The Limits of Giorgetti's Criticism of Banks

The government has done its part, the banks must do theirs. Politicians have adjusted the public finances, bankers must extend credit to businesses. This, in short, was the message delivered by Giancarlo Giorgetti at the meeting of the Italian Banking Association (ABI) . The Minister of Economy recounted the positive results of the Italian economy, especially in terms of public finances: a reduction in the deficit and spread, and a resulting improvement in the rating. "The banks have benefited most from the improvement in national public finances," the minister emphasized, given that the reduction in the spread "translates into a revaluation of banks' assets" and the "improved sovereign rating has translated into an upgrade of those of many banks."

Giorgetti then recalled how the "exceptional returns granted to shareholders" were also possible "thanks to the public guarantees provided during the Covid crisis." Despite this public effort, however, banks are doing little for businesses. While acknowledging that Italian institutions have recovered and recapitalized over the past 15 years, the minister noted that over the same period, loans to businesses have declined by a third: the traditional function of credit intermediation has given way to "asset management." Giorgetti spoke of the risk of "forgoing wealth creation in favor of simply managing existing wealth."

The Minister of Economy certainly highlights some elements of truth, but within a partial vision. It's as if Giorgetti limited himself to a condemnation or a moral warning along the lines of "don't just think about dividends, but about encouraging the development of Italian businesses," without addressing the causes of this situation. What is the incentive structure that produces such a suboptimal outcome?

When the minister praises "the turnaround from 10 years ago" for the improvement in prudential indicators, which are "better than the European average," he cannot help but acknowledge that this path is—to a certain extent—the flipside of the reduction in business lending. The new prudential rules introduced after the major crises of 2008 and 2011, precisely with the aim of making banks more solid and resilient, have pushed for a reduction in risk and, consequently, in credit.

If non-performing loans have fallen from approximately €140 billion to €30 billion in the space of a decade , with their ratio to total loans falling from 6% to 1.5%, it was no coincidence. The reduction in banks' risk exposure, with the onerous requirements of the Basel Accords, has to some extent produced the public guarantees introduced with Covid, which continue even years after the emergency has ended: the state has reduced the risk of saving banks ex post with a bailout , but has assumed ex ante risks by guaranteeing credit to businesses.

This is what the minister should consider: should guarantees remain as a structural measure? Should the state intervene to insure business risk? Or, as the minister says, should these extraordinary measures be phased out, but with the possibility of a further credit contraction?

The other issue concerns the economic situation, which, to focus only on more recent times, has seen nearly three years of declining industrial production. Therefore, credit demand must also be considered. And Bank of Italy surveys indicate that in 2024, the reduction in business lending is primarily due to "weak demand." It's certainly true that the credit contraction is more severe for small businesses, because they are considered more at risk, but this is another fact of life that cannot be changed by telling banks to "be more generous and bold."

Here, two structural problems of the Italian economy come together: the dwarfism of businesses and the bank-centric nature of the financial system. On the one hand, the small size of businesses makes access to bank credit difficult; on the other, a capital market based almost exclusively on banks prevents alternative forms of financing for businesses. Furthermore, the government has abolished an important instrument, the ACE , which was precisely an incentive for businesses to finance themselves with equity rather than debt.

On the other hand, regarding capital market development, there is no progress. Indeed, the government's moves to use the Golden Power and its dirigisme in banking risk—paralleled by the similar stance of the German and Spanish governments—only impede the emergence of a single capital market in Europe and an industry capable of competing with that of the United States, which, not coincidentally, attracts savings and investments from Europe. This is the perspective outlined by Bank of Italy Governor Fabio Panetta , also in his speech to the Italian Banking Association (ABI). But the Meloni government's decisions, from its veto on the ESM to its Golden Power on market operations, point in the opposite direction.

Minister Giorgetti was right in the past to reject unacceptable and irresponsible requests from the Italian Banking Association (ABI), such as extending the Superbonus and expanding the transfer of tax credits: a pool of parasitic income that banks have pounced on at the public's expense. But it is precisely through incentives and reforms that the government must focus to create investment opportunities and attract capital, whether through moral condemnations or appeals to goodwill.

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