The Italian Banking System During the 1907 Financial Crisis and the Role of the Bank of Italy

This paper examines the Italian banking system during the 1907 financial crisis, from start to finish. Using bank balance sheet data from the Historical Archive of Credit in Italy, we analyse the developments of the banking system in the run-up to the crisis. We show that the four Italian mixed banks, which registered a rapid growth at the beginning of the 20th century, were little engaged in the traditional activity of bill discounting and largely involved in ‘repurchase agreements’ on stocks and in correspondent current accounts. Because of this business model, the mixed banks – and in particular the Società Bancaria Italiana – turned out to be fragile when the international crisis hit the country. Then we analyse the complex interactions between the major financial institutions and the government in order to face the crisis. We focus on the role of the Bank of Italy, which acted as a modern central bank for the first time since its creation.