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VARIETIES WITHIN CAPITALISM?

THE MODERNISATION OF FRENCHAND ITALIAN SAVINGS BANKS,1980-2000

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Olivier ButzbachFaculty of Political ScienceSecond University of NaplesVia del Setificio, 15Complesso Monumentale Belvedere San Leucio81020 Caserta (CE)ItalyE-mail: [email protected]

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Acknowledgments

This study draws on my doctoral dissertation; my thanks, therefore, gofirst of all to my doctoral thesis advisor, Martin Rhodes, who helped mefocus and asked me the right questions throughout my research andwriting. My thanks also go to the other three members of my doctoraljury: Colin Crouch, Richard Deeg and Adriano Giannola, who providedme with precious comments in the last phase of the writing process. I alsothank all my interviewees, whom I cannot list here, and all of those who,at various stages, have facilitated my research. In particular, I wish to thank,in France, Valérie Delumeau and Jean-Philippe Goethals and the staff at:the Caisse d’Epargne de Picardie, the Caisse d’Epargne de ProvencesAlpes Corse, the Fédération Nationale des Caisses d’Epargne and theCaisse Nationale des Caisses d’Epargne; in Italy, the Associazione frale Casse di Risparmio Italiane, Mrs. Giacchetti and the AssociazioneBancaria Italiana.

I further wish to express my gratitude to my Italian friends and colleagues,in particular Adriano Giannola and Giuseppe Pennisi who have honouredme with their trust and given me, at various stages of my doctoral life,very valuable support and opened for me the doors to the University.

Last but not least, I wish to thank Mita and Nicolas for their continuoussupport and their resistance to “doctoral fatigue”.

This study has been published by ESBG (European Savings Banks Group)in the framework of the first Savings Banks Academic Award. The objectiveof the Savings Banks Academic Award is to stimulate comparativeresearch projects on the rich historical heritage of the European savingsbanks and to propose solutions for the future.

The findings, interpretations and conclusions expressed in this paper donot necessarily reflect the views of ESBG (European Savings Banks Groupor WSBI (World Savings Banks Institute). ESBG nor WSBI guarantee theaccuracy of the data included in this work. The material in this publicationis copyrighted.

ESBG – The European voice of savings and retail banks.

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The world of finance has changed rapidly over the past two decades:heightened competition, financial globalisation, technological innovations,regulatory changes… European savings banks, which constitute a pillarof European political economies, have had to adjust.

French and Italian savings banks have been all the more exposed to changeas they formerly belonged to a very specific kind of financial systemcharacterised by heavy state intervention and regulation; and as suchstate-administered credit systems have been completely dismantled duringthe 1980s. Savings banks in both countries faced, therefore, a dramaticallyaltered environment to which they had to adjust in order to survive.

This research, building on a case study approach, aims at uncovering theprocess of change in the savings banks sector in France and Italy; andat identifying the factors of change in each country. According to theliterature on comparative political economy, adjustment patterns (of firmsor national economic systems) are shaped by existing institutions.Institutional specificities, which are path-dependent over time, determinethe peculiar outcome of change in each country; and while convergenceis the outcome of market forces, divergence reflects the operation of“rigid” national institutions. The research question addressed hereconcerns, therefore, both the direction of change and its causes. In otherwords, what explains French and Italian savings banks’ apparent differenttrajectories in front of common pressures to adjust?

Findings show simultaneous convergence and divergence forces at playwithin French and Italian savings banks’ adjustment processes. Frenchsavings banks have become a nationally integrated cooperative bankinggroup, while Italian savings banks have either merged with other banksto form nationally integrated commercial banking groups, or formedalliances at the regional or local level.

EXECUTIVE SUMMARY

On the business side, the evidence is even less linear: savings banks inboth countries have demonstrated a suprising ability to innovate (at thelevel of products or markets), while maintaining strong positions in theirtraditional activities. Findings suggest, therefore, the presence of a multi-layered process of change, where institutions both determine and aredetermined by the strategies pursued by top management.

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Table of Contents

Acknowledgments 4

Executive summary 5

Introduction 9

1. Factors and directions of change in European banking 17

2. Organisational and institutional changein national financial systems 39

3. The role of savings banks in the European economiesin the XXth century: the cases of France and Italy 53

4. The unravelling of state administered credit systemsand their impact on banking 93

5. The regulatory normalisation of savings banks 141

6. The changing boundaries of coordination: savings banks’corporate restructuring and sector organisation 169

7. Changes in savings banks’ corporate governance 199

8. Changes in savings banks’ corporate strategies 219

9. Conclusions 251

Bibliography 263

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1. The research puzzle: European savings banks’ adjustmentto radical shifts in their environment

Savings banks fill both an important and peculiar space in the history ofEuropean financial systems. In fact, savings banks can be considered astrademarks of the economies of Germany, Belgium, Spain, France, Italyand the Netherlands, since they are intricately linked to those countries’industrial and financial development, and because they exhibit strengthand financial power rarely seen elsewhere.

The first savings banks were created in the early to mid XIXth century inthe UK and Germany as deposit banks catering for the low incomeearning populations, who were then ignored by other credit institutions.Along the years, the savings banks movement spread throughout Europeand savings banks expanded their activities on the asset side, throughlending both to individuals and small firms – considered too risky by largenational banks - and through financing public investments via the holdingof government securities.

Initially, savings banks were mostly local, private, non-profit banks oftenorganised in strong sector associations at the local, regional and nationallevel – epitomised by the German model of “giro” associations. Most savingsbanks were originally set up by local power-holders and institutions linkedto the church or to the rising elites of the new industrial society. Their non-profit nature meant that, in contrast to commercial banks, they did nothave to make profits or pay dividends. In fact, savings banks carried outan explicit redistributive mission, giving part of their yearly revenues tothe poor or to the local economy. Hence savings banks’ profound rootingin local economies and communities.

INTRODUCTION

Savings banks usually benefited from a protective legal status that allowedthem to exert their mission as public goods providers without beingconfronted to the same market pressures faced by commercial banks.In Germany, for instance, the Sparkassen used to enjoy unlimited stateguarantees that enabled them to secure the highest possible credit rating(which recurrently raised the concerns of for-profit competitors andEuropean regulators).

Most European savings banks retained their specific organisational andgovernance features throughout the XXth century. Today, they are stillpowerful actors in the banking sector in France, Germany, Italy, Norway,Belgium, Spain, Austria, Portugal, and Sweden. Their local rooting andownership, the trust they built over the years among depositors, theoccasional protection and regulatory advantages provided to them bythe state enabled savings banks to reap and keep, until today, highmarket shares in the deposit (and in some cases the lending) market inthe nine countries mentioned above.

More precisely, in 2002 European savings banks represented, on average,25% of housing loans in their home country, 23% in lending to firms andhouseholds, and held 19.6% of total assets in the banking market; onthe liability side, they held around one third of total deposits1. In Spain,the 46 Cajas held, as of December 2002, 46% of banking loans and 47%of deposits. And these market shares have been growing over the pastten years. In 2000, French savings banks “weighed” 36.6% of totallending to households (commercial banks held a 44% market share inthis segment), against 27.4% in 1995; more generally, cooperative banksincreased their shares in deposits, up to 59.7% of the market in 20002.In Italy, (former3) savings banks held in 2003 a 27% market share fordeposits, and a 17% market share for lending. In Germany, the non-profit sector is even more dominant; in 2002 75% of deposits were atSparkassen or at Deutsche Genossenschaftsbank, the lead institution ofthe co-operative banking sector.

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1 Data from the European Savings Banks Group’s 2003 Annual Report. The data refer to the eightcountries mentioned above plus 15 other European countries – all members of the ESBG.

2 Source: Banque de France, CECEI, 2000 Report.3 As will be precised later on, all of Italy’s savings banks have lost their specific legal status

during the 1990s. Many of them have merged or been acquired by commercial banking groups.

And its hegemony does not seem to be questioned by the failed mergersbetween Deutsche Bank and Dresdner Bank, and then between Dresdnerand Commerzbank. Savings banks are also important actors whencompared internationally. In 1999 the French Caisse d’Épargne ranked 39thamong the world’s largest banks, with 1,012 billion dollars in assets4.

Savings banks’ resilience is all the more surprising as European financialsystems have been exposed to strong pressures to change since the late1970s. Such changes have led to much more market-oriented financialsystems, thus giving private, for-profit banks a premium when comparedto non-profit banks such as savings banks. Indeed, as mentioned above,the savings banks philosophy is opposed to the free-market view. As Revellput it in the late 1980s, “the conflict is between the free market philosophy,with its single goal of profit maximisation, and the philosophy of thesavings banks in all countries, which attaches value to the economicwelfare of a particular locality, to social works for the benefit of theinhabitants of that locality, and co-operation rather than conflict andcompetition between individual savings banks.” (Revell 1989: p.1.)

