Abstract

The crisis of many Italian banks, be them large commercial banks or small local mutual banks, is adversely affecting the European banking system. Confidence in Italian banking firms has decreased substantially in Italy and abroad. Financial intermediaries have specific shortcomings and specific problems to solve. Necessary improvements include better management of costs and risks, less influence by political parties on banks, improved selection mechanisms of managers, and more productive allocation of credit. Bank balance sheets should be improved in order to facilitate lending and thereby strengthen the real economy. This will take time since it is not easy to repair bank balance sheets and update the governance of banks. Rehabilitation of banks should essentially be matched by a proper cultural twist in the mindset of Italian citizens. On the other hand, the ability to secure a healthier banking sector is very much dependent on the recovery of the real economy and, therefore, on the ability for corporations to have access also to capital markets. Without such improvements, however, Italy may pose a serious challenge to the idea of a competitive European Union as advocated in the past for instance by former President of the European Commission Romano Prodi (1999).

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