SIS 2011 Statistical ConferenceIstat, SIS, Banca d'Italia

“Statistics in the 150 years from Italian Unification”S. 22: "Statistics, banks and financial system in Italy"

Bologna, June 10, 2011

The Italian financial system between 1861 and today:a statistical reading

G. Della Torre

Department of Economic Policy, Finance and Development, DEPFIDFaculty of Economics “Richard Goodwin”, University of Siena

dellatorre@unisi.it

Abstract

This work aims at a statistical reading of the Italian financial evolution between 1861 and the recent past. There are many scientific works on this argument which are based on Raymond W. Goldsmith’s financial indicators (integrated by several other authors such as Ross Levine). These indicators refer to the financial dimension of the economic system (“financial interrelations ratio”, FIR); the distinction between the systems bank or market oriented; the incidence of the banking system’s financial assets (i.e. loans by the banks and by the issuing banks) in comparison with financial markets’ assets (i.e. shares and bonds); the comparison between public and private debt; and finally the distinction of companies’ debts between shares, bonds and bank loans.The statistical series that my work proposes have both important analytical and interpretative aims. Together with the outlining of the age-old topic of the correlation between financial development and economic growth, the aim is one of analyzing if and to what degree the stages of Italian economic growth – where the innovation in economic structure was very important (i.e. railways, large technological systems, and so on) – were accompanied by forms of financial system “market oriented” structure, with a high degree of securities placement directly with final investors. While, when economic growth became routine, other stages were characterized by “bank oriented” financial structures.

1. Contents and goals

This work aims at a statistical reading of Italian financial evolution between 1861 and the recent past. There are many scientific works on this argument which are based on Raymond W. Goldsmith’s financial indicators (see particularly Goldsmith 1955, 1969 and 1985). Subsequently, the debate has been greatly deepened by

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those economists who have studied the links between finance and economic growth (e.g. Levine 1997, Demirgüç-Kunt, A. and R. Levine Eds. 2001, Allen and Gale 2001, Rajan and Zingales 2003). These indicators have also been used in the analysis of the transition processes of the South-East European countries (Bank of Italy 2002). The last financial crisis has revived interest for the “abuse of finance” as a likely crucial factor for the global recession (e.g. Arcand, Berkes and Panizza 2011). Goldsmith’s original indicators are based on different dimensions of financial structure. This work will highlight four principal issues:

a) the relationship existing between financial assets and the real wealth, the so-called “financial interrelations ratio, FIR”;

b) the distinction between bank oriented and market oriented systems, that is generally approximated by “the financial intermediation ratio”, that compares the banks’ liabilities of financial companies (banks, the central bank, other financial intermediaries, and insurance companies and pension funds) to the liabilities of non-financial sectors of the economic system;

c) the comparison between public debt (“dead weight debt”) and liabilities of the most productive sector;

d) companies liabilities considered in their components: shares, bonds and banking loans.

The paper has 6 paragraphs in addition to the present brief introduction. The 2nd

paragraph presents the state of the art (i.e. economic literature review). Paragraph 3 summarizes FIR long term evolution. The 4th one considers the intermediation ratio. The 5th regards the relationship between public and private debt. Both the level of companies liabilities and composition of the same are studied in the 6 th

paragraph. Finally, the 7th sketches the work’s results.

2. A brief review of literature

The scientific interest for the descriptive approach à la Goldsmith was born during the 60s. In that phase the main question regarded which factors had pushed economic development after the 2nd WW, trying to explain the various results for different countries. The functioning of the financial system was considered one of the most important of these factors, principally in Italy where it was definitely less developed in relation to other developed countries. In this research field, the scientific contribution of the historians of financial institutions was very important, most of all the works by Alexander Gerschenkron and Rondo Cameron (e.g. Ciocca 1975, Della Torre 1990). In the same period, the preparing of financial accounts by Raymond W. Goldsmith was aimed at finding those lines of financial development which could be defined as common to the historical experiences of different developed countries. This, in order to support Rostow’s hypothesis of the existence of financial stages (Garofalo and Gnesutta 2010). The interest for the links existing between financial development and economic growth was particularly present in the studies by the Bank of Italy. Besides the

