaolo:

Total Assets €256,647,858

Total Banking Assets € 2,560 billion

Share in Percentage 1.0025%

Banco popolare:
Total Assets € 137,705,537(according to 2007)

Total banking Assets € 2,560 billion

Share in Percentage 0.5379%

Ubi Banca:

Total Assets € 122 billion

Total banking Assets € 2,560 billion

Share in Percentage 4.7656%

MedioBanca:

Total Assets

Total Banking Assets € 2,560 billion

Share in Percentage
 Activities performed by the Different

banks in Italy

ABI - Associazione Bancaria Italiana:

ABI (Italian banks association) promotes an ordered stable and

efficient growth of the financial and banking system, agreeing to

both national and European competitive normative law.

Banca Credito Italiano - Unicredit Group:

Unicredito italiano stands out for its multibusiness structure: a

network of financial advisors, in-store branches, telephone

banking and on-line trading offered by the various group banks.

Banca d'Italia:

The functions of Banca d'Italia are currency issue; banking and

financial supervision; market oversight; safeguarding competition

in the credit market; economic and institution analysis, research

and study; and, jointly with the European central bank, oversight

over payment systems.

Banca Monte Dei Paschi Di Siena:

It is one of the most important banks in Italy and it operates

mostly in traditional banking activity, special credit, asset

management, bancassurance and investment banking

Banca Nazionale Del lavoro - BNP Paribas:

BNL is specialized in financial services, remote banking, online

banking (e-family) and operates through an international network

of branches.

Banca Popolare Di Bergamo:

BPB is a multi-functional bank which operates in insurance,

leasing and merchant banking areas.

Banca Di Roma - Unicredit Group:

The activities of the group Banca di Roma are: main credit

services, asset management, and long-distance banking services

for enterprises and firms.

Gruppo Bancario Banco Di Napoli:

It provides traditional financial and banking services and new

economy and business assistance.

Mediobanca:
Financial credit bank, structured, asset and corporate finance,

capital equity market.

Mediocredito:
Specialized in corporate banking, investment banking, company

credit and private equity.

Unicredit:
UniCredito Italiano is the largest banking group in Italy in terms

of operating income and market capitalization and second as

regards interest margin and income from banking activities.

Role of the Bank of Italy

The Bank of Italy is the Central Bank of the country. It is the

head of all the banks. All the banks are sub-ordinate to it. It is a

Government owned institute and was established in 1893. It

performs various functions in the banking field and economy of

the country. Most important is the issuance of euro banknotes

and withdraws and eliminates the worn pieces.

The authority of monetary policy and exchange rate policies is no

more in the hands of the Bank of Italy. In 1998 these authorities

were transferred to the European Central Bank which is the head

of all the banks in Europe. The main functions played by the Bank

of Italy are as under:

1. Supervise the banking system.

2. Supervise the financial system.

3. Ensure stability and efficiency of the system.

4. Compliance to the rules and regulations formulated by the

European Central Bank.

5. Bank of Italy is the secondary authority in the legislation

point of view.

6. It co-operates with the governmental authorities in the

formulation of laws.

7. Due to reforms introduced in 2005 the sole authority of

Bank of Italy in the credit sector is now shared with the

Italy’s Antitrust Authority.

8. IT also performs other small functions also which are as

under:

• Supervision of the Markets.

• Oversight of the provision system and provision of

settlement services

• State Treasury Services

• Central Credit Register

• Economic Analysis

• Institutional Consultancy

Ownership of Banking Institutions

The ownership of the banking industry can be clearly identified

according to a report submitted to the Bank of Italy in which it is

specified that:

• 27% ownership of capital of banking industry in the hands

of Italian banks. (i.e.-e there ownership is Italian based)

• 4% ownership is with the foreign banks working in Italy.

( Ownership is of other countries)

• 18% is in the hands of public and non-profit institutions.

(Govt. owned institutions)

• 5 % by insurance companies and financial undertakings.

(Other than Banking Institutions)

All these are due to the changes in the policies and reforms

which the banking foundations or heads carry out. If we compare

1980’s figures with today’s figures we will find out that in 1980

the 75% business was captured by the public sector banks which

today is reduced to merely 15% and is likely to be reduced more

in the upcoming period due to changes in the policies. Now,

privatization is prevailed in Italy.

The reason behind so less foreign banks

ownership is that the Italian banking has suffered greatly after

the 2nd world war. Italy was discouraged by many laws with their

exchange with the international markets but this situation was

removed in the 1990’s after which the Italian banking sector

emerged as a competitive player in the global financial markets.

In the 1990’s the drop interest rate played a

very vital role in the financial sector of the country. The

development of stock exchange, prompted financing through the

issuance of equity are done in this period of time. Now a larger

part of the banking sector is owned by private firms.