Thus the first issue tackled by this research presents itself: how havesavings banks successfully adjusted to exogenous changes that were apriori unfavourable to their specific business profile? In other words, asthe Institute of European Finance put it in a 1999 report: “how mightthose savings banks survive?” (IEF, 1999) Indeed, successful adjustmentcan be measured on the basis of the survival of a business organisationin an adverse environment (tight selection). Of course, survival here meansconservation of the organisation's business identity (core activities,structure, objectives). Survival, therefore, does not precludetransformation; but to “successfully adjust” a firm should maintain, in achanged environment, the core elements that characterised its businessmodel in the previous environment. In our cases, legal and corporatestatuses could change, therefore; as long as savings banks remaindistinguishable from other types of banks, they will have adjusted in asuccessful way.

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4 Source: The Banker, July 1999.

The issue is all the more relevant in those countries where changes havebeen more severe, i.e. France and Italy. These two countries were longcharacterised (at least since the late 1920s) by extensive state interventionin the economy, and especially in the credit system – giving birth to whathas been known as a “state-administered credit system” in France andother countries (see Zysman 1983; Loriaux, 1991; and Loriaux et. al,1997), a category that could include Italy, too (as will be argued inchapter 4)5. In both countries, savings banks were a key component ofstate-administered credit, especially on the liability side: in short, theycollected savings that were in turn channelled to fund public investmentpredominantly through government securities. In exchange for takingpart in administered credit, savings banks received regulatory protectionagainst competition, which, until the late 1970s, prevented savings banks’business homologation with, and takeover from commercial banks.

Therefore, French and Italian savings banks faced a radically alteredbusiness environment in the 1980s and 1990s. Not only did they facechanges common to all European countries: technological innovation,changes in clients’ behaviour, increased competition by banks and non-bank financial institutions and markets, European regulation. In addition,French and Italian savings banks also had to cope with the unraveling ofstate-administered credit in both countries, starting in the late 1970s.They seem, however, to have adjusted successfully: as mentioned above,French and Italian savings banks have (at least until the early 2000s)maintained high market shares in the savings and deposit markets (thesame market share of 27.3% in 1997 for both countries) and in somesegments of the credit market as well (while savings banks lendingrepresented 18% of all bank lending in Italy in 1997, that proportion fellto 5% for France – but in market segments such as lending to localgovernments or households, French savings banks did perform well)6.

Yet this adjustment has taken, it seems, two radically different paths: inFrance, savings banks have gradually tightened their organisational andbusiness ties to form a united banking group present on all segments ofthe credit market, following a series of top-down impulses from regulatorsand top management.

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5 In his seminal 1983 work, Zysman proposed a three-fold categorisation of nationalfinancial systems, based on the main provider of financial services and products to firmsand households: market-based systems (such as the UK and the US), bank-based systems(Germany, Japan), and state-administered credit systems (such as France).

6 Numbers are from the Institute of European Finance’s 1998 report on the future ofEuropean savings banks (IEF 1999).

In addition, the French caisses d’épargne have been granted a cooperativestatus by law-makers. In Italy, savings banks have become joint-stockcompanies and have disappeared as a distinct category; and the adjustmentpaths differ from one savings bank to another – a process of differentiationclosely associated with territorial differences. Adjustment paths here referto the twenty-year long changes experienced by savings banks withrespect to: (i) legal and corporate status,; (ii) corporate ownership andgovernance; (iii) inter-firm relationships and organisation; (iv) market andproduct strategy.

Hence our two research questions: First, how have savings bankssuccessfully adjusted to a priori adverse changes in their environment?Secondly, what can explain the different adjustment paths taken byFrench and Italian savings banks, given similar points of departure andsimilar pressures to change?7

2. The implications of changes in French and Italian savingsbanks

Finance and banking have for a long time played a central role in definingthe peculiar characteristics of national economies. Financial systems, inparticular, are associated with specific patterns of economic and industrialdevelopment and business-government relationships. In countries such asFrance and Italy, for instance, governments have historically used theirleverage over the credit system to direct savings to industrial investment.

Moreover, capital accumulation is often associated with financialintermediation as a driver for economic development. The creditsystem allows transforming “dormant capital” into productive capital,thus unleashing the forces of economic growth and development.Some economic historians, such as Richard Sylla, further argue that notonly did financial revolution precede the industrial revolution; it actuallyprepared it (Sylla, 2000). Yet other scholars have found that the market-government nexus at the heart of modern European economicdevelopment heavily relied on finance, and in particular intermediatedfinance (Zysman 1983).

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7 This study builds therefore on a “most similar cases” comparative strategy, which will befurther discussed in chapter 1.

In addition, recent works in comparative political economy, inspired bynew institutionalism, assign finance and financial institutions a key role inthe maintenance of a country’s distinctive path of economic development.In particular, Hall and Soskice identified finance as one of five key institutions(the other ones are: corporate governance, industrial relations, the role ofstate and the skill production system) that together shape national“varieties of capitalism” (Hall and Soskice 2001). Indeed, as argued inthe book’s introductory chapter, national financial systems represent anattractive field of inquiry for comparativists, since they are seen as thesegment of the economy most exposed to globalisation, and, therefore,to convergence pressures (for a similar argument see Cerny, 1989, Loriaux,1991, Story and Walter, 1996).

Concretely, this means that, for instance, having locally rooted networksof cooperative banks that own shares in local businesses will permit smallfirms to rely on a stable source for long-term finance – without havingto resort to large cash flows, equity creation or market finance for theirinvestments. This specific financial configuration is, in turn, linked tospecific performance targets (long-term versus short-term; stable growthversus cost-cutting, etc.) and specific organisational forms and labour-management relations that, together, characterise a country’s politicaleconomy. Finance, therefore, lies at the heart of national capitalism.More importantly for this research, banking (or intermediated finance)lies at the heart of European varieties of capitalism. In his seminal work,Gerschenkron showed indeed how intermediated finance was acharacteristic of late development and XXth century capitalism(Gerschenkron 1963).

Given the central role of finance in modern capitalism, understandingchanges in finance and banking is instrumental to understandingchanges in national capitalism as a whole. As Zysman has argued, “byknowing the financial system one can predict the nature of the processof adjustment” (Zysman, 1983). This has two implications for researchers.First, changes in financial structures and functioning are likely to have animportant impact on the rest of the economy. Specifically, bankingconcentration, dis-intermediation and financial market de-segmentationare likely to affect (i) the range of instruments, services and productsoffered to corporate and individual customers and (ii) the conditionsunder which firms and households have access to such services andproducts. In fact, firms often voice their concerns over changing financingconditions by banks and financial intermediaries.

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For instance, the recent conclusion of the “Basle II agreement”, led by theBank for International Settlements, which modifies the way bankscalculate their risk ratios, led to strong opposition from Italy’s small andmedium firms’ business associations, fearing that this would furtherhinder their access to banking loans.

Secondly, changes in finance and banking are likely to epitomise changesin the political economy as a whole. Banks were among the firstcompanies to be nationalised by the French government in 1981-1982.Similarly, the privatisation of Italian banks in the early 1990s constitutedthe first step towards a massive shift from public to private ownershipacross sectors. Finally, changes in banks’ organisation, structure andstrategies are likely to reflect, or “co-evolve” with changes in non-financialfirms’ organisation, structure and strategies. Therefore, analysing changesin banking and finance should provide us with good insight into changein national capitalism as a whole.

3. Outline of the study

Chapter 1 presents the existing empirical evidence on changes in financeand banking. Chapter 2 discusses the literature relevant to the questionsspelled out above, delineates the conceptual framework of the researchand presents the methodology used. Chapter 3 explores French andItalian savings banks’ history and presents their situation prior to changes.Chapter 4 analyses the origins, nature and functioning of state-administeredcredit systems in France and Italy and their dismantling in the 1970sand 1980s. Chapters 5 to 8 present and analyse the research findings.In particular, chapter 5 addresses the regulatory changes undergoneby the savings banks sector over the past two decades; chapter 6 focuseson mergers and acquisitions and changes in savings banks’ sectorboundaries; chapter 7 deals with changes in savings banks’ governancestructures; and chapter 8 analyses changes in savings banks’ businessstrategies. Chapter 9 concludes and chapter 10 discusses the implicationsof the research.

