Abstract
The analysis of the funding strategies adopted by the Italian banks over the last ten years confirms the trends observed for the banks operating in the major European countries. Indeed, since late 2012 deposits have been steadily growing, the weight of bonds, compared to the liabilities, has sharply declined. We find that, after a peak of 11% reached in 2011, at the end of 2016 the share of households’ wealth invested in banks’ bonds was around 3.3% only. Furthermore, until 2007 banks were used to place the majority of their bonds to households. After a steady decline throughout the years, at the end of 2016 only 25% of bank bonds appeared to be in retail investors’ portfolios. Overall, this underscores the key role played by the banks in guiding households’ investments decisions.
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Notes
- 1.
At the end of 2016, only 387 companies were listed in the Italian stock exchange, of which 77 in the Alternative Investment Market (AIM), a special trading venue dedicated to SMEs. The total market capitalization was 525,050 millions of Euro, that is 31.8% of the GPD. About 80% of this capitalization refers to the 40 largest companies, all of them belonging to the FTSE MIB Index (which is the main index of the Italian stock exchange).
- 2.
Piani Individuali di Risparmio (individual savings accounts) were introduced at the beginning of 2017 as a new instrument to improve the financing of SMEs. Households investing in PIR (that are usually represented by specialized mutual funds) are granted a total tax exemption if they maintain their investments for 5 years. The main feature of a PIR is that it must necessarily invest a minimum percentage (21%) in instruments (bonds and equity ) issued by companies that are not included in the FTSE MIB Index.
- 3.
For an international comparison, see https://data.oecd.org/hha/household-savings.htm#indicator-chart.
- 4.
Net financial wealth is the difference between gross financial wealth (4,168,002 millions of Euro) and financial liabilities (928,230 millions of Euro).
- 5.
For example, two of the largest ‘Banche Popolari’, namely Banco Popolare and BPM, merged in 2016.
- 6.
The reshaping of the distribution channels is creating a dramatic drop of jobs in the banking industry.
- 7.
The difference between gross and net amounts in bad loans was registered as losses in banks’ income statements.
- 8.
Data were collected from ABI Monthly Outlook. ABI is the Association of Italian banks. In 2015, the amount of total (gross) NPLs was over 360 billion of Euro, or 18% of total assets; in other words, almost one loan out of five was in trouble.
- 9.
In their paper, Jobst and Weber (2016) try to evaluate how the profitability of Italian banks could recover if economic headwinds and structural hurdles were removed. Even if their analysis is limited to the 15 largest banks, they find that the system is overall profitable, but there exist significant heterogeneities across banks.
- 10.
Operating costs, on the other hand, contribute positively—probably due to the reorganization process of the distribution channels.
- 11.
Italian banks raised 60 billions of Euro in equity instruments since 2007. On the other hand, the fall of RWAs is the effect of three main elements: (i) the adoption of internal rating-based models, for measuring credit risk, by the major players; (ii) the reshaping of portfolios in favour of less risky assets; and (iii) the reduction of defaulted exposures through devaluation.
- 12.
The recapitalization occurred at UniCredit basically followed a strong devaluation of impaired loans .
- 13.
The database is available at the following link: http://www.bancaditalia.it/statistiche/basi-dati/bds/index.html.
- 14.
In this case, we use as denominator total liabilities, which equals total assets minus capital and reserves. “Others” refers to the remaining forms of funding (i.e. everything apart from bonds and deposits from residents).
- 15.
Actually, a maximum level of 0.26 was reached some months before July 2012.
- 16.
MiFID I stands for ‘Markets in Financial Instruments Directive 2004’, a European Union law that provides harmonized regulation for investment services across member states of the European Economic Area.
- 17.
Actually, also before MiFID I Italian legislation required banks to comply with adequacy rules, and to act in the best interest of clients. So, we are not saying here that the behaviour of banks was fraudulent (even if sometimes it was indeed), but surely (using a famous expression by Richard Thaler) credit institutions were able to “gently nudge” investors to subscribe financial instruments which were in the best interest of banks too.
- 18.
Italian savers yet seem to not have correctly understood the strong relationship between risk and return.
- 19.
A great number of bonds issued by small and medium banks are not listed in a regulated market, or traded by a specialized market maker. In this case, the issuing bank itself usually acts as a dealer, although without granting continuous quotations or acceptable bid-ask spreads.
- 20.
See, in this regard, Coletta and Santioni (2016).
- 21.
This category includes plain vanilla fixed coupon bonds , zero coupon and stepped bonds .
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Crespi, F., Mascia, D.V. (2018). The Funding Strategies of Italian Banks: The Importance of Bonds. In: Bank Funding Strategies. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-69413-9_2
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