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Did governance fail universal banks? Moral hazard, risk taking, and banking crises in interwar Italy1

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  • STEFANO BATTILOSSI

Abstract

In interwar Italy, at least six major episodes of banking crises required the intervention of monetary authorities to bail out, restructure, or liquidate distressed intermediaries. The five large universal banks rescued in the systemic crisis of 1930–1 jointly accounted for one‐third of the total assets of the banking system. What made Italian leading banks so prone to crises? This article suggests that their fragility was ultimately caused by governance failures, both public and private, that enhanced excess risk‐taking. Empirical evidence is consistent with theoretical insights according to which the potential for moral hazard and conflict of interest, endemic in universal banking, can be magnified when banks enter into long‐run relationships with firms and base their growth strategy on the pursuance of monopolistic rents. Interwar Italy emerges as a case in which an insider system devoid of the disciplinary devices provided by sound governance institutions created perverse incentives and weakened the resilience of the banking system to adverse macroeconomic shocks.

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  • Stefano Battilossi, 2009. "Did governance fail universal banks? Moral hazard, risk taking, and banking crises in interwar Italy1," Economic History Review, Economic History Society, vol. 62(s1), pages 101-134, August.
  • Handle: RePEc:bla:ehsrev:v:62:y:2009:i:s1:p:101-134
    DOI: 10.1111/j.1468-0289.2008.00442.x
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    File URL: https://doi.org/10.1111/j.1468-0289.2008.00442.x
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    Cited by:

    1. Raphaël Hekimian, 2017. "The French banking sector during the interwar: What lessons can be drawn from the stock market?," EconomiX Working Papers 2017-3, University of Paris Nanterre, EconomiX.
    2. Mark Billings & Forrest Capie, 2011. "Financial crisis, contagion, and the British banking system between the world wars," Business History, Taylor & Francis Journals, vol. 53(2), pages 193-215.
    3. Colvin, Christopher L., 2015. "The past, present and future of banking history," QUCEH Working Paper Series 15-05, Queen's University Belfast, Queen's University Centre for Economic History.
    4. Michelangelo Vasta & Carlo Drago & Roberto Ricciuti & Alberto Rinaldi, 2017. "Reassessing the bank–industry relationship in Italy, 1913–1936: a counterfactual analysis," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 11(2), pages 183-216, May.
    5. DELOOF, Marc & VERMOESEN, Veronique, 2011. "The value of bank relationships: Evidence from Belgium at the start of the Great Depression," Working Papers 2011021, University of Antwerp, Faculty of Business and Economics.
    6. Ivanov, Martin & Ganev, Georgy, 2015. "Bulgarian business elite, 1900s-2000s," MPRA Paper 103427, University Library of Munich, Germany.

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