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1.1 The forces of change in European banking

Since the late 1970s, the environment of European banks has beenprofoundly transformed. Five forces can be identified behind thistransformation: financial globalisation, shifts in industrial countries’macroeconomic regimes, regulatory changes, technological innovationsand changes in customers’ behaviour. To these five factors one may add,for Western European countries, the pressures linked to economic andmonetary integration, especially after the 1986 Single Act.

1.1.1 Financial globalisation and the growing interdependenceof financial markets

Today financial globalisation, characterised by a heightened volume ofexchange and the growing interdependence of financial markets, seemsmore salient than global trade as a political and economic phenomenon.As is well known, hundreds of billions of dollars worth of stocks andbonds are exchanged each day on the world’s stock markets – whichfar exceeds the financial payments requested by international trade.Financial interdependence has reached unknown levels since the early 1900s.

Financial globalisation has a three-fold implication for domestic financialsystems. Firstly, financial actors located, for instance, in Milan or Paris maydraw into a broadened pool of resources consisting of instruments usedto spread their risks, or diversify their portfolio through stocks and bondsissued in New York or Tokyo. Secondly, financial actors – and regulatoryauthorities – face new constraints. For instance, foreign stock ownershipmight – and often does, although in a diversified manner (see Goyer 2004)– force domestic financial firms (and other businesses) into businessstrategies not desired or foreseen by domestic owners.

1. FACTORS ANDDIRECTIONS OF CHANGEIN EUROPEAN BANKING:THE EXISTING EVIDENCE

In addition, institutional investors might – and often do – require compliancewith international norms or standards in terms of accounting and financialtransparency. Third, domestic financial actors face new competition fromfinancial institutions and instruments located abroad, but now accessibleto domestic firms and households.

1.1.2 Shifts in the macroeconomic regime

Shifts in industrial countries’ macroeconomic regimes represent a secondmajor change in the environment of European banks. A comprehensivesynthesis of such a shift is provided by Forsyth and Notermans: “thegrowth regime of the 1950s and 1960s relied on monetary and fiscalpolicy (macro-policies) to stimulate demand and thereby promote growthand employment, while it used labour market policies and regulationof financial markets (micro-policies) to curb inflation; by contrast, thedis-inflationary regime of the 1980s and 1990s relied and still reliesprimarily on monetary policy (macro-policy) to fight inflation andmaintain external balance, and on supply-side policies, including selectivetax cuts and other investment incentives (micro-policies) to promotegrowth and employment” (Forsyth and Notermans, 1997).

Such regime change had tremendous implications for financial systems,especially those state-administered systems such as France or Italy (seechapter 4 for an expanded presentation and discussion of such systems).In both countries, until the early eighties, budgetary deficits (incurred tofinance public investment programs) were monetised by the central bank;and Treasury bonds were mainly absorbed by the banking sector, thanksto a tight system of constraints and incentives produced by regulatoryauthorities. Banks – especially savings banks – were therefore providedwith cheap and guaranteed resources, and able to maintain a largeinterest spread8.

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8 The interest spread is the difference between active interest rates, i.e. the rates charged tothe clients for (mainly) new loans, and passive interest rates, i.e. the rates paid to clientsfor deposits.

In France, that accommodating policy mix (associated with what someauthors called France's “overdraft economy”9) was definitely abandonedin 1983 with the adoption of a “competitive disinflation” strategy, basedon fiscal stability, wage freeze, a strict monetary policy predicated uponimported disinflation through the “franc fort”. Indeed, with the monetarypolicy essentially focused on the defence of the French Franc’s parityvis-à-vis the Deutsche Mark, banks lost the certainty of being refinancedby the central bank in case of default. This trend accelerated with theremoval of credit ceilings in 1984-86, and of exchange controls in 1990.

Similarly, in Italy, high inflation and rising public debt led to the “divorce”between the Treasury and the Bank of Italy (henceforth Bankitalia) in1981. That year, Bankitalia was officially relieved from its obligation tobuy Treasury bonds unsold to banks, thereby putting an end to themonetisation of the deficit. However, the role of Bankitalia as guarantorof financial market stability ended up carrying on the relationship in anindirect manner – since the central bank, weary of excessive flows oftreasury bonds on the market and of its consequences in terms of interestrates, would have to buy those bonds anyway. But the seed of a shift inmacroeconomic policy was planted. Along the 1980s, but especiallyduring the early 1990s, deficit reduction became a top priority, and afterthe 1992 lira devaluation the central bank began to pursue a strictmonetary policy predicated upon price stability, and driven by the numberone political priority: joining the EMU.

Such changes in macro and micro economic regimes echoed andreinforced the opening of financial markets (to capital flows and foreigninvestment) and led to increased competition within them – whichdeepened financial globalisation, as mentioned above. Indeed, the lift ofcapital controls and the abandonment of deficit monetisation policies,both increased the depth (and therefore the attractiveness) of financialmarkets and gave them, in return, greater leverage on macroeconomicpolicies pursued.

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9 France’s “overdraft economy” (term coined by scholars in the 1980s) was characterised byselective credit subsidies and a very loose monetary policy, which allowed a continuouschannel of cheap financial resources to the economy, but also created a structural inflationarybias and deficit in the balance of payments; overdraft relied on indirect (intermediate)finance, and banks could afford, during the 1960s and the 1970s, a very low level ofreserves, having the certainty of being refinanced by the Central Bank. With the end of theoverdraft economy, banks had to strengthen their internal structure and change theirstrategies (de Boissieu, 1990). See chapter 4 for a more detailed analysis.

Recent fiscal and social reforms throughout Europe completed the shiftin macroeconomic policy regimes evoked above. The slow transformationof European countries’ welfare and pension systems has paved the wayto a greater involvement of financial firms and financial markets, akin toUS or British pension funds. In Germany, for instance, a 2001 pensionreform allowed employees to invest 0.5 % of their gross salary in privateschemes, rising to 4% in 2008. This is far from cancelling out the state-run pension system, but should nevertheless benefit managed savingsand might encourage a shift from traditional savings to such schemes.

Fiscal reforms might, too, have an impact on national financial systems.In Germany, again, a 2001 reform of the income and corporate tax regimesdisposed the abolition, from January 2002, of capital gains tax on corporatesales of shares in other companies, which threatened cross-shareholdingsat the core of German commercial banks’ activities and, more importantly,was still expected to trigger a wave of M&As aimed at increasingshareholder value in German businesses. This reform also concernednon-profit banks, although in an indirect way, since it could create newincentives for mutual banks to “de-mutualise” and take advantage of amore liquid market in corporate shares, as has been occurring in GreatBritain for instance.

1.1.3 Changes in regulation

Shifts in industrial countries’ macroeconomic regimes led to, oraccompanied profound changes in financial regulation10. Three broadtrends can be identified: privatisation, de-segmentation (of financialactivities), and a shift from “structural” to “prudential” regulation.

The 1980s marked the eve of a new wave of privatisation in industrialised(as well as developing) countries11. All sectors were concerned, especiallypublic utilities, oil firms, transportation companies, postal offices andfinancial and banking firms. The United Kingdom, under MargaretThatcher’s leadership, led the fray, with the privatisation of steel, miningand transportation companies in the 1980s. But the case of France is,arguably, even more spectacular.

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10 The precise causality between macroeconomic changes and regulatory changes will beaddressed in chapter 4.

11 Which were joined, of course, by Eastern European “transition” countries in the 1990s.

Upon their arrival in power in 1981, President Mitterrand and his socialistgovernment launched the widest-ranging nationalisation program sincethe immediate postwar reconstruction (see Machin and Wright, 1985).Among the newly nationalised firms were three large banks (Créditindustriel et commercial, Crédit du Nord and Crédit commercial de France)and two financial firms, Paribas and Suez.

A few years later, however, a newly elected right-wing government headedby Prime Minister Jacques Chirac reversed that policy and sold dozens ofpreviously-nationalised companies – among which several of France’slargest financial institutions: Paribas, Suez, the Banque Nationale de Paris(BNP), the Société Générale, the Crédit Lyonnais... Privatisations weresuspended in 1988 (upon President Mitterrand’s reelection and socialist’svictory in the parliamentary elections), and resumed in 1993 under anotherright-wing government, but continued in the late 1990s under theleadership of socialist Lionel Jospin. Privatisation, pursued on and off since1986, has dramatically reduced the size of public ownership in financeand industry, tailing well behind the reversal of the 1981 nationalisationwave. As of 2003 only five banks were still owned by the French State, incontrast to 36 in 1983. The only remaining financial entities within theorbit of the French State are the Caisse des Dépôts et Consignations, thefinancial arm of the Postal Office (now totally corporatised12), aninsurance firm (CNP assurances), a housing credit firm (Crédit immobilierde France) and the Banque de développement des PME.

