Italian Banking Sector
Transcript of Italian Banking Sector
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Sources of finance for IndustryThe 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.
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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.
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Perhaps the most famous Italian bank was the Medici Bank, set
up by Giovanni Medici in 1397.
For the h i s to ry o f the Bank o f I ta ly w e canconc lude the fo l lowing po in ts :
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.
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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.
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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 Europes 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
Ord ina ry Com m e rc ia l 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.
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CO-Opera t i ve 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 -Opera t i ve C red i t 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.
Ban ca d I ta l ia :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.
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Pos t O f f i ces Banks :Post office banks are the saving banks for the
residents (nationals) and foreign residents. Although, Non-
residents arent permitted to open post office account.
Other Act iv i t ies :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
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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
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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 inItaly
Here we have analyzed the assets of top five banks of Italy in
Comparison to their total assets.
Un ic red i t C ap ta l ia :
Total Assets 136 billion
Banking System Assets 2,560 billion
Share in Percentage 5.3125%
I n tesa Saonpao lo :
Total Assets 256,647,858
Total Banking Assets 2,560 billion
Share in Percentage 1.0025%
Banco popo la re :
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Total Assets 137,705,537(according to 2007)
Total banking Assets 2,560 billion
Share in Percentage 0.5379%
U b i B a n c a :
Total Assets 122 billion
Total banking Assets 2,560 billion
Share in Percentage 4.7656%
M e d i o B a n c a :
Total Assets
Total Banking Assets 2,560 billion
Share in Percentage
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Activities performed by the Differentbanks in Italy
ABI - A ssoc iaz ione B ancar ia I ta li ana :ABI (Italian banks association) promotes an ordered stable and
efficientgrowth of the financial and banking system, agreeing to
both national and European competitivenormative law.
Banca Cred i to I ta li ano - Un ic red i t G roup :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 ' I ta l ia :
The functions of Banca d'Italia are currency issue; banking and
financial supervision; marketoversight; 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 M onte De i Pasch i D i S iena :
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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 Naz iona le De l l avo ro - BNP Pa r ibas :
BNL is specialized in financial services, remote banking, online
banking (e-family) and operatesthrough an international network
of branches.
Banca Popo la re D i Be rgam o :BPB is a multi-functional bank which operates in insurance,
leasing and merchant banking areas.
Banca D i Rom a - Un ic red i t G roup :
The activities of the group Banca di Roma are: main credit
services, asset management, and long-distance banking services
for enterprises and firms.
Gruppo Ba ncar io Banco D i Napo l i :
It provides traditional financial and banking services and new
economy and business assistance.
Med iobanca :
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Financial credit bank, structured, asset and corporate finance,
capital equitymarket.
Med ioc red i to :Specialized in corporate banking, investment banking, company
credit and private equity.
Un ic red i t :UniCredito Italiano is the largest banking group in Italy in terms
of operating income and marketcapitalization and second as
regards interest margin and income from banking activities.
Role of the Bank of Italy
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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
Italys Antitrust Authority.
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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
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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
1980s figures with todays 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
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removed in the 1990s after which the Italian banking sector
emerged as a competitive player in the global financial markets.
In the 1990s 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.
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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
L iqu id i ty R isks :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.
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I n te res t Ra te R i sks :A banks 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.
Cred i t R i sks :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.
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Trad ing R i sks :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 r i sks : 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).
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Techniques Used in Risk Management byItalian 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:
L iqu id it y Managem ent :The banks minimize the liquidity risk by
applying the liquidity management technique which includes both
asset management and liability management.
A s s e t M a n a g e m e n t :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.
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L iab i li t y Manage m ent :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.
Cred i t R isk Managem ent :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.
I n te res t Ra te R i sk Managem ent :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
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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.