The recent events of the supermanager Alessandro Profumo, discouraged and forced to resign by the Board of Directors of the Unicredit Group, once again bring the banks and their relationship with the economy, politics and savers into the limelight.
What is the relationship between banks and politics? Whose banks are they? What do foreigners have to do with Italian banks? But above all: what are the banks for? And you really can't do without it?
ITALIAN BANKS IN FIGURES
According to the Bank of Italy, 815 different banks are operating in our country with over 33, 700 branches. In June 2008 bank deposits (ie the sum of all current accounts and bonds issued by the same credit institutions) amounted to 1.890 billion euros, more than the GDP of the entire nation. A real mountain of money that banks use as the raw material of their production process, just like a pastry chef who transforms flour and eggs into cakes to sell to the market to make a profit.
In the same way, the banks, which in effect are private, profit-making companies just like the confectionery, "work" the money provided by customers with the ultimate aim of having a profit to distribute to their respective owners.
But what is a bank doing with the money deposited in its coffers? In general it reimposes them in another form in the economic system: for example by investing them in stock markets on behalf of its customers, moving them to make payments or lending them to those who request them. And on each of these operations the bank charges a commission. The interest rate on a loan, the percentage that holds back on stock transactions, the amount charged to us when we make a withdrawal at the ATM, the costs of a transfer are just a few examples.
WHAT IS THE ROLE OF BANKS IN THE ECONOMIC SYSTEM?
Banks are an essential component of the economic system. Their main functions are two: credit and monetary.
In the first case they play the role of intermediaries between those who have money and those who do not. In more technical terms, between those who have a surplus of money to invest and those who need it (credit function).
In the second case, instead, they manage all payments that are not settled directly between the parties in coins and banknotes (monetary function). To do this, banks issue "bank money" which can be paper type (checks), or electronic (online transfers, credit cards, debit cards, etc.).
Banks on the one hand favor the formation of savings, directing them towards productive activities (if investing gives me a profit I am inclined to save), on the other they create money through a mechanism known as "deposit multiplier" (see box).
If there were no banks: investing would be more difficult and risky and everyone would be driven to hide the money under the mattress, thus blocking economic growth. Not only: payments could only be settled in cash. Exchanges of money between physically distant subjects would be difficult if not impossible and the trades would have only a local dimension.
Yet there is someone who claims that the time has come to rebel against the banks, and Focus has interviewed him.
WHAT RELATIONSHIP IS BETWEEN MY BANK AND THE EUROPEAN CENTRAL BANK?
The banks have the function of transmitting to the businesses and families the monetary policy decisions taken by the Central Banks. When, for example, the European Central Bank decides to favor investments, it lowers the discount rate, ie the interest rate at which it lends money to other banks. This decision immediately turns into a reduction in the rate at which banks apply to a borrower. And so families who want a mortgage to buy a house or companies that need financing to buy new machinery are encouraged to go into debt and invest.
If there were no banks: there would not be a Central Bank or even a monetary policy to guarantee price stability that would begin to rise uncontrollably. Money would lose value and soon we would return to barter. The strongest and richest local authorities could decide to beat their own currency, creating the conditions for political instability.
WHO ARE THE BANKS?
Today in Italy the banks are in effect private companies which, by law, must have the legal form of a joint-stock company or a limited partnership. The shares may be held by one or more shareholders, Italian or foreign, and may be listed or not on the stock exchange. But it hasn't always been this way. On the next page, the history of Italian banks.
WHEN AND WHAT HAS THE STATE DECIDED TO REFORM THE BANKING SYSTEM?
Such a state-based system effectively eliminated competition between banks. Between the end of the 1980s and the beginning of the 1990s, Italian companies are again in crisis because they cannot access credit on the same favorable terms that foreign companies find in their respective countries.
The Government thus decides to initiate a complex reform of the banking system which between 1990 and 1998 completely revolutionizes the finance of our country.
First of all, it is established that banks are real companies and that as such they must produce a profit (ie they cannot borrow to infinity to save companies in crisis, as they had done in the past).
At the same time the State decides to exit the banking sector by selling IRI shares (which in addition to the banks also owned large state-owned companies including ENEL, ENI, Telecom): the banks thus become joint-stock companies whose shares are owned by private.
This liberalization of the credit market means that the shares of Italian banks can also be purchased by foreigners and allows foreign banks to come to Italy to open their branches.
WHAT DID THE PRIVATIZATION OF BANKS?
The most obvious consequence of this liberalization process is undoubtedly the concentration of the banking system : credit institutions buy each other, merge, some go public and are bought and then resold.
Today in Italy there are 815 banks that report to 23 groups (source: ABI).
