Allegro ma non troppo

Italy's way with bank reform

ONE of Italy's biggest banks, Banca Commerciale Italiana, now part of the Intesa group, is not quite as Italian as it seems: it was founded, back in 1894, by a German-Swiss-Austrian consortium. More recently, Italy has shown itself to be progressive in other ways, making more headway with privatising banks than many other European countries - though mainly, it must be said, because the government needed the cash in the early 1990s. It was obliged to reduce its public debt drastically in order to qualify for euro membership by the starting date of 1999. That meant considerable consolidation in Italian banking in the past ten years, including the privatisation of most savings banks (something the French and Germans have not yet achieved).

There are now three main banking groups, UniCredit, Intesa and Capitalia, as well as a handful of medium-sized banks - Monte dei Paschi di Siena (the world's oldest bank), BNL, Banca Antonveneta and Banca Popolare di Lodi, which could consolidate into two more big groups. Even the biggest Italian banks are not huge by European standards, but UniCredit and Intesa have built up considerable networks in central and eastern Europe. They are among the few European banks to have retail operations in other countries' domestic markets.

The picture at home, however, is not that rosy. After the bankruptcies of Parmalat and some other poorly run Italian companies, the banks were rocked by a series of scandals in early 2004. Parmalat collapsed in December 2003, revealing a $17 billion hole in its accounts, about $3 billion of which was owed to Italian banks. But worse than Parmalat was the sale of many thousands of bonds issued by unrated Italian companies and offered to Italian mutual funds with minimal due diligence. Many of the bonds defaulted, damaging customers' confidence in Italian banks and bankers. This matters, because Italian private savers play a vital part in financing the economy.

In the past two years the banks, and the banking association, ABI, have made gallant efforts to regain some of that trust. ABI, for example, publishes a comparison of bank services on its website, guiding the public towards the best deals. It also puts its own rating on investments touted by the banks.

The banks, for their part, had to deal with a raft of non-performing loans, which required big clean-ups and recapitalisations. UniCredit and Intesa are now regarded as sound and stable. Capitalia still has some work to do, but Matteo Arpe, who took over as its boss nearly two years ago, has earned the confidence of the market.

A handful of European banks now see Italy as a promising market to buy into. Some already have considerable stakes in Italian banks: at the beginning of this year ABN Amro owned 9% of Capitalia and 12.7% of Banca Antonveneta; Credit Agricole had a 16.9% share of Intesa; and BBVA had a 14.9% stake in BNL. Until recently the Bank of Italy, the central bank, seemed to be suggesting that a 15% share for a foreign owner was as much as it would tolerate.

This does not fit well with the EU's declared goal of a single European market for financial services. In February Charlie McCreevy, the new European commissioner for markets, duly wrote a letter to the Bank of Italy's governor, Antonio Fazio, asking him what he thought about foreign ownership of Italian banks.

Mr Fazio's power over what can or cannot be done in Italian banking is legendary. His appointment as governor is for life, and he has control over competition issues as well as prudential supervision. Politically, too, he seems to be bulletproof. He wrote back to Mr McCreevy to point out that foreign banks already own around 17% of the Italian banking sector, more than in most western European countries. For ABN Amro and BBVA, that was an unhelpful response. In mid-March, BBVA nevertheless notified the Bank of Italy and the market that it intended to make a bid for BNL. ABN Amro followed suit with a bid for Banca Antonveneta. Predictably, Italian suitors began to line up in preparation for a counterbid.

Deutsche Bank has a small bank in Italy, which it bought from Bank of America in 1986. But because the German bank has been schizophrenic about its own strategy, it has not made the best of opportunities in Italian retail or private banking.

The bank of Italy's protectionism can only do damage to Italian banks, says one Italian bank boss. But some Italian bankers are worried that foreign banks would be less inclined than domestic ones to lend to Italy's vast number of small companies. “You have to evaluate entrepreneurs,” says the head of a big Italian bank. “That is the bread and butter of the Italian economy.” German and French banks have let many companies go to the wall, the Italians note, whereas Italian banks feel some social responsibility for firms on their patch.

The Italian banks also have a record of coming to the aid of beleaguered Italian giants. In 2002, they bailed out Fiat to the tune of €3 billion, and last year they poured in funds to refinance Telecom Italia after its merger with Olivetti in 2003. “A bank in foreign hands might not have taken the same view,” says an Italian banker, insisting that sometimes a brand is worth saving: “That may be a better goal than looking at quarterly earnings.”

Italy's way with bank reform. Article is part of an Economist survey of international banking.

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