Italy’s competitiveness is hindered by a number of challenges that drag its productivity. The country ranks 49th in the Global Competitiveness Index 2014-2015 (GCI), below most advanced economies. The disaggregated results point to some of the same challenges that attract much attention from international media and institutions, such as the sclerotic regulation of the labour market (ranked last among 49 high-income countries) or the corrupt and inefficient institutional framework (48th out of 49). However, Italy’s capacity to invest, innovate and prosper is also jeopardized by the country’s underdeveloped financial sector, reflected in its 47th rank in the GCI Financial Development pillar among high-income countries.

The relationship between financial development and the capacity to specialize in capital-intensive, more productive sectors is well established. The Italian economy suffers from the combined effect of two weaknesses that pertain to the financial system: an old-fashioned and poorly managed banking sector; and a small capital market still largely influenced by the government. In 2007 the market capitalization of Italian listed companies amounted to a mere 49% of GDP, well below Germany (61%), France (104%), Spain (122%), the United States (138%) and Switzerland (267%). Several reasons lie behind this outcome.

Italy’s cooperative banks, representing an important share of the domestic banking system, should be modernized. The Investment Compact bill, currently under approval, is a step in the right direction. Things are now changing, as the government tries to spur investment and modernize the economy. On 20 January, it passed the Investment Compact bill ‒ now in Parliament for final approval ‒ which introduces incentives for investment in research and innovation and revolutionizes the governance system of Italian cooperative banks.

Mostly established at the end of the 19th century, banche popolari (cooperative banks) account for almost 20% of the Italian banking sector and follow special regulations whereby each shareholder has right to one vote independent of how many shares she holds (one member-one vote system). Although initially intended as a guarantee for democratic governance and fair representation of the interests of shareholders (traditionally pooled within the local community), these regulations have revealed their weaknesses in the last decades, acting as a limit to management accountability and an obstacle to the process of consolidation in the banking sector.

Practically, the one member-one vote rule made it very difficult for any investor or shareholder to lead a change in the bank’s control, as outvoting incumbent management required, in some cases, the support of as many as 100,000 individual members. This kept most external and institutional investors away from investing in Italian cooperative banks, reduced transparency, accountability and competition within the sector and contributed to increasing the fragility of the domestic financial system. According to the Comprehensive Assessment of the European Banking Sector published by the European Central Bank in October, seven of the nine Italian banks that presented a shortfall in capital as of 31 December 2013 were cooperative banks.

Poor governance structures can impair the stability of financial institutions and the performance of entire banking sectors. Both the Bank of Italy and international institutions had pointed out the weaknesses and threats arising from the regulation of cooperative banks in Italy. Most recently, an IMF Working Paper looked into the governance of Italian banks and recommended that “the largest cooperative banks should be encouraged to convert into joint stock companies.”

The Investment Compact bill goes exactly in this direction, forcing all cooperative banks whose assets exceed 8 billion euros to convert into joint stock companies within the next 18 months. Ten banche popolari (seven included in the ECB watch-list plus three others) will have to comply. If fully implemented, this could be a revolutionary first step. But more should be done to fully unlock the potential of the financial sector in Italy.

The governance of the entire banking sector should be restructured, removing banks from the influence of politics, well-connected individuals and other interest groups. Jassaud’s paper provides good guidelines on recommended next steps in reforming the Italian banking sector. Among the weaknesses highlighted in the paper, a key one relates to the regulation and oversight of banking foundations. Formed in the early 1990s during the process of privatization of the banking sector, these not-for-profit institutions were set up as shareholders of the newly-privatized banks. The goal was to ensure that the dividends of banking activities would be reinvested in the local community in the form of grants for projects of social and cultural interest.

Banking foundations soon became a vehicle for political parties and other interest groups at the local level to exert control over the financial system. Banking foundations still control a large part of the banking sector either through share ownership or special shareholder agreements. As of 2013, 35 banks (accounting for 23% of the Italian banking sector) had one single banking foundation as their main shareholder (with share ownership above 20%). Other banks, including the two largest in the country, were controlled via special agreements granting foundations the possibility of nominating the majority of the board members.

But who controls banking foundations? The statutes of each foundation mandate that specific large electors from the local community appoint the members of the board of directors. On average, 47% of them are appointed by local political authorities. This gives local politicians a de facto control of most banking foundations, given also that another 21% of the members are nominated by the board of the directors itself. Local chambers of commerce appoint another 11% of the members, local universities 9% and the Church the remaining 5%.

Scandal after scandal, Italians have learned how such institutional framework leaves room for corrupt practices, collusive behaviour and, more simply, inefficient allocation of financial resources. Recently, Banca Monte dei Paschi di Siena, founded in 1472 and traditionally linked to the Democratic Party in Tuscany, gained the public’s attention for the 4 billion euro public loan it received to restore its troubled finances after years of poor management and hazardous operations, which also led to the ongoing criminal investigation for fraud.

The Italian government has made a first step in reforming the governance of banking foundations and their role in the Italian financial system. On March 11, the Ministry of Economy issued non-binding guidelines to increase risk diversification in foundations’ total assets and improve the stability of the financial system. If they had to comply, some foundations will need to sell part of their shares in Italy’s top banks, thus losing some their influence of the banks’ board. The guidelines also set caps on pay for foundations’ board members, introduce more stringent professional requirements for their appointment and limit to a maximum of eight years their stay in office.