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works edited by Monti and Padoa-Schioppa 1976, Carli 1977 and Vicarelli 1979, at the beginning of the 70s, with the preparing of financial accounts (Ercolani and Cotula 1969, Cotula and Caron 1971), some financial indicators on both stock and flow dimension were made in order to explain their evolution in Italy during the 1963 – 1970 period. Among the results of this kind of studies there was the view of the Italian financial system as a “bank oriented system”, with a low vocation for investments in shares and bonds. In those years, savers showed a marked preference for liquidity (banking deposits), above all following the sharp fall in share quotations during the two-year period 1862-63.The works by Goldsmith and Zecchini 1975 and Biscaini and Ciocca 1979 were essentially based on a long period of empirical analysis (i.e. about a century) between financial development and real growth. These two works have given some indications about financial evolution in comparison with national real product and also about the composition of financial aggregates for some benchmark dates 1861, 1881, 1895, ..., 1973, between Italian Unification and the ‘70s.More recently, the Bank of Italy has given rise to a research project on financial accounts, whose results were published in two volumes: the first one concerned the definition of the account system (Bank of Italy 2003); the second one applied analyses (Bank of Italy 2008). We particularly highlight Bonci and Coletta’s 2008 work where the authors prepare financial accounts for 1950-2004.

3. The Financial Interrelations Ratio and its correlation with real per capita GDP

The Financial Interrelation Ratio (FIR), introduced by Goldsmith, is a much used indicator in this kind of analysis. The ratio is obtained by dividing the total of financial assets in existence at one date (the «financial superstructure») by the national wealth («the real infrastructure»). The «financial superstructure» includes debt and equity securities, at market prices, issued by domestic non financial sectors (the private sector and the public sector, plus «indirect» securities issued by domestic financial intermediaries and net foreign assets. At the denominator, we have national wealth, equal to the stock of domestic tangible assets, reproducible (houses, buildings, machinery, public works, and so on) or not reproducible (land, natural resources, etc.), plus net foreign assets.The idea is that the growth of the quantitative financial dimension is positively correlated to economic growth (real per capita GDP) – till full financial development is reached – and is represented by a FIR value between 1 and 1,5 (Goldsmith 1969, Levine 1997, Garofalo and Gnesutta 2011).1975 Goldsmith and Zecchini’s data, drawn on by Biscaini and Ciocca 1979 and updated by Goldsmith 1985, saw growth of financial dimensions of Italian economy from the low level in 1861 (with a FIR about 0,20) – typical of a primordial financial system – to 0,47 in 1913 and to 0,70 in 1939, the dramatic fall post 2nd WW, the strong growth in the period between the ‘60s and 70s, till the 1,16

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in 1973, close to the plafond levels related to the full financial development (see fig. 1, series by Goldsmith and Zecchini 1975, for some benchmark dates).For the following years till to the 1st oil crisis, the series elaborated by Bonci and Coletta 2008 – on the recent Bank of Italy research project on Financial Accounts – shows a marked reduction of financial dimension during the ‘80s, then strong growth till the record high of 2000 (see fig. 1, series Bonci and Coletta 2008, years 1951-2004). In this way, the present FIR level is aligned to that of developed countries (see Bartiloro et al. 2008).However, the link between FIR and per capita GDP dynamics has been considered for the period 1861-1914 as “vague and irregular”, the hypothesis of a positive correlation between the two phenomena not having been confirmed, as – during the twenty-year period that followed the Italian Unification – the dimension of the banking system grew rapidly, with the result that the 1881 FIR was higher by 1/3. Vice versa, the parameter grew very slowly between 1881 and 1914, with the «big spurt ahead» (Goldsmith and Zecchini 1975). For a research project about the Italian banking system, I have proposed to broaden statistical information mentioned in the abovementioned Goldsmith and Zecchini’s works, going beyond the limits of benchmark dates (see fig. 1, series Della Torre 2000, years 1861-1914, 1921-1939). On this occasion, I have reconstructed the historical series of the main Goldsmith indicators, for the years between 1861 and 1981, and I have also made a rough estimate on correlation between financial development and per capita GDP. The results has strengthened both Goldsmith and Zecchini and Biscaini and Ciocca’s critical evaluations about the lack of a significant correlation between the two indicators. The years till the end of the 19th century saw the rapid growth of financial activities (the FIR grows from 0,21 in 1861 to about 0,70-0,80), while real per capita GDP (of the “old” series ISTAT-Vitali) (ISTAT 1957, Ercolani 1969, Vitali 1969) remained on 1861 values, about 400-450 lira. Therefore, financial intensification didn’t result in a concomitant growth of real product: the correlation is negative (-0,22). Vice versa, the years 1898-1914 show FIR values levelled on the value of ‘90s (from 0,68 in 1890-91 to 0,72-0,74 in 1913-14), but FIR stability matched the “big spurt”: per capita GDP grew from 400-450 to 600 lira (while correlation is positive and significant) (Della Torre 2000, App. 2).More recently, in two works with M. Coccìa, V. De Leonardis and M.C. Schisani (Della Torre et al. 2006, 2008), I have added a review of financial superstructure for the years till 1st WW. Particularly, I have taken into account the fact that during most of the 19th century the “domestic” financial superstructure was overestimated since an important part of public debt was owned by non residents and “rendita italiana” quotation was constantly below par during the 19 th century (see fig. 1, series Della Torre et al. 2008, years 1861-1914).The most interesting results have been the following:

