Financial Development, Overbanking, and Bank Failures During the Great Depression: New Evidence from Italy

This paper employs quantitative and qualitative methods to examine the link between overbanking, banking competition, and financial distress during the interwar period in Europe, focusing on Italy as a case study. Econometric analysis on bank balance sheet data and a systematic review of contemporary printed sources show that banks experiencing distress had opened many branches and were operating in areas with harsher competition. Poor managerial choices had led banks to face higher operational costs, pushing them towards more remunerative but riskier activities. The 1920s saw a profound transformation of the Italian banking system, with extensive branch expansion and cut-throat competition for deposits. This work argues that such changes in the banking system’s structure made it more fragile, exposing it more to the negative effects of the international crisis following the New York Stock Exchange crash in 1929. Available evidence on other European countries suggests that Italy was not an isolated case. The study contributes to the literature on banking crises during the Great Depression and on the relationship between banking competition and financial stability.