Italians have traditionally invested their savings in real estate or government bonds, failing to support the creation of thriving capital markets. Italians have traditionally been big savers, and are among the highest per capita in terms of wealth in the world today. However, as in most of continental Europe, the wealth of Italian families is strongly skewed towards housing and other real assets. In 2012, financial assets accounted for only 39% of their total assets. This value is roughly aligned with that of France and Germany, but below Canada and the United Kingdom (both around 50%), Switzerland and Japan (approximately 60%) and especially the United States (about 70%).

Investing in real estate was generally convenient in Italy until 2012, when the government increased property tax rates to align with those of other European countries. Although the benefits and costs of diffuse home ownership are still to be fully explored, it is remarkable that if the Italian share of wealth invested in financial assets had to align on the same level as that of, for example, Switzerland, this would mean an approximate shift of 1.9 trillion euros from real estate into the financial markets (corresponding to 118% of Italian GDP).

But Italians’ passion for real estate alone does not explain the small size of the domestic capital market. As of 2013, Italians had invested about 500 billion euros (or 13% of their financial assets, down from 25% in 1996) in securities directly or indirectly financing the Italian government, such as government bonds and postal certificates issued by the government-owned development bank (Cassa Depositi e Prestiti). Since 2011, these instruments have enjoyed a capital gain tax of 12.5%, less than half that of other financial assets (26%) and even lower than private pension funds (20%).

These fiscal distortions can be seen as part of a recent trend of “financial repression” common to many advanced economies, particularly in Europe, whereby governments have sought cheap money to finance their expenses, often through semi-private development banks such as the Italian Cassa Depositi e Prestiti. In line with their rhetoric on the need to improve access to finance for private businesses, governments should avoid diverting private savings from private borrowers, eventually reducing their own financing needs.

The government’s influence on capital markets is still strong, controlling a large share of Italian private companies and most of the pension and social security system. Directly or indirectly, the government also bears a heavy weight in the already-small domestic capital market. For example, it controls, at either the central or the local level, a number of companies listed on the stock exchange ‒ accounting all together for about 35% of the total capitalization of Milan’s FTSE MIB index, with an additional 25% represented by banks, whose governance we discussed above. It does not come as a surprise that a few well-connected actors have been able to capture for years what was left of the small domesticcapital market, creating a dense web of cross-shareholdings and gentlemen’s agreements that only the current financial crisis has been able to shake.

Italy should also review its social security system, reducing public monopolies (such as that on workers’ accident insurance) and increasing the role of private financial institutions in the pension system. Currently, Italians are required to contribute to a public, pay-as-you-go first-pillar pension system and to a special fund fully contributed by employers (TFR) and similar to a second-pillar scheme. Until 2005, employers were entitled to keep 100% of the TFR and use it for their own financing needs until the employee retired. Besides distorting market competition, this also represented a major obstacle to the creation of vibrant financial markets.

Since 2005, employees have been allowed to choose where to invest their money. Yet, according to some estimates, of the approximate 27 billion euros set aside every year as TFR, only 5 billion go to private pension funds, while 10 billion are kept by the employers and 12 billion go into special pension funds held by the public social security agency. The recent government decisions to increase taxation of private third-pillar pension funds and allow workers to receive until 2018 their TFR together with their salaries (in an attempt to boost consumption) are a step in the wrong direction.

Historic data from the Global Competitiveness Index suggests that the Italian financial market was already performing below the European average before the 2007 financial crisis and the 2011 euro crisis. Most of the problems that existed in 2006 have not yet been addressed. The Investment Compact bill currently under discussion is a good start, but not bold enough. Without deeper structural reform of the financial sector, expansionary monetary policy will not be enough to provide financing to those who really deserve it in Italy.


  • Raghuram G. Rajan and Luigi Zingales, “Financial Dependence and Growth”, The American Economic Review, Vol. 88, No. 3 (June 1998), pp. 559-586
  • Nadège Jassaud, “Reforming the Corporate Governance of Italian Banks”, IMF Working Paper 14/181, September 2014
  • European Central Bank, “Aggregate Report on the Comprehensive Assessment”, October 2014
  • Luigi Guiso, “Banche popolari, la fine di un’era”, 20 January 2015,
  • The Bank of Italy, “Supplementi al Bollettino Statistico. La Ricchezza delle Famiglie Italiane”, Anno XXIV – No. 69, December 2014
  • Stefano Patriarca, “TFR in busta paga?”, 30 September 2014,
  • Andrea Filtri and Antonio Guglielmi, “Italian Banking Foundations”, Mediobanca Securities, May 2012
  • Monnet E., S. Pagliari and S. Vallée, “Europe between financial repression and regulatory capture”, Bruegel Working Paper 2014/08, July 2014
  • Rachel Sanderson, “Italian business: No way back”, 20 August 2013, Financial Times

Author: Attilio Di Battista, Junior Quantitative Economist, Global Competitiveness and Benchmarking Network, World Economic Forum.

Image: Italy’s largest bank UniCredit is pictured in downtown Milan September 12, 2013. REUTERS/ Stefano Rellandini