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a) the initial FIR level was lower than the available estimates about interaction between public debt owned by non-residents and securities’ evaluation at market prices: the difference between the two FIR series decreased at the beginnings of the 20th century before the «great conversion of rendita» of 1906;

b) “financial deepening” process (measured by the “reviewed” FIR) is less irregular than the FIR estimated at present (measured by the “traditional” FIR);

c) FIR review doesn’t alter the correlation with the old GDP series by ISTAT-Vitali and continues to highlight the existence of two periods, while new GDP estimates by Fenoaltea 2005 and Malanima 2006 determine the disappearance of the “vague nature” of the correlation between finance and real growth (highlighted by Goldsmith and Zecchini 1975, Biscaini and Ciocca 1979, and Della Torre 2000).

During the period that followed Italian Unification, it is interesting to note that FIR starting low values were peculiar to a financial system based on “banking houses” and “merchant bankers”, who directly placed public securities among final savers and discounted bills of their clients. As statistical data of banking series commonly available (elaborated by De Mattia 1967) refer both to banks of issue and deposit banks, it follows that the reckoning lacks the value of intermediation of banking houses and merchant bankers. Therefore companies’ liabilities were restrained, for the low level of shares in circulation and the loans granted by deposit banks but also because of the failed gathering of discount amounts granted by banking houses.In other terms, FIR important growth during the 19th century is also the result of the process of substitution from archaic (banking houses) to more evolved (deposit banks) forms of intermediation (Della Torre 2000, Della Torre et al. 2006, 2008). After the 1st WW there are two different stages: the years till 1939 and the post 2nd

WW period. During the first period the FIR increased sharply, on the contrary national product grew very little: the sign of equation is positive, but the correlation ratio is substantially worthless. Only in the stage of growth during the post 2nd

world war period is the sign “right” and the correlation ratio high (0,79) (see fig. 1, series Della Torre 2000, years 1921-1939; Bonci and Coletta 2008, years 1951-2004).

4. The financial intermediation ratio

The financial intermediation ratio measures the role played by intermediaries when they take up on their own the risks of liabilities of final debtors: risks of counterpart, risks of liquidity, risks of rates, and so on. The parameter is defined by the ratio between the liabilities of financial companies (banks, the central bank, other financial intermediaries, and insurance companies