Italy also offers an apt example of far-reaching privatisation. And, again,banking and finance stood at the heart of privatisation programsimplemented in the 1990s. During that decade, the state firstcorporatised, and then sold shares it owned in three large banks throughthe public holding IRI: Comit, Credit, Banca Nazionale del Lavoro. At thesame time, the 1990 Amato Law transformed savings banks from public toprivate entities. Privatisation continued in the 1990s with public divestituresin all sectors, ranging from telecommunications to energy and the airlineindustry (The Italian Treasury still holds a minority share in Alitalia, thecountry’s national carrier, which also seems to be soon for sale).

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12 A state-owned enterprise is said to be corporatised when it becomes a distinct legal personfrom the state, with autonomous management and budgeting.

Besides privatisation, policy changes from the early 1980s to the mid-1990s were characterised by a new wave of “de-regulation” followingthat of the 1960s and profoundly transforming the banking regulatoryregime in most European countries, along the lines of market opening(or de-segmentation) and expansion. As Gardener argues, a deregulatedbanking environment is “predicated to a large extent on the economicdesirability of a strong market orientation, a demand-determined emphasis,in banking strategies.” (Gardener, 1994: 59.)

Those regulatory changes, along with the shift in macroeconomicregimes described above, entailed a profound transformation of the roleplayed by the state in the economy. This change is even more apparentin what John Zysman called “state-administered credit systems” (byopposition to market-based and bank based financial systems; seeZysman, 1983), such as France and Italy.

However, such transformations do not seem to have led to a straight-forward retreat, or withdrawal of the state, as some popular accountsmay have suggested at the outset of the 1990s (in the early years of“transition to market” in East European economies, and in the aftermathof the anti-State rhetoric at work under Thatcher and Reagan in theWest13). Available evidence pleads for more nuanced views. First of all, asGarret and Lange have pointed out, public spending has increased inmany countries, rather than decreasing (Garrett and Lange, 1997).Secondly, de-regulation and re-regulation waves have followed differentpaths that do not lead to the same level of state involvement (see Vogel’scomparison between Japan and UK: Vogel 1999). Third, one should notreduce state intervention to a single quantitative dimension. As LindaWeiss has showed, state capacity is multi-faceted and privatisation/liberalisation policies affected just one side of it (Weiss, 1997).

In fact, along the lines of the arguments just mentioned, financialregulation changed its nature. To sum up, there was a shift fromstructural to prudential regulation. Regulation is structural when the statedirectly intervenes to shape the structures of the financial system –through the discretionary authorisation of new entrants, setting interestrates, setting credit ceilings, market segmentation…

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13 Of course, the actual policies pursued by the successive Reagan administrations in particular,which ended up increasing public deficits, contradict somehow the rhetoric then used.

Prudential regulation means that the state should guarantee the effectivefunctioning of the financial market, through control and monitoring ofprudential ratios by banks and other financial institutions. Within thatnew framework, traditional regulatory authorities, such as the central bankor the Treasury, did not disappear or become obsolete: they changed theirmission – for instance, they started monitoring competition rather thanactually engineering it. In addition, new regulatory authorities were setup – for instance, the Commission des Opérations de Bourse (COB) inFrance, or the Consob in Italy.

Besides changing the nature of state involvement in the economy,such regulatory changes profoundly transformed banks’ playing field –especially in countries such as Italy and France, where the banking andfinancial sectors had heavily relied on state ownership and regulationuntil the 1980s.

1.1.4 Changes in technology and in clients’ behaviour

Since the 1970s, a series of technological innovations took place thatradically transformed the business of finance over successive years.Powerful, high-speed electronic networking has allowed real-timeinformation flows across markets and between institutions –interconnectivity becoming the cornerstone of financial markets’interdependence. Technological innovation has streamlined banking andfinancial business organisation, and has changed clients’ relationshipswith their banks: automatic teller machines (ATMs) first allowedmultiplying the territorial rooting of banks; e-banking later allowedclients to perform many operations at home.

Changes in customers’ behaviour put further pressure on banks andfinancial institutions to adjust. Large firms were the first to change theirfinancing behaviour. With rising interest rates and the emergence ofstock markets in the 1970s, many large firms throughout Europe startedresorting to the market (through commercial notes and bonds) to financetheir investment needs, thus leaving their traditional banking lenders insearch for a new strategy. With the rapid growth of the stock market inthe 1980s and 1990s and the availability of new instruments (as well asnew services geared towards helping firms access market finance), manymedium-sized firms were also tempted to shift from bank loans to bondsissued on the market.

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Changes in clients’ behaviour were not circumscribed to banks’ liabilityside. More recently, households too have been modifying their financialbehaviour. First, they have been offered the possibility of diversifying theirportfolio and starting to earn real interest14 on some of their savings.Secondly, households are increasingly switching their funds from short-term savings to protect themselves against the risk of becomingunemployed, to longer-term investment destined to complement theirpensions. Overall, “banks’ twofold dependence on money markets andcredit ratings today plays a similar role to the last-century’s fear of adepositor’s run on the bank.” (Verdier, 2002).

1.1.5 European monetary and financial integration

A last key factor of change in the environment of European banksconsists of the changes in the regulatory regime that have accompaniedthe acceleration of European integration after the mid-1980s.Baltensperger and Dermine (1990) identify three regulatory periods sincethe 1950s: a first period, from 1957 to 1973, marked by deregulation ofentry to domestic banking markets; a second period, from 1973 to 1986,characterised by the first attempts towards the harmonisation ofdomestic regulations; and a third period, from 1986 on, marked by theefforts to create an integrated European financial market.

The first period ended with the adoption by the European Council ofMinisters, in 1973, of a Directive prohibiting barriers to the domesticbanking and financial markets. However, persisting capital restrictions andregulatory differences seriously hampered effective cross-border competition.Harmonisation really took off with the 1977 Directive “on the Coordinationof Laws, Regulations and Administrative Provisions Relating to the Takingup and Pursuit of the Business of Credit Institutions” (hereafter known asthe “First Banking Coordination Directive”). That directive gave a definitionof banks as credit institutions (which would, as we will see in chapter 3,further legitimise French and Italian lawmakers in their attempts tode-segment the banking market) and established the home countrycontrol principle, whereby supervision of credit institutions operating invarious member countries would be the responsibility of the home countryof the parent bank.

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14 From the mid-1970s until the mid-1980s, the real interest rate earned on administeredsavings (“Livret A”) in France was negative, given a fixed interest rate and high inflation.

Several minor Directives in the early 1980s completed those firstharmonisation efforts, notably establishing European standards foraccounting and consumer protection. Still, as Baltensperger and Derminenote, integration was not achieved by this first wave of Europeanregulation. Capital restrictions were still in place in most EC countries,and member countries retained a quasi-discretionary power on theregime of authorisations to create new banks.

The third and last period identified by Baltensperger and Dermine is therun-up to the completion of the single market, triggered by the 1986Single Act. The 1985 European Commission White Paper on the internalmarket set guidelines for a single banking license, home country controland mutual recognition. Those principles were embodied in the SecondBanking Coordination Directive, proposed by the European Commissionin 1988 and adopted by the Council of Ministers in December 1989.That Second Directive aimed at ensuring full freedom of banking servicesacross Europe by 1992. In particular, it provided for minimum capitalrequirements and the creation of a single banking “passport” allowing anybank authorised to operate in one member country to sell its productsand services to all others.

Building on Baltensperger and Dermine, one could further add twoperiods: one spanning from 1992 up to 1999, which is marked bythe run-up to the monetary union, and the following period (from 1999until present), characterised by a fully integrated monetary union andthe absence of regulatory barriers to the establishment or operation ofbanks in any member country. In any case, the acceleration of Europeanmonetary and economic integration, along with the build-up of a commonEuropean regulatory regime on banks and financial institutions constitutetremendous changes in banks’ environment, which cannot butprofoundly impact banks’ strategies and structures.

With the introduction of the Euro as a single currency and the broadeningof the single market, European authorities are indeed increasing pressurefor the dismantling of state subsidies (and guarantees and protectionin all sectors), in the name of competition and free-market principles.Recently, for instance, the European Commission increased the pressure onGerman Landesbanken for receiving direct state aid. The fourth biggestGerman bank in terms of assets, Westdeutsche Landesbank (WestLB)was fined for this reason in 1999. In 1992 WestLB, owned by the state ofNorth Rhine-Westphalia and the region’s publicly owned savings banks,had acquired from the state the assets of a housing development agency.

