Are Banks Procyclical? Evidence from the Italian Case (1890-1973)
AbstractRecently a number of studies on banking systems’ procyclicality have been drawn. Such an issue, often developed as a consequence of Basel 2 agreements, is related with credit crunch phenomena and financial stability. Typically, a temporary shock may produce a long term effect following or amplifying fluctuations through finance. For this reason procyclicality may significantly affect capital accumulation and long-term growth. Therefore, verifying and measuring whether a banking system is, or is not, procyclical is relevant in order to understand which effects regulatory schemes and financial architectures can produce on capital formation processes. While studies generally have a short period perspective, this paper analyses business fluctuations and banking cycles in the long run. The Italian financial history could provide useful insights because its evolutionary path experimented two different banking patterns. Universal banking prevailed until the Great Depression, whilst specialised financial institutions emerged afterwards. Economic historians have considered Italian universal banks, up to the early 1930s, a convincing example of procyclical intermediaries. Such hypothesis relies on qualitative research based on case studies, but it has not been verified in quantitative terms, yet. Thus, this paper aims to verify procyclicality of the Italian banking system in the long run applying VAR analysis on a wide set of economic and financial indicators. What emerges is that a certain cycle-smoothing effect is observed during the whole period, in spite of the major institutional shock occurred in the early 1930s (i.e. the new bank law), whilst relevant changes in banks’ asset structures suggest that central bank and government intervention had important impact on banks behaviour and policies
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Bibliographic InfoPaper provided by Department of Economics, University of Siena in its series Department of Economics University of Siena with number 523.
Date of creation: Dec 2007
Date of revision:
credit cycles; business cycles; procyclicality; credit crunch; financial stability; universal banking;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913
- N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-
- N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
- N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-01 (All new papers)
- NEP-BAN-2008-03-01 (Banking)
- NEP-FDG-2008-03-01 (Financial Development & Growth)
- NEP-HIS-2008-03-01 (Business, Economic & Financial History)
- NEP-MAC-2008-03-01 (Macroeconomics)
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