 Banks Ownership in Non-Financial Firms

The banks in Italy are regulated by the laws formulated by the

Bank of Italy as it is the Head of the economy of Italy. According

to laws there is no such restriction or limitations on the banks to

invest their money in non-financial firms. But also this is a point

that we don’t find any such example that any bank is engaged in

this activity. Banks are willing to invest only in the financial

activities as they find it profitable and suitable for them.

As far as the case of ownership of non-financial firms in banks is

concerned, there is also no restriction for the share in banks. The

non-financial firms can invest and own shares of commercial

banks and also have equal voting rights.

Risks Faced by the Banking Sector in Italy

A bank has many risks that must be managed carefully,

especially since a bank uses a large amount of leverages. If the

banks do not use good and effective risk management

techniques they could easily become insolvent. While talking of

the Italian industry the major risks faced are:

1. Liquidity Risks

2. Interest Rate Risks

3. Credit Default Risks

4. Trading Risks

Liquidity Risks:
Liquidity is the ability of banks to pay their

customers’ demand for cash or simply to meet the cash

requirements of its customers. The banks face risks as the

amount payable on bills and other negotiable instruments is

known by banks as they know the due date and amount of it. But

the customers’ demands on the chequing accounts are very

much unpredictable. So the banks face the risk of shortage or

keeping high cash with them is both risky.

Other liquidity risks which the Italian banks face are off-balance

sheet risks, such as loan commitments letter of credits etc.

Interest Rate Risks:
A bank’s main source of profit is the conversion

of liabilities interest rate and asset interest rate. The banks earn

by paying low rate on its liabilities (loans debentures etc) and

receiving higher rate on its assets (loans investments etc). The

risks arise as the interest rate for short term liabilities and

assets are also short term based. It means they are not fixed and

change according to different situations in the market. So the

risks of the difference in the interest rate is always faced by

banks as they do not know the exact rate for a longer period of

time .However, in case of long term deposits and borrowings this

risk is very much minimized as the rate of interest is fixed and

known to the banks.

Credit Risks:
Credit risks are involved when a borrower fails to

pay the amount of loan outstanding to his account. The Banks in

Italy are required by law to create a loan loss reserve account to

cover these types of losses. Usually after 90 days of non-payment

of loan the loan is to be considered as bad debts. When the banks

offer loans to the people other than its customers the bank

conducts a Credit Risk Analysis. CRA is the determination of the

possible risk involved in advancing the loan to that specific

person and the result is deducted on the basis of his credit rating

and history.
Trading Risks:
Generally greater risks are involved in the

achievement of greater profits. By Law the banks in Italy are

limited to their leverage ratios but they can earn by trading

securities. For this purpose a separate department which

involves hire traders specialized in hires trading. But the more

the banks will try to earn profit the more the risk is faced by

banks.

Other risks:
• Foreign Currency Risks (Changes in the value of

foreign currency that a bank holds).

• Sovereign Risks (Due to political instability of

countries economy the fall in the value of native

currency).

• Operational Risks (The damage to the equipment

of the bank which is used in daily working).

 Techniques Used in Risk Management by

Italian Banks

As we discussed above the risks which are faced by the Italian

banking sector. Now we will take a look at the techniques or

methods of managing those risks carried out by banks. The

techniques are as in the same sequence as the risks to clarify

the more parts and are as under:

Liquidity Management:
The banks minimize the liquidity risk by

applying the liquidity management technique which includes both

asset management and liability management.

Asset Management:
This technique is applied by taking into

consideration the cash ratio and the amount of liquid asset. The

Banks are required to keep a specific ratio of its cash. So the

bank keeps a sum of cash with it and other as liquid assets to

meet the urgent demand of its customers.

Liability Management:
A bank increases the liability by

borrowing. It can borrow either by taking loans or by issuing

securities. The banks borrow from each other in the inter bank

market which is known as Federal Funds Market. In this method

the banks having large amount of cash offers loans to the banks

with less cash power. In this way they keep a liability sector

stable and safe.

Credit Risk Management:

The banks can reduce their credit risks

by taking full information before granting loans. The banks apply

effective credit techniques by creating a separate team for

collecting and verifying all the information regarding the

applicant of the loan. The banks also reduce their credit risks by

granting loans to the different sectors of economy and not are

limited to only one of the sectors. So that if one sector is

defaulted the amount given to other sectors can be recovered.

Interest Rate Risk Management:

To overcome the interest rate risks

the banks match the sensitive rate of assets to its liabilities. The

banks also can use long term loans which are based on fixed rate

of interest. Increasingly now the banks are using interest rate

swaps to reduce their credit risk where bank receives fixed rate

on its assets and in exchange for a floating rate (non-fixed) to the

other party. However, if the banks use this technique it

ultimately reduces the profit if the banks as low line of borrowers

will accept this type of rate policy.