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Commercial banks claimed that the transfer was an illegal injection ofcapital at below market prices. The European Commission ruled in theirfavour, deciding that WestLB had received illegal state aid of 808 millioneuro, the value of the housing agency plus accrued interests.

The Commission has been investigating other similar cases, and a complaintby the European Banking Federation challenging the whole Germansystem of state guarantees led to the abolition of state guarantees15.At stake are the special guarantees and the excellent credit ratings enjoyedby Landesbanken. If these guarantees are stricken down, either the ratingswill be adjusted to the real financial situation of the regional banks,forcing them out of business, or the banks will have to find new sourcesof equity to support their vast balance sheets. They would have to cutservices and shred businesses. Privatisation might even appear possible.

Furthermore, with the Euro and the increased cross-border competition itentails, certain banking practices seem hardly sustainable. This is the case,for instance, with a decades-long agreement on free checks that limitedcompetition in the French banking sector. Under this rule, banks may notpay interest on current accounts, in exchange for not charging customersfor the cost of processing checks. As of December 2004, the Frenchgovernment was planning to reform this agreement, which should leadto renewed competition in the sector and “anchor” more solidly banks inprofit-maximisation (cost-minimisation) strategies. More importantly, theemergence of new actors in finance and banking (mutual funds,investment funds…) increases the competitive pressure on banks andtraditional credit institutions.

Finally, one should mention the role played by international regulation,in particular regulatory changes pursued by the Bank for InternationalSettlement – instrumental in diffusing prudential ratios adopted bynational and international regulatory authorities. The introduction in1988 of the “Cooke ratio”, in particular, set the basis for prudentialregulation by national authorities and created a “minimum profitabilityconstraint for banking assets” (Lévy-Lang, 1990)16.

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15 Taking effect in July 2005; an agreement was reached in 2004 between the EC, GermanLander and the Landesbanken to soften the impact of the abolition of state guarantees onbanks’ ratings.

16 The Cooke ratio, adopted with the first Basle agreement in 1988, sets the minimal amount ofown funds a bank should possess in function of the risks born by its liabilities. More precisely,the Cooke ratio imposes two constraints: (i) the ratio (own funds + quasi-own funds)/totalliabilities should be superior to 8%; and (ii) the ratio own funds/total liabilities should besuperior to 4%.

With the Basle II agreement, signed in 2004, banks will be submitted toindividual risk management with the Mac Donough ratio (successor ofthe Cooke ratio), which should start being implemented in 2006.

1.1.6 Convergence mechanisms

The vast transformations in European banks’ regulatory, technological andcompetitive environment in the 1980s could not leave banks unaffected.In fact, even while the transformation of banks’ environment was underway, many observers made conjectures on what changes banking wouldundergo (see European Commission 1990; and PriceWaterhouseCoopers1988). In particular, four trends were identified: (i) growing competition;(ii) banking disintermediation – that is, the crowding out of bankintermediation by market actors and activities; (iii) the marketisation ofbanking – that is, the increased reliance of banks on financial markets fortheir revenues, and the transformation of banking strategies to better suitmarket incentives and constraints; (iv) the “rationalisation” of bankingstructures – that is, the restructuring of the banking system throughmergers and acquisitions. This restructuring trend was also to lead to afifth expected change: the emergence of an integrated Europeanfinancial market, with cross-border mergers leading to the constitution oftruly European banking or financial groups operating on a level playingfield – the same market with identical instruments and regulations.

Finally, since the same changes affected European national financialsystems, those systems were expected to converge on one another andappear more alike. In particular, along with dis-intermediation, bankswere to become much more market-oriented – being more responsive tocompetition, better able to rapidly adjust their strategies. This led to thewidespread expectation that non-profit, cooperative or public banks werebound to lose their identity – or disappear (PriceWaterhouse, 1988).

Such expected convergence was not limited to finance and banking; agrowing literature saw “globalisation” leading to irresistible convergence,across countries, of both macroeconomic performance and microeconomicstructures (see, for a review, Berger 1996). Berger lists five mechanismsfor convergence: competition, imitation, trade, capital mobility and diffusionof best practice (Berger, 1996). These five mechanisms are all associatedwith globalisation. Deeg (1999) adds the technical revolution, and thepressure to adopt lean production – both of which could be subsumedinto the ‘imitation and ‘diffusion of best practice’ category.

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Some of these mechanisms are pure market mechanisms, such ascompetition or trade. Others are not. For instance, imitation or thediffusion of best practice also occurs through self-consciously pursuedharmonisation. According to Deeg, “because national economies areorganised around different rules and institutions that create structuraladvantages and disadvantages for their firms in internationalcompetition, firms in one nation will push for a ‘level playing field’leading to the harmonisation of economic policy, regulation and,ultimately, economic structures.” (Deeg 1999).

There are also ‘pure’ political mechanisms – several “convergence” and“divergence” scholars agree that changes are driven by the policy decisionsof financially powerful states. Eric Helleiner has emphasised the roleplayed by the United States in the transformation of the internationalpolitical economy (Helleiner, 1994). Similarly, Loriaux underlined how thecrisis of the interventionist model in France was provoked by the policyshifts within the hegemon (Loriaux, 1991, 1998a, 1998b). Finally, eventhe proponents of the “convergence” view accept the idea that changedoes not happen simply as a result of external pressures, but out of acombination of external pressures with ‘domestic pull’ – that is, theaction of domestic actors pushing for a specific agenda that reinforcesand transforms external pressures into policy (Ogata 1996, Upham 1996).However, the actual changes observed in the late 1980s and the 1990sdeparted significantly from the convergence story.

1.2 The evidence: mixed outcomes

1.2.1 Growing competition in the banking market

The changes in banks’ environment mentioned above were expected,as early as the 1980s, to intensify competition on the banking marketand force all banks and financial institutions to radically adjust theirbusiness behaviour and strategies. In particular, the already mentioned1988 PriceWaterhouse study on the expected impact of the completionof the internal market argued that the latter should bring to a levelling ofprices across a broad range of economic sectors – among them bankingand finance (PriceWaterhouse, 1988). Price levelling has not taken place(yet?). But competition has definitely increased throughout Europeanbanking markets.

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Across countries, successive EU regulation has indeed lifted the barriersto entry on national markets for foreign banks; and indeed, foreign bankshave entered national markets, although at a varying rhythm and withvarying successes: in France, for instance, 17% of all active bank branchesin 2004 belonged to foreign banks or banking groups; in Italy, foreignbanks held a 21% market share in the 2003 market for deposits17.

But competition has increased above all within countries, following marketde-segmentation and the lift of price controls. In some countries, increasedcompetition can be observed through the rapid rise in the number ofbank branches. This is the case in Italy, where the number of bank brancheshas jumped from 23,460 in 1980 to 30,890 in 200418. In others, eventhough the number of bank branches has not changed, or has varied onlyat the margin (such as France, where the number of bank branchesincreased from a total of 25,490 in 1984 to a total of 26370 in 200419),increased competition can be seen through the diversification of banks’products and services: for instance, the multiplication of savings productsat the beginning of the 1980s clearly threatened French savings banks’quasi-monopoly on the market for savings deposits.

More importantly, perceived competition has increased, even where orwhen competition has not effectively increased yet. In many Europeancountries, the advent of the Euro and the substitution of nationalcurrencies in 2002 were expected to unleash a new wave of competition;banks anticipated the change by previously modifying their strategies.Similarly, where banks were not directly threatened by other banks orfinancial intermediaries, they nevertheless modified their behaviour as ifcompetition had increased. This phenomenon was effectively captured bythe theory of contestable markets (Baumol, Panzar and Willig 1982).According to this theory, a perfectly contestable market is one in whichentry and exit are absolutely costless. In such a market, competitivepressures supplied by the perpetual threat of entry, as well as by thepresence of actual current rivals, can prevent monopoly behaviour20.

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17 The data is from central bank annual reports in both countries.18 Source: Banca d’Italia, Bolletino statistico, 1980 and November 2004.19 Source: Banque de France, Bulletin, December 2004.20 Although the theory is not universally accepted and presents many questionable elements

(for instance the overlooking of regulatory barriers to entry), it still provides a good approachto analyse the mechanisms by which the threat of competition is internalised by firms.

