Competition

Abstract

We can identify two phases in the policy for the defence and promotion of competition in banking and finance since the 1950s, placing the turning-point in the late 1970s. During the first phase the Bank of Italy ensured the independence of banks from industrial groups, that is from non-financial firms. It also ensured that the banking system consisted of a suitable number of banks, grouped into various institutional categories and size classes. These two objectives were instrumental to the fundamental aim of countering industrial monopoly. Under the logic of ‘second-best’, competition internal to the banking system — competition between banks in setting interest rates — was sacrificed to that higher goal. At the same time, the backwardness of the money and financial markets and the restrictions on cross-border capital movements limited competition external to the banking system. The economic crisis of the 1970s marked a watershed in the central bank’s action for competition. In keeping with the analysis of the nature of the crisis set out above, the Bank acted to promote competition on prices and in all other legitimate forms, within the banking system as well as externally. The low level of concentration in banking, the progress of the capital markets, the increasing popularity of government securities and the opening-up of the economy to international capital flows also worked to favour competition between banks and throughout the entire financial system.