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The Italian financial cycle: 1861–2011

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Abstract

In this paper, we investigate the main features of the Italian financial cycle, extracted by means of a structural trend-cycle decomposition of the credit-to-GDP ratio, using annual observations from 1861 to 2011. In order to draw conclusions based on solid historical data, we provide a thorough reconstruction of the key balance sheet time series of Italian banks, considering all the main assets and liabilities over the last 150 years. We come to three main conclusions. First, while there was close correlation between loans and deposits (relative to GDP) until the mid-1970s, over the last 30 years, this link became more tenuous and the volume of loans has increased in relation to deposits. The banks covered this “funding gap” mainly by issuing new debt securities. Second, the Italian financial cycle has a much longer duration than traditional business cycles. Third, taking into account the deviation of the credit-to-GDP ratio from its trend, an acceleration of credit preceded or accompanied a banking crisis in 8 out of the 12 episodes listed by Reinhart and Rogoff (This time is different: eight centuries of financial folly. Princeton University Press, Princeton, 2009). A Logit regression confirms a positive association between the probability of a banking crisis and a previous acceleration of the credit-to-GDP gap. However, there were also periods—such as the early 1970s—in which the growth of the credit-to-GDP ratio was not followed by a banking crisis.

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Notes

  1. For opposite views on the effectiveness of early warning indicators of financial crises, see Borio and Drehmann (2009) and Rose and Spiegel (2009).

  2. Very recently, Herrera et al. (2013) show that an increase in the popularity of governments (defined as a “political boom”) is a good predictor of financial crises in emerging countries.

  3. http://www.bancaditalia.it/pubblicazioni/pubsto/quastoeco/quadsto_26.

  4. For the purposes of compiling the series, the following definitions of loans and deposits have been adopted: loans mainly comprise credit granted to households and non-financial corporations; interbank loans are excluded. Loans are estimated net of bad debts because of the difficulties in finding data in the past. As for liabilities, deposits consist mostly of funds collected from households and non-financial corporations, while interbank deposits are excluded.

  5. The expression “special credit institutions” was introduced after the approval of the Banking Law in 1936; before 1936, this category included intermediaries granting credit to the agricultural sector, to the real estate sector, to the industrial sector. They mainly provided long-term credit, issuing bonds and deposits with agreed maturity, without collecting current accounts.

  6. In 1861, there were four banks of issue in Italy: Banca Nazionale nel Regno d’Italia, Banca Nazionale Toscana, Banco di Napoli and Banco di Sicilia. In 1864, Banca Toscana di Credito per le Industrie e il Commercio d’Italia was added to the list. Following the annexation of Rome, in 1870, the banks of issue were joined by Banca Romana. During the crisis of 1893, they were reduced to three: Banco di Napoli, Banco di Sicilia, and the newly created Bank of Italy. In 1926, the Bank of Italy became the only bank of issue, assuming the characteristics of a modern central bank.

  7. Also according to Luigi Einaudi and his colleagues at the Turin school of economics, the Italian economy experienced an upward phase in the 1898–1908 “Giolittian growth period”, characterised by technological innovations, improvements in productivity, and the formation of German-style “universal banks” (Sella and Marchionatti 2012).

  8. While universal banking has been often associated by economic historians with sharper growth and higher economic development, other studies have called into question Gerschenkron’s hypothesis: recently, Piluso (2010), with reference to the 1950s–1960s, claims that the “Italian economic miracle” was not dependent on the prevailing banking system at that time. Thus, according to Piluso, banking patterns and credit regulation do not always contribute to the country’s macro performance (see also Conti 2010).

  9. The credit crunch was a part of tighter monetary policies, which in Italy date back to the 1926 “quota 90” by Mussolini. On this, Italy was not unique, of course. There is now new evidence stressing the role played by tighter financial and monetary policy for the onset and development of the 1929 crisis. For the United States, see for example Greasley and Madsen (2013).

  10. Sbrana (2011) derives the analytical relationships between structural and reduced form parameters of the local linear trend model with correlated shocks.

  11. Sbrana (2013) provides the implied values of θ 1 and θ 2 when λ = 100 (annual data: θ 1 =  −1.558; θ 2 = 0.638) and λ = 14,400 (monthly data θ 1 =  −1.871; θ 2 = 0.879).

  12. See, among others, Sbrana and Silvestrini (2012), who study the consequences of temporal aggregation on the cyclical component model as in (3).

  13. The countries considered in the sample are the United States, the United Kingdom, Germany, France, Japan, Italy, Canada, Belgium, the Netherlands, Denmark, Finland, Norway, and Sweden.