1.2.2 The growth of financial markets

The growth of stock-markets has led to: an increased reliance on externalfinance for large companies; a wave of financial innovations (with newinstruments such as credit and currency swaps, futures and caps etc.); andthe emergence of new financial actors. Faced with these developments,banks were expected to lose their central role in most European countries’financial systems, to the profit of market finance, epitomised by stockmarket activities. Indeed, “market” finance represented 12% of externalfinance for large firms in 1980, in contrast to 35% today21 – meaningthat bank loans have, logically and at least in relative terms, lost ground.

However, European finance today is still highly intermediated (intermediatedfinance still represented around 75% of total external finance of non-financial actors from 1992 to 1998 in France and Germany22). But whilethis intermediation was essentially based on credit until the 1990s, it nowincreasingly involves hybrid forms of finance, with banks and otherintermediaries being active market actors, and earning a sizeable portionof their revenues from market activities. Moreover, the parallel increasein “securitisation” has led to an increasing dependence of banks onfinancial markets (both for credit ratings and off-balance sheets operations).

1.2.3 The marketisation of banks’ business

Commercial and non-commercial banks in most European countries haveundergone significant changes in their organisation, profit strategies andtheir product mix. Banks have become hybrid, somewhere in betweenmarkets and traditional financial intermediaries – a phenomenon that hasbeen called “marketisation” of banking, “market intermediation” (Courbis,Froment & Karlin, 1990), “variable geometry banks” (Lubochinsky andMétais, 1990), or “assetless banking” (Giddy, 1985).

In particular, there has been a shift in banks’ product strategies: bankingintermediation in the traditional sense (lending and deposit activities) hasdecreased, while “market transactions” (financial instruments operations)have increased. Banks are now multi-product firms, which draw fromfinancial markets enough resources to counterbalance traditional assetand liability management.

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21 Source: The Financial Times, October 23, 2000.22 Source: Paranque et al., 1999.

Decomposition, more target risk analysis and management overcome thediversification and scale strategies previously pursued – trends reinforcedby the new Basle accords23. In addition, securitisation permits theoutsourcing of risk management, while helping to de-emphasise lending –a necessity for banks facing increased competitive pressures on the lendingmarket. Already, the big German banks get most of their revenue fromthese activities.

Moreover, banks throughout Europe have grown much more shareholdervalue-oriented, with a strong emphasis on profit objectives and performancetargets such as return on equity or return on assets24. The increasingimportance of profitability and ROE were pointed out in 1994 (MorganStanley, 1994). In addition, the IEF report emphasised the growingimportance of value-added – i.e. the value corresponding to the excess ofrevenues on costs. Value-added strategies are intrinsically market-oriented – since, as the IEF report points out, “Value-added returns andthe respective costs are increasingly based on comparisons with other,competing products and services in the market. […] Value-added is anexternally focused, opportunistic measure” (IEF 1999, p.8).

However, again, those changes are not all-encompassing. Onado’s 1990work on a sample of 108 Italian banks showed that banking competitionhad undeniably increased in Italy during the 1980s, but that did not resultin fundamentally altering banking performance or business (Onado 1990).Increased competition was, according to Onado, a kind of “lop-sidedprocess”, characterised by a mere transformation of bank revenues fromdirect intermediation to placement fees. “Alternatively stated, bankshave not lost their relationship with the customer and that certainlyhelped to maintain segmentation (by location, type of deposit, class ofcustomer, size of accounts, etc.)” (Onado, 1990: 104). More recentevidence supports similar findings. Affinito et al., in particular, emphasisethe persistent differences in the balance sheet structure of Europeanbanks (Affinito et al., 2003); while Murinde at al. and Flier et al. point tothe divergent business strategies followed by banks across Europeancountries (Flier et al., 2003; Murinde et al., 2004).

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23 Interestingly, as pointed out in the IEF 1999 report, in 1997 the European Savings BanksGroup, in comments made during the debate on the completion of the Internal market,underlined that current European banking regulation mainly derived from rules elaboratedwithin the Basle Committee, which themselves reflected the practical supervisory needs ofinternational commercial and investment banks (IEF 1999: p.19).

24 See “Blot on the landscape”, The Banker, February 2001, pp.44-46.

1.2.4 Shifts in corporate ownership and control

Market and regulatory pressures have also led to a wave of corporaterestructuring in banking, characterised by two trends. A first trend isthe continuous and rapid decrease in the number of credit institutions.In France, for instance, from a peak of 2,152 in 1987, it fell to 1,837in 1991, 1,445 in 1995, and 1,143 at the end of 199925. The decrease isalmost twofold in 12 years. All banks were affected, but especially mutualand cooperative banks (down from 663 in 1984 to 155 in 1999).

A second trend is the increased concentration in banking. In France, fora long time, the banking sector had been characterised by very littleconcentration, compared with other sectors. Only one bank, the CréditAgricole, had a market share of over 10% (of both total loans anddeposits). And the restructuring activities that took place in the 1980sand the early 1990s did not affect much the level of concentration of thebanking sector, since they happened within same groups (mergersbetween ‘banques populaires’, savings banks…) By contrast, since themid-1990s, new, large-scale M&A activities have signaled an accelerationof concentration in the sector26. One can cite the takeover of Crédit duNord by the Société Générale in 1998, the takeover of Paribas by the BNP(and the failed takeover of Société Générale by the latter) and, of course,the takeover of the Crédit Lyonnais by Crédit Agricole in 2003.

However, contrary to what the 1989 Cecchini Report predicted, suchrestructuring did not lead to a complete upheaval of the banking sectorin most European countries. First, many banking markets remaincharacterised by a high number of operators – far from the markets forautomobile, oil, or electricity, for instance. In France and Italy there areabout a thousand active banks and financial firms. Secondly, a closer lookat the banking M&A that took place in the 1990s shows that thosemergers occurred mainly between banks belonging to the same networks(savings banks, cooperative banks) or credit institutions active in the samemarket. Thirdly, European banking markets remain less concentrated.In France, the CR5 ratio (ratio of concentration of the 5 biggest creditinstitutions vis-à-vis the whole banking sector, in terms of assets) was39,20 in 1998 (against 41,30 in 1995, but 34.45 in 1990). In Germany,the ratio is even lower: it stood at 19,15 in 1998, from 16,67 in 199527.

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25 Source: Banque de France, Internet site, August 2001; see chapter 4.26 The number of M&A operations over FFm 500 jumped from 54 in 1994 to 98 in 1998

(Source: Banque Magazine, February 2000)27 Source: European Central Bank Statistics, June 2001

Finally, again contrary to most expectations (European Commission 1989;PriceWaterHouse 1988), there is no unified European financial market.Cross-border mergers between financial institutions have been rare and havenot led to a level playing field at the European level. National authoritieshave been busy strengthening or creating their own national champions,and remain wary of the idea that a foreign bank, be it from anotherEuropean country, should take over a large national bank28.

1.2.5 Limited convergence between banking systems

The literature provides evidence on financial regimes appearing more alike.Vitols (1997) presented evidence supporting the argument that thedifferences between the three ideal-types of financial systems identifiedby Zysman (1983) - securities market-based systems; bank-based systemsand state-based, administered credit systems, are fading away. The latter,in particular, are unraveling everywhere, while market and bank-basedsystems seem to be taking on similar features. In Germany, for instance,the close relationships between companies and their banks have beenweakened by the increased ability and willingness of large corporationsto avail of the services of competing banks, especially in foreign markets,or to resort to market finance (Lutz, 1998). In addition, moving beyondthe boundaries of finance and banking, dominant economic and sociologicaltheories of organisation assert that globalisation is leading to a convergencetowards a single model of the firm29.

Story and Walter’s book on European financial systems also cites evidenceshowing that the construction of an integrated financial market in Europe(a development that accompanies and reinforces the “globalisation process”itself) reveals a strong converging trend to similar financial regimes, despitea “battle of systems”30 (Story and Walter 1997).

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28 See the recent public exchange between EU Commissioner for Internal Market and theGovernor of the Italian central bank on the degree of opening of the Italian banking sector.

29 See Fligstein, 1996, for a critical account of this literature.30 Here is the difference between financial systems and regimes, according to Story and

Walter: the financial system is the ensemble of relationships between financial institutions,whereas a financial regime is the ensemble of rules that enable these relationships to takeplace. “In equilibrium, the process of financial intermediation evolves within a financialsystem that is regulated according to a hierarchy of norms, effectively implemented” (Story& Walter, 1997, p.106). This is a tricky distinction, since even the authors show someconfusion in their analysis of the European situation. Subtitled “A battle of systems”, theirbook is indeed much more focused on financial regimes… We will see later on how thatconfusion might have important consequences at a theoretical level.