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and pension funds) and total liabilities of non-financial sectors. Obviously, in institutional situations in which intermediaries are not present or do not assume credit positions on their own toward final debtors – they mainly carry out operations as broker or dealer – the ratio assumes a worthless or minimum value. On the contrary, when the total of primary securities issued by final debtors is placed into intermediaries’ portfolio, the ratio assumes values close to 1, which is the theoretic maximum.This parameter has showed a continuous and sharp growth between 1861 (about 0,12) and the 2nd WW (about 0,60); after the fall of the post 2nd world war period (due to the growth of stocks of shares at market value), the indicator develops very rapidly, reaching 0,84 in 1973 (fig. 2). The very low initial value of intermediation ratio was the result of interactions of: 1) the low level of private sector liabilities, essentially composed of shares and bonds, with very low levels of both deposit bank and issue bank loans (see fig. 3-4); 2) the lack of information pertaining to discounts of enterprises’ bill portfolios, on the part of banking houses and merchant bankers; 3) public debt, really very high (see fig. 3), was placed abroad and partly held there and only a very small part was both in deposit and issue banks’ portfolios; and 4) credit intermediaries, including issue banks, were few compared to the archaic forms of intermediation represented by banking houses and merchant bankers (Della Torre et al. 2006, 2008; Della Torre and Schisani 2011).With fiat money (1866-1881), the ratio doubles in just a few years, due to the expansion of issue banks activities, and then it returned to initial levels with the restoration of convertibility. After this experience, the growth of the intermediation ratio in post unification decades is driven by banking sector development and, until the ‘30s, by banks and special credit banks. In the mid ‘30s total intermediation signifies more than 60% of private and public sectors’ liabilities; on this occasion banks denoted 30-40%, special credit banks 10-15% and Bank of Italy 10%.The post 2nd world war period, after the mid-‘60s, is conditioned by the “via finanziaria allo sviluppo” [“financial way to development”], that – for monetary policy reasons (interest rates pegging during the ‘70s and then the securities investment requirement and the ceiling on lending) – drives parameter values to a theoretic maximum, with an absolute importance of the banking sector: 0,68 face of a parameter total value of 0,84, referred to all financial intermediaries. After 1990, as a consequence both of investment funds development and the reduction of Treasury funding by the Bank of Italy, both the credit system intermediation ratio and the banking system intermediation ratio fall.The Italian financial system, characterized by a progressive “orientation to intermediaries” until the 2nd WW and after the war by intermediation ratio highs close to 100%, showed – after the 1980s– a change in structure, with low levels of intermediation and so a more marked “orientation to markets” (De Bonis 2008, Bartiloro et al. 2008). Obviously, it does not mean that it is really a process of banking disintermediation: “the reduction can be only apparent because banks control a great part of non banking intermediaries” (Ciocca 2005).

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5. Public debt and private sector liabilities

I note that, for reasons of homogeneity with FIR definition, public debt and private sector liabilities are put in relation to the national wealth at market value (fig. 3). Public debt series here used has been recently developed by Francese and Pace 2008 and it represents the first attempt at constructing – since 1861 – the stock of public debt, including local government (e.g. regions, provinces, municipalities and so on). For the whole 19th century, public debt “climbing” is clearly evident. Between the two world wars, public debt sharply grows, above all after 1935 with the beginning of “capital circuit”, the initiatives in Italian Africa and the involvement in the Spanish civil war. It is most interesting to note that private sector liabilities (including stock capital of companies) are very low till the end of the 19th century (about 10% of national wealth), and begin to increase at the beginning of the 20th century and after the end of the 1st WW (fig. 3, series by Della Torre 2000, years 1861-1939). In the immediate post 2nd world war period a sharp reduction of public debt occurred, but also private debt decreased. Differently from the 19th century, during the post 2nd world war period enterprises’ liabilities were considerable with respect to public debt.1 It can be noted that families’ liabilities (for which some information are available only after the 2nd post war) do not assume a crucial role (fig. 3, series by Bonci e Coletta 2008, years1951-2004).

6. Private sector and enterprises’ liabilities: shares, bonds and bank loans

Up to the 1st WW, the financial liabilities of the private sector are rather low (about 10% of national wealth) and shares and bonds assets are considerable in relation to the loans granted by issue banks, banks and special credit institutions (see fig. 4). However, affirming that this stage is a stage of “security capitalism” could be hasty, because bonds seem to be overvalued during the first decades after Unification. Bonds data used, developed by Goldsmith and Zecchini 1975, Goldsmith 1985 and De Mattia 1990, are determined on the basis of epic hypothesis. Without forgetting the fact that data are essentially railway bonds, for which public action was always very intense, even if sometimes hidden (Della Torre and Schisani 2011). Between the two wars, the expansion of the private sector’s liabilities is supported by banks and special credit institutions’ loans, but also by the expansion of securities. For the post 2nd world war period, cyclical stock market phases are evident (the sharp increase of the ‘50s and the fall after the crisis at the beginning of the ‘60s, and then a new increase from the end of the ‘70s) and the presence of two different moments for bank and special credit institutions’ loans (the sharp

1 Due to inadequate statistical information, the series used till 2nd WW refers to the private sector, while that used for the post second world war period is articulated in households and enterprises.

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crisis till the beginnings of the ‘70s and the strong reduction in the successive phase).All told, in the face of the 19th century being essentially centred on few debts, after the 1st WW, enterprises’ funding is broader and spread over securities and bank loans. The composition of securities-loans seems not to be linked to the accumulation phases of productive capital of enterprises (more or less innovative and broad in dimensions). It is a point still to be studied in depth.

