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.
The firstA banksA were probably the religiousA templesA 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 asA gold, in the form of easy-to-carry compressed plates. Ancient RomeA 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 likeA Florence, VeniceA and Genoa. TheA BardiA andA PeruzziA families dominated banking in 14th century Florence, establishing branches in many other parts of Europe. Perhaps the most famous Italian bank was theA MediciA Bank, set up byA Giovanni MediciA in 1397.
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.
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: Ordinary Commercial/Credit Banks Co-Operative Banks Co-Operative credit 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.
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.
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.
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 office banks are the saving banks for the residents (nationals) and foreign residents. Although, Non-residents aren’t permitted to open post office account.
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
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: Unicredit – Capitalia (81.39 billion euros) Intesa Sanpaolo (69.2 billion euros) Mediobanca (12.38 billion euros) Ubi Banca (11.5 billion euros) Banco Popolare (11.34 billion euros) B Monte Paschi Siena (11.32 billion euros) B Carifirenze (5.3 billion euros) Banca Pop Milano (4.3 billion euros) Banca Carige (3.9 billion euros) Crdito Emiliano (2.8 billion euros) The total asset value of the entire Italian Banking Market is approx. A¢”šA¬ 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.
Here we have analyzed the assets of top five banks of Italy in Comparison to their total assets.
Total Assets A¢”šA¬ 136 billion Banking System Assets A¢”šA¬ 2,560 billion Share in Percentage 5.3125%
Total Assets A¢”šA¬256,647,858 Total Banking Assets A¢”šA¬ 2,560 billion Share in Percentage 1.0025%
Total Assets A¢”šA¬ 137,705,537(according to 2007) Total banking Assets A¢”šA¬ 2,560 billion Share in Percentage 0.5379%
Total Assets A¢”šA¬ 122 billion Total banking Assets A¢”šA¬ 2,560 billion Share in Percentage 4.7656%
Total Assets Total Banking Assets A¢”šA¬ 2,560 billion Share in Percentage
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:A 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:A It provides traditional financial and banking services and new economy and business assistance. Mediobanca:A Financial credit bank, structured, asset and corporate finance, capital equity market. Mediocredito:A 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.
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: Supervise the banking system. Supervise the financial system. Ensure stability and efficiency of the system. Compliance to the rules and regulations formulated by the European Central Bank. Bank of Italy is the secondary authority in the legislation point of view. It co-operates with the governmental authorities in the formulation of laws. 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. 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
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.
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.
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: Liquidity Risks Interest Rate Risks Credit Default Risks Trading 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.
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 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.
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.
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).
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:
The banks minimize the liquidity risk by applying the liquidity management technique which includes both asset management and liability 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.
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.
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.
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.
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