  14. Working with industrial production data over the 1866–1913 period, these authors identify for 13 advanced North Atlantic economies (Australia, Austria, Canada, France, Germany, Hungary, the Netherlands, Italy, Russia, Spain, Sweden, UK, and USA) a fairly regular cycle with a periodicity of 7–10 years.

  15. The seven countries studied over the period 1960–2011 by Drehmann et al. (2012) are as follows: Australia, Germany, Japan, Norway, Sweden, the United States, and the United Kingdom.

  16. STAMP estimates interventions variables, i.e. dummy variables defined to take the value zero up to the point in time in which an exogenous event occurs, and the value one thereafter. They are often associated with episodes such as changes in the government policy, external shocks, or wars.

  17. A similar graph with further diagnostic checking for the “LLT(S)+Stoch. Cycle” model is available from the authors upon request.

  18. Please note that also Ciccarelli and Fenoaltea (2007) propose both the Baxter and King (1999) filter and structural time series models to identify the Italian business cycle over the period 1861–1913. They apply these two techniques to the new estimates of Italy’s GDP presented by Fenoaltea (2005).

  19. In this article, the emphasis is on the credit-to-GDP ratio, but we acknowledge that other variables have been suggested as early warning indicators of future financial instability. Notable examples include total bank assets and measures of real estate and equity price appreciation, such as the percentage change in real estate prices and the stock market growth. For an analysis on the effectiveness of macroprudential instruments and on their implementation, useful references are Borio and Drehmann (2009), Rose and Spiegel (2009), Lim et al. (2011) and Panetta (2013).

  20. Toniolo (1995), Carriero et al. (2003), De Bonis (2008), and Gigliobianco and Giordano (2012) provide contributions on the most important crises that the Italian banking system has witnessed since 1861 and on connected regulatory changes.

  21. Sraffa (1922) wrote that the failure of the Banca italiana di sconto was the result of the close relationship between mixed banks and firms; firms became increasingly dependent on banks, by taking control of them in order to secure funding. This led to the formation of large groups of industrial companies dependent on one or a few banks, mutual exchanges of common shares and the appointment of directors (the so-called interlocking directorate).

  22. For up-to-date comparisons with the other main European countries, see Felice and Carreras (2012), pp. 448–449.

  23. The three largest private banks—Banca Commerciale Italiana (COMIT), Credito Italiano (CREDIT), and Banco di Roma—experienced a deep crisis and the state intervened by establishing, in 1933, the “Istituto per la Ricostruzione Industriale” (IRI), a public holding company that aimed to provide a stimulus to the economy and to take control of the troubled banks. Consequently, COMIT, CREDIT, and Banco di Roma were nationalised and became the largest state-owned banks.

  24. Battilossi et al. (2013) provide evidence of allocative efficiency only up to the early Seventies, and later on, in the Nineties, when financial liberalisation is thought of as having promoted once again the efficiency of the banking system.

  25. A notable exception is the “Banco Ambrosiano scandal”, erupted in 1982, which was essentially a fraudulent-bankruptcy case. Also, some special credit institutions were affected by capital adequacy and profitability problems that led to state recapitalisations, without resulting in major crises.

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Acknowledgments

We wish to acknowledge the contribution of Fabio Farabullini, Miria Rocchelli, and Alessandra Salvio to a previous version of this manuscript. We express our special thanks to the editor, Claude Diebolt, and to an anonymous reviewer for very useful suggestions that greatly improved the quality of this paper. We are also grateful to Fabio Busetti, Alfredo Gigliobianco, Claire Giordano, Giuseppe Grande, Giuseppe Marinelli, Giacomo Sbrana, Moritz Schularick, Hayley Smith, Massimiliano Stacchini, Marie Vander Donckt, and participants in seminars held at the Bank of Italy and at the Italian Ministry of Economy and Finance for helpful comments and discussion. This article is the responsibility of its authors and the opinions expressed do not necessarily reflect those of the Bank of Italy or of the Eurosystem.

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  1. Bank of Italy, Economics, Research and International Relations, Via Nazionale 91, 00184, Rome, Italy

    Riccardo De Bonis & Andrea Silvestrini

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  1. Riccardo De Bonis
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Correspondence to Andrea Silvestrini.

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De Bonis, R., Silvestrini, A. The Italian financial cycle: 1861–2011. Cliometrica 8, 301–334 (2014). https://doi.org/10.1007/s11698-013-0103-5

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