7. Some results

During the century and half from political Unification, four principal trends emerge in the Italian financial system:

a) the thickening of financial structure with respect to real national wealth is evident since Italian Unification. Italy begins its history with very contained FIR values, typical of an archaic financial system. A phase of progressive growth during the 19th century, till to the “great conversion” of 1906, - in which, forms of substitution of archaic structures with modern structures of intermediaries played a role - was followed by the stability of the ‘20s and ‘30s and an increase in the phase of “capital circuit”. During the post 2nd

world war period, after the resetting of real values of financial wealth produced by inflation, FIR continuously increased, from the economic miracle to the first oil crisis. The “financial deepening” continues even during the most recent phase. At the moment, FIR data are in line with values of developed countries.

b) The intermediation ratio data sees progressive growth from Unification, with a further increase due to the measures adopted by the monetary authorities between the ‘70s and ‘80s. From values of about 10% both of private and public sectors’ liabilities in 1861 it reaches more than 80% of 1984’s, to 60% of 2004’s. The system seems to evolve from a “market oriented” structure – in the early phase with values of about 10-20% - to a “bank oriented” one, with values between 60 and 80% for the period between the ‘30s and ‘80s, till the most recent reduction of intermediation, with values of about 60%. For the existence of archaic forms of intermediation (bank houses and merchant bankers) – at the time of Unification – it is possible that the development of the intermediation ratio is also to be partly ascribed – during the 19 th century – to some processes of substitution between these forms and more evolved ones (deposit banks). Putting the stress on the banking system, two results emerge. First of all, independently of the fiat money period (1866-81), when issue banks became relevant, it is possible to ascribe the thickening of intermediation to banks, till the 2nd WW, and to special credit institutions between the ‘20s and ‘30s. Secondly, after the 1962-63 crisis, orientation to intermediaries was supported by banks, as was its reduction. If this is true, it is possible

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that it was an effect of the phase of “administrative measures” of monetary policy, i.e. of their introduction and of their progressive withdrawal.

c) Highlighting that, for the years 1861-1939 and 1951-2004, the series used for evaluating national wealth are methodologically different, public debt and enterprises’ passive (including stock capital) have different stories. Public debt “climbing” during the 19th century do not find support, either in terms of level or in terms of intensity, in the remaining part of the 150 year period (obviously excluding the experiences between the two WW). After the reduction of the beginnings of the post 2nd world war period, public debt was permanently lower than enterprises’ passive. Enterprises’ passive, after the low values of the 19th century, had – with some cyclical waves – values between 10 an 30% of national wealth.

d) Enterprises’ passive shows an internal composition closely related to the stock exchange’s cycle. Furthermore, in some moments, there were processes of substitution between shares and loans (e.g., between the 1962-1963 crisis and the beginnings of ’70s), while in others there were processes of complementarity (e.g., years at the beginning of 20th century and between the two WW). The first decades after unification, when the level relative to shares and bonds was higher, do not denote a moment of “security capitalism”; instead, they are the result of the limited importance both of deposit banks and issue banks’ loans, in a world still characterized by the presence of banking houses and merchant bankers (with intermediation activities not registered).

In the end, with the present state of the literature, I believe further study is required to prove that a correlation exists between the composition of securities and loans of enterprises’ passive and the forms of real capital accumulation.

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Fig. 1. Il financial interrelations ratio: 1861-2004

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Fig: 2. Il rapporto di intermediazione creditizia, 1861-2004

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debito pubblico Francese_Pace 2008 Della Torre 2000_settore privato_totale

Bonci_Colletta_2008_imprese_totale Bonci_Colletta_settore privato

13

Fig. 4. Passivo delle imprese: azioni e obbligazioni, prestiti sulla ricchezza reale nazionale, 1861-2004

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

0,40

1858

1862

1866

1870

1874

1878

1882

1886

1890

1894

1898

1902

1906

1910

1914

1918

1922

1926

1930

1934

1938

1942

1946

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

Azioni e obbligazioni_Della Torre 2000 impieghi ICS_Della Torre 2000 impieghi IE_Della Torre 2000

impieghi bancari_Della Torre 2000 Della Torre 2000_settore privato_totale obbligazioni_Bonci e Colletta 2008

azioni_Bonci e Colletta 2008 prestiti_Bonci e Colletta 2008 Bonci_Colletta_settore privato

14