Others, such as Forsyth and Notermans, point towards broader convergenceat the level of macro-economic regimes (Forsyth and Notermans 1997).Such convergence is attributed to a variety of reasons: the pressure ofinternational trade and finance; the obsolescence of Keynesianeconomics; the unraveling of those coalitions (or policy communities) thathad supported the previous regulatory arrangements (see Moran, 1984).

Yet if differences between financial regimes tend to fade away, financialsystems remain quite distinct from one another. In other words, althoughZysman’s third ideal-typical financial system – the state-administeredmodel – has clearly collapsed, banking intermediation remains the prevalentsource of corporate finance in most continental European countries.Several recent works (Busch, 2002; Deeg, 1999; Vitols, 1999; Lutz, 1997;Perez, 1997) show indeed that banking systems resist rather well toconvergence pressures. Deeg and Vitols present evidence supporting thepersistence of non-market forms of financial intermediation and of asizeable banking sector in bank-based systems (Deeg, 1992 and 1999and Vitols, 1999). Others, such as Labye and Renversez, do acknowledgethat “market intermediation” has increased in countries such as Germanyor France, but emphasise that this form of intermediation “cohabits”with more traditional, credit-based intermediation (Labye and Renversez,2000). Here we can observe a slight difference from the interpretationevoked before: instead of divergence, Labye and Renversez speak of“limited convergence” or convergence towards… distinctiveness vis-à-visstock market based economies. Similarly, Soskice opposes “bifurcatedconvergence” to “uniform convergence” (Soskice, 1999).

Moreover, even national banking systems differ from one country to thenext. In a 1994 study (which drew on data from the late eighties),Molyneux, Lloyd-Williams and Thornton found that “competitiveconditions” in banking were still diverse across European countries(Molyneux et. al., 1994). But these authors found the same trend towardsthe emergence of a handful of large banks over time “in almost everydeveloped country”. In other words, the changing structural characteristicsof the banking system looked very much alike across continental Europe:France, Germany, Italy and Spain were characterised by a group ofdominant or “core banks”, who were being challenged (to a varyingdegree) by mutual or cooperative banks with a strong regional or localfocus (see Molyneux et al., 1994).

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The same authors, however, rightly pointed out that the existing “evidence”on competitive conditions in banking markets is often inferred frommarket structure variables, such as concentration ratios, branch numbers,and number of banks (Molyneux et al., 1994). There is yet no simple,linear relationship between market structure and effective competition,especially in the light of contestable markets theory. The only validempirical study up until the 1990s remained, in that perspective, thePriceWaterhouse study on the “costs of non-Europe” (PriceWaterhouse1988). Molyneux, Lloyd-Williams and Thornton used a non-structuralmeasure of competition (the Ross-Panzar statistic31) to investigate competitiveconditions in banking in five European countries, from 1986 to 1989.They concluded that as of the late 1980s, commercial banks’ revenuein all of these countries “behaved as if earned under monopolisticcompetition”, noting that this significantly diverged from contestablemarkets theory, which holds that potential competitors force competitivepricing strategies upon incumbents. (Molyneux et al., 1994: p.25)

Similarly, in a 1994 study on Italian banking, Cesari, Conti and Onado foundthat “the sign and speed of changes are by no means clear”, althoughprevious works carried the expectation that competition forces would putpressure on national banking systems and eventually lead to convergenceof market structures and business conditions. Furthermore, the sameauthors found that increased competition (from 1986 to 1990) led to areshuffle of market shares in individual segments, rather than changesin the aggregate market shares of individual banks. They concludedby saying that “even in an integrated country, even in a period ofderegulation and greater competition, differences tend to remain” (p.39).

More recent evidence gives mixed support for the convergence thesis.Several works exploring the degree of integration between Europeanfinancial systems point to the significant convergence of macro andquantitative indicators. Calcagnini, Farabullini and Hester, for instance,show that money market interest rates have converged across Europeancountries in the twenty years preceding the advent of the single currency(Calcagnini et al., 2000). Similar observations are made regarding interestyields on stocks and government bonds by Danthine et al. (2000).

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31 The “Rosse-Panzar H statistic”, first elaborated by Rosse and Panzar in the late 1970s andthen used and refined by several banking economists, measures the sum of total revenuesrelated to input prices. Rosse and Panzar, and the users of the H statistic after them, holdthat such value cannot be positive if a firm is a profit-maximising monopoly. Indeed, undersuch conditions, an increase in input prices will increase marginal costs and, consequently,total revenue.

However such macro-level convergence does not necessarily lead tomicro-level convergence. In fact, the evidence for banking systemsconvergence is much less straightforward.

Building on a cross-country and longitudinal study of banking in 10 countriesfrom 1993 to 1997, Murinde et al., for instance, find that convergenceacross European banking systems is only found in terms of loans tothe private sector and foreign liabilities; but not in terms of loans topublic administrations, demand deposits and time and savings deposits(Murinde et al., 2004). Flier et al. have studied the diffusion patterns ofregulatory and technological developments in five European countries(France, Italy, the Netherlands, Sweden and the United Kingdom) on a27-year period (from 1972 to 1999) (Flier et al., 2003). They find that atthe national level, differences (in the pace of diffusion) tend to decreaseover time; but at the firm level, they find significant differences betweenstrategic behaviours amongst countries. According to them, suchfindings indicate “divergence and room for managerial intentionality inthe process of strategic renewal” (Flier et al., 2003: 27). Affinito et al., fortheir part, show that there is a great dispersion between the averagebalance sheet structures of European banking systems – their studycovers 11 countries for a 1996-2001 period (Affinito et al., 2003).

Thus, there is contradictory evidence on both the nature and the directionof the actual changes that took place in banking and finance duringthese past two decades. National financial systems seem to havesimultaneously converged and diverged; profoundly changed and keptthe same characteristics. Nowhere are these paradoxes more apparent thanin the most idiosyncratic sectors of European banking: savings banks.

1.2.6 What about savings banks?

Savings banks have been exposed to the same “environmental” changesaffecting other banks or financial institutions. But their peculiarcharacteristics made them even more vulnerable to those externalpressures. First of all, state guarantees, or statutory protection for theirnon-profit activities, are threatened – both by de-segmentation andcompetition law. This is especially true in countries such as France andItaly, where savings banks were part of state-administered credit systems.Secondly, increased competition and marketisation, similarly, threatentheir non-profit and redistributive purpose.

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Third, competition and corporate restructuring threaten their independenceand their viability as locally rooted financial institutions. In sum, savingsbanks are presented, it seems, with a difficult alternative: to adjust totheir new environment – and lose their identity and specificity; or todisappear. How have savings banks reacted so far? Is there a common(converging) adjustment path across countries?

The existing evidence is mixed. In many countries, the total number ofsavings banks has shrunk over the years, along a pace much more rapidthan in the commercial sector. Moreover, savings banks have activelytaken part in the M&A wave of the 1990s. In France, in 1999, thenetwork of Caisses d’épargne et de prévoyance took over Crédit foncierde France; and more recently, the savings banks groups went ahead withthe takeover of the merchant bank operations and subsidiaries of thestate-owned Caisse des Dépots et Consignations. In Italy, Cassa di Risparmiodelle Province Lombarde (CARIPLO), Milan-based biggest Italian savingsbank, struck an alliance in the 1990s with a large former public bank,Comit, leading to the formation of Banca Intesa, Italy’s largest bankinggroup. Similarly, savings banks from Turin and Bologna formed allianceswith other former public banks, before merging to form large bankinggroups. And the restructuring wave is not over. In 2002-2003, there weretalks of status change for German savings banks, in order to allow themto merge with each other or with privately owned banks. This discussionarose when, with the perspective of the removal of state guarantees, oneexpected a spur in M&As – but the legal status prevented, for instance, amerger between two neighbouring savings banks such as Frankfurt’sSparkasse and the Nassauische Sparkasse. Discussions around statuschange often referred to the French and Italian example32.

Furthermore, since the early 1990s, savings banks have also taken part inthe “universalisation” of banking33. Savings banks now look more likecommercial banks, with their presence in most markets, their ability tooffer any service to any kind of client; their “statutory homologation”with commercial banks. Quesada (1994) finds that Spanish banks ingeneral and savings banks in particular have integrated the financialinnovations rather well. And according to Gardener, the growing role ofthe marketing function in savings banks indicates the growing “demand-determination” of banks’ strategy (Garderner 1994).

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32 See « Status critical for Sparkassen » in The Banker, August 2002, pp.27-29.33 As Revell (1994b) notes, the term “universal banking” has come to mean many things

different to many people. The two defining criteria, according to him, are that theuniversal bank (i) undertakes both retail and wholesale business and (ii) operates in othercountries than its home country.

However, the existing evidence equally points to the resistance or resilienceof savings banks’ identity in the face of homogenisation pressures. Frenchsavings banks, for instance, have not disappeared, nor aligned tocommercial banks status. Actually, in 1999, they became a cooperativegroup, moving further away from for-profit banking. In Italy, althoughsavings banks have indeed lost their non-profit purpose, most remainlocally rooted and at the service of their old clientele. In both countries,savings banks still hold an edge in savings accounts and related products.More puzzling still, despite their limited adjustment, savings banks inmost continental Europe (and especially in France and Italy) have not losttheir stronghold position within the banking sector, as numbers quotedabove have indicated.

To sum up, the evidence on changes across financial systems is ambiguous:there seem to be some strong common trends and even convergentforces at play across national banking systems; but there also seems to bepersisting idiosyncrasies within each system, preventing fully fledgedconvergence – and savings banks seem to be a good example of persistingcross-country variation. How can one make sense of this mixed evidence?In other words, how can one theoretically account for persistent cross-country variation in national financial systems, especially with regard tosavings banks?

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2.1 Explaining varieties of financial systems:the role of institutions

2.1.1 Explaining cross-variation in history: the static roleof institutions

Strictly speaking, there is no cross-country comparative work on savingsbanks34. There is, however, a vast comparative literature on financial systems.This heterogeneous literature builds on a stylised fact: financial systemsvary from one country to the next. Moreover, this literature addresses twoclosely related but distinct issues. The first one relates to the origins ofcross-country variations in financial systems. The research question is thefollowing: how do we explain the existence (and the origin) of differentfinancial systems between nations?

The second issue has to do with the persistence of cross-country variationsthroughout the years. This later issue has given rise to a literature that isclosely linked to the wave of comparative political economy works that,since the 1970s, have sought to understand the variety of adjustmentpatterns of countries / systems in the face of growing external pressuresto change (technological change, globalisation…). The question addressed inthis literature is the following: why are national financial systems notconverging on each other (or on a third model)? This issue specificallyrelates to the research question tackled in this study – namely, thedirection of changes. It has come to the fore with the debates aboutglobalisation and its impact on national paths of economic developmentand national production systems.

2. ORGANISATIONAL ANDINSTITUTIONAL CHANGEIN NATIONAL FINANCIALSYSTEMS

34 Apart from the already cited 1999 IEF report. There are comparative historical works onsavings banks, but they mostly rely on a juxtaposition of monographs. (See Mura, 1996;and Mentré and Mérieux, 2002).

2.1.2 Cross-country variation in the presence of convergencepressures: the dynamic role of institutions

Path-dependency lies at the core of the neo-institutionalists’ theory ofinstitutional change, which itself constitutes the pillar of recent worksthat seek to explain the persisting variation of national financial systemsin the face of globalisation and homogenisation pressures. According tothose works, it is institutions that shape adjustment (and non-adjustment)patterns. Vitols, for instance, finds that Germany’s bank-based financialsystem’s resilience is due to the stability of patterns of savings and investmentby households and companies alike (Vitols 2004). Such stability is in turnlinked to low levels of income inequality (favourable to long-term savingsand risk-adverse behaviour from households) and the characteristics ofthe German production system. Therefore, the German financial system,despite Anglo-Saxon inspired regulatory reform, remains true to its post-war founding principles – since it is embedded in the broader politicaleconomy of German capitalism. In her work on Spain, Sofia Perezunderlines the role domestic politics played in bending the regulatoryreform in a certain direction – cogent with the interests of a small groupof reformers within the central bank and of private bankers (Perez 1997).Deeg and Perez (2000) further argue that the limited convergence ofcorporate finance and corporate governance systems between countrieshas much to do with the politics of reform; and the ways in whichexternal pressure is mitigated by internal institutions. Similarly, Lutz arguesthat the extent of regulatory convergence is linked to the existence (orabsence) of what she calls “institutional veto points” in the domesticpolitical system (Lutz 2003).

In fact, most of the recent studies on banking and finance cited here– even though they are more substantial on the empirical side than onthe theoretical side - explicitly rely on new institutionalism to explain nationalfinancial systems’ persisting differences. In particular, those persistingdifferences are attributed to (a) the interlock of various institutionsshaping firms (banks or financial institutions)’ expectations andbehaviour, (b) institutions’ path dependence and (c) the role played byregulatory authorities and politics in mitigating external pressures ondomestic firms (banks). Those three mechanisms stand at the heart of the“varieties of capitalism” approach, which, itself, builds on the broadtheoretical literature on new institutionalism. Further analysis of these tworelated theoretical frameworks is thus required.

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• Neo-institutionalism and persistent cross-country variation in nationalproduction systems

As is well-known, the rediscovery of institutions by social scientists inthe 1970s has led to a new conceptualisation of the role institutionsplay in shaping economic and social agents’ behaviour and, therefore,social, economic and political outcomes. “New institutionalism” wasdefined both in opposition to the behavioural and structuralist theoriesin vogue in the social sciences in the 1950s and 1960s; and in contrastto the “old institutionalism” present in the works of economists,sociologists and political scientists in the first half of the XXth century(Veblen, Commons, Schumpeter…).

In the field of comparative political economy, the neo-institutionalistagenda was given a strong impetus from the crisis that affectedindustrial countries in the 1970s and, above all, the variety ofresponses to it. As Goldthorpe has argued, distinct institutional matricesproduce diverse responses to similar economic problems (Golthorpe1984). A first generation of neo-institutional studies thus addressedthe variety of post-crisis adjustment patterns among industrialisedcountries, focusing in particular on the effect such adjustment patternshad on national economic performance. These studies were followedby a second generation of works in comparative political economyinterested in the differences between the structure (not the performance)of national economic systems, and their persistence over time (Bergerand Dore 1996; Crouch and Streeck 1997; Boyer and Hollingsworth1997; Kitschelt et. Al 1999; Quack et al. 1999; Hall and Soskice 2001;Whitley 2002).

Most of these works argued that globalisation pressures do not leadto convergence in the functioning and organisation of economicsystems. Moreover, most of those studies explicitly based theirtheoretical frameworks on neo-institutionalism. Institutions, they argue,shape social outcomes, and thus give their distinct flavour to nationalforms of capitalism. As Whitley puts it, “specific patterns of economicorganisation result from, and are effective within, particularinstitutional environments so that variation and changes in the lattergenerate differences in the former” (Whitley 1995: 5). This causalityoccurs at different levels and runs through various channels.

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Soskice, for instance, argues that institutions structure coordinationbetween and among firms, which in turn shapes national productionregimes (Soskice 1999). Kristensen claims that different institutionalcontexts determine different firm-types (Kristensen 1995). And, accordingto Quack and Morgan, national institutions shape national patterns oforganisational innovation and adaptation (Quack and Morgan, 1999).In addition, most of these authors explicitly identify the key institutionsthat shape production regimes, innovation or organisation patterns.These include the financial system (the literature heavily draws on adistinction between market and bank-based financial systems),industrial relations, welfare arrangements, and corporate governanceinstitutions. Fligstein adds cognitive institutions, under the form of“conceptions of control” that influence actor’s behaviour – and,ultimately, national patterns of behaviour (Fligstein 1995).

Of course, there are several types of neo-institutionalism. Hall andTaylor list the three main strands: historical institutionalism,sociological institutionalism and rational choice institutionalism(Hall and Taylor, 1996). The problem with the second generation ofcomparative political economy works is their difficulty to theoreticallyaccount for the permanence of institutional frameworks in front ofexternal pressures to adjust. The third generation of neo-institutionalworks, what we call here the “Varieties of capitalism” (VOC)approach, after the homonymous book by Hall and Soskice (2001),aimed precisely at overcoming such difficulty.

• The Variety of Capitalism approach

The VOC approach has been applied to a broad range of constitutiveelements of national production systems – industrial relations, corporategovernance, corporate finance... The starting question of VOC worksis the same as that tackled by the earlier generations of comparativepolitical economy works. Namely: what can explain national capitalisms’tendency to diverge despite strong convergence pressures? In theirseminal work, Hall and Soskice (2001) proposed an answer based ontwo innovative hypotheses: (i) the hypothesis of comparative institutionaladvantage; and (ii) the hypothesis of institutional interlock and pathdependence. According to Hancké (2001), these characteristicsdistinguish