Abstract
The paper refers to the processes of consolidation and privatization occurred in the Italian financial market during the nineties, in order to analyze their possible effects on efficiency, competition, and ownership reallocation of the banking system. The main results are that these two processes were accompanied by gains in the efficiency and competitiveness of the Italian market for traditional banking services, but they were unable to offset the drawbacks in the financial services offered to households and in the ownership structure of Italy's largest and medium-sized banking groups. In this last respect, the paper shows that banks mergers and acquisitions and privatization tightened the mesh of cross-shareholdings, and placed at the center of the consequent spiderweb of ownership a small number of major shareholders dominated by a peculiar nonmarket institution – that is, the Italian bank-derived foundations
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- 1.
This chapter was first published as Messori M (2002) Consolidation, ownership structure and efficiency in the Italian banking system. BNL Quarterly Review 221:177–217. Reprinted with permission.
- 2.
It is sufficient to recall that banks are typically multiproduct companies, and that deposits have been treated as both inputs and outputs of banking.
- 3.
It is generally stressed that the larger economies of scale could be the effect of new technologies and of the financial innovations introduced in the banking sector. It should be recalled that substantial size is required for banks to be able to use derivative products or sophisticated risk management techniques. Note also that more and more financial services no longer have the form of personal debt contracts and have been transformed into negotiable assets. It is not advantageous for small banks to produce these services, but they can acquire and distribute them.
- 4.
The foregoing observations refer specifically to banks' operating efficiency and do not address important problems of allocative efficiency. Bank mergers could generate distortions in the supply and changes in the composition of financial services that penalize small and medium-sized firms. Recent empirical studies based on US data (Berger et al., 1998; Peek & Rosengren, 1998; Strahan & Weston, 1998) show that this actually did occur in mergers between large banking groups but not in mergers between smaller banks. The systemic effects were modest, however, thanks to the compensating reaction of local banks. Empirical findings for Italy indicate that small and medium-sized firms may be penalized more heavily (Sapienza, 1997).
- 5.
There is no single measure of concentration. For now I shall refer to the traditional Herfindahl index (HHI), which is equal to the sum of the squares of the market shares of each firm and thus increases as the number of competitors decreases and as the variance of their market shares increases. Because of the Herfindahl index's theoretical and empirical shortcomings, it cannot be used for reliable international comparisons. In Sect. 9.3 I shall therefore use a less sophisticated index of concentration: the share of assets of the five largest banking groups in each national market.
- 6.
In US this also holds in part for the eighties. Gilbert (1984) finds a positive correlation between concentration and profitability in only a little more than half of the cases examined. These results are not decisive, however. They could indicate that M&As do not increase the monopoly positions of the new banking groups, or that the latter's greater monopoly rents do not translate into profits because they are appropriated by the managers or by other coalitions of employees owing to agency problems or influence costs (see, for example, Milgrom & Roberts, 1992).
- 7.
This position is borne out in part by empirical evidence on local credit markets in Italy. Sapienza (1997) shows that M&As involving banks with substantial initial shares in local markets do result in higher bank lending rates. On the other hand, Angelini & Cetorelli (2000), who also examine local banking markets in Italy, do not find significant links between M&As and gains in market power for the banks involved.
- 8.
- 9.
- 10.
Some medium-sized banks, though formally independent, are actually components of major banking groups. The acquisition of substantial minority stakes in these institutions has created solid, asymmetrical relationships of alliance.
- 11.
- 12.
In the next section some reservations will be raised about the accuracy of such a measure of competitiveness for the more recent years.
- 13.
There is only an approximate correspondence between operating income and ‘net income’ owing to accounting and organizational factors. Here it is sufficient to note that during the nineties Italian banks increasingly spun off some of their most profitable services (e.g., various forms of asset management), income from which thus ceased to appear in their financial statements. It follows that the change in the ratio of Italian banks' actual net income between 1991 and 2000 could have been positive despite the decrease in the ratio of operating income.
- 14.
The ABI sample today covers more than 92% of the total assets of the Italian banking system. Because it was modified between 1990 and 1993 and again in 1996, I have chosen to refer exclusively to the new sample (ABI, 2001). Note, however, that on the basis of the universe considered by the Bank of Italy, in 2000 net interest income still accounted for a larger share (53%) of operating income than income from services (see Table 9.5).
- 15.
Operating costs rose by 4.7% in 2000 owing primarily to major technological and organizational adjustments (Banca d'Italia 2001). The figure for staff costs in 1998 benefited from tax reliefs.
- 16.
Although many of the new branches are lightly staffed (the average number of employees per branch has fallen appreciably), new branch openings increased by nearly 4% in 2000. While this phenomenon is plainly a reaction to the restrictive policies of the past, the growth in the branch network is also aimed at protecting Italian banks' traditional factors of comparative advantage.
- 17.
There is an interesting analogy with the two phases of bank M&As in the United States some years earlier. Mishkin (1999) reports that the balance-sheet difficulties of the US banking industry between 1980 and 1992 went hand in hand with an initial phase of rapid consolidation. From 1993 on the return of banks to high profitability was accompanied by a second wave of M&As aimed at curbing costs, expanding the range of services offered and making distribution more efficient.
- 18.
Group of Ten (2001, p. 453). In 1970 Italy was joined by Canada and in 1971 by Japan, France and Germany. More recently, Switzerland and the Netherlands have appeared on the list.
- 19.
I am not concerned here with evaluating the short-term efficacy of these different strategies. It is well known, for example, that the current troubles of investment banking weigh on the balance sheets and organizational choices of important intermediaries. This does not alter the fact that investment banking is an essential component of supply in the financial markets and can be an excellent specialization for a superregional bank or even for a global player.
- 20.
Three major and four midsized Italian banking groups have recently acquired important roles in several East European countries. In particular, Italian banks now hold market shares of around 20% in Croatia, Poland and Bulgaria (Banca d'Italia 2001, pp. 298, 304).
- 21.
Six of the eight largest Italian banking groups (by assets) have at least one large European financial intermediary among their substantial shareholders. Even when this gives rise to cross-shareholdings (as it does in at least two cases), the foreign intermediary enjoys asymmetrical power.
- 22.
For the sake of brevity and owing to the lack of definitive data, the examination is limited here to the ownership structure of the major banking groups and Mediobanca.
- 23.
Note that the six European financial groups did not try to acquire full control of the Italian banks by means of market transactions. Perhaps discouraged by the lack of contestability of Italian ownership structures, they limited themselves to participating in the web. Italy's major banking groups thus risk suffering the worst form of passive internationalization, i.e., not becoming crucial parts of global or superregional banks but also not enjoying the autonomy needed in order to play an active role in the European markets.
- 24.
The continual expansion of traditional distribution channels reinforces the worries in this regard.
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Messori, M. (2009). Consolidation, Ownership Structure and Efficiency in the Italian Banking System. In: Silipo, D. (eds) The Banks and the Italian Economy. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2112-3_10
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