The top five (UniCredit, Intesa San Paolo, Mediobanca, Banca MPS, Ubi Banca) hold over 50% of the market.
WHAT ROLE DO THE FOREIGNERS HAVE IN THE ITALIAN BANKS?
In 2005 the share of foreign participation in the top 4 Italian banks was 16%, the highest in Europe. According to some authoritative opinions, including that of Antonio Fazio, Governor of the Bank of Italy between 1993 and 2005, the entry of foreign capital, even with significant shareholdings, into the Italian banking system would be desirable, as it would favor the increase in competition and bring a new culture to the bank, improving its efficiency.
According to others, foreign participation in the Italian financial system must be limited because there is a risk that it favors foreign companies to the detriment of national ones.
And you? How would you find yourself in the economist's shoes? Find out here.
WHAT ARE BANK FOUNDATIONS?
In our country, until the start of the banking reform of the 1990s, there were some rather peculiar banks with a strong vocation for solidarity and philanthropy born in the 1800s: they were the savings banks and the banks of the mountain . These institutions, in addition to carrying out the banking and lending activities typical of the banks, were very active in various humanitarian and training fields and allocated a substantial part of their profits to beneficial activities and social utility.
The law 218 of 1990 which established the obligation for banks to become a spa, imposed on these particular bodies the separation of the philanthropic activity from the credit activity. This is how the banking foundations were born, non-profit organizations with their own statutes and their own governing bodies, to which 100% of the shares of the new savings banks and of the new banks of the spa were allotted. The law obliged the foundations to keep the majority bank packages of origin until 1994.
In 1998 the foundations were forced to renounce the control of the banks that sell the majority of the shares in their possession on the market. The only foundations exempted from this obligation are those that have a net book value of less than 200 million euros or based in special statute regions.
If the idea of a generous bank seems strange to you, look at this interview with Jacques Attali, one of the most respected world economists, who talks about the need to be altruistic.
HOW DO THE FOUNDATIONS USE THE DIVIDENDS WHICH, AS SHAREHOLDERS, OBTAIN FROM THE BANKS?
Today the foundations of banking origin no longer have any task of governance in the banks of which they are shareholders (little more than a third of their total assets are allocated to banking activities). They are in fact investors like the others and from the investment of their assets they get the profits necessary to carry out the philanthropic activity.
According to the data of the ACRI (Foundation of Foundations and Cassa di Risparmio Spa) the Foundations bestow around one and a half billion euros a year to different sectors including art, cultural activities and assets, research, education, education and training, volunteering, philanthropy and charity, local development, social assistance, public health, environmental protection and quality, sport and recreation.
However, the fact remains that the Foundations can exert pressure and influence on the banks of which they are shareholders, as evidenced by the recent affair Profumo - Unicredit.
By law, 90% of the economic resources of the foundations must be invested in initiatives of a local nature, ie within the region to which they belong. This is why politics and local authorities are so interested in having a good relationship with banking foundations.
HOW MANY ARE THE FOUNDATIONS IN ITALY? WHAT SIZE DO THEY HAVE?
The Foundations of banking origin in Italy are a total of 88, different in size and way of working. They are all very large: the 18 most important have 76.9% of the total assets of the Italian foundations and the first 6 (Cariplo Foundation, Monte dei Paschi di Siena Foundation, Compagnia di San Paolo, Cassa di Risparmio di Verona Vicenza Belluno Foundation and Ancona, Cassa di Risparmio di Torino Foundation) holds around 49%.
WHO COMMANDS IN A FOUNDATION?
It depends on the statute. They are usually the president, the board (an advisory and strategic body with powers of direction and control over the foundation), the board of directors, which has executive tasks, the board of auditors and the general secretary. These organs generally last around four years.
WHAT IS POLITICS WITH FOUNDATIONS?
For example, through the appointment of councilors, politics can have a strong influence. Usually the members of the council are elected by the local authorities, the Municipalities, the Provinces, the Regions, as well as by the Chambers of Commerce, by representatives of the academic world and the voluntary sector.
Recently the General Council of the Cariverona Foundation was renewed, the first Italian shareholder of Unicredit, which saw the entry of a large group of men close to the Northern League who played a fundamental role in the Profumo affair.
WHO CHOOSES ON THE OPERATION OF BANKS?
The reform of the banking system has instructed the Bank of Italy to monitor the work of the banks and all financial institutions. The law requires the Bank of Italy to monitor the way banks are managed, with particular attention to the overall stability, efficiency and competitiveness of the financial system.
The Bank of Italy must also monitor the transparency of the contractual conditions of banking and financial transactions to facilitate the improvement of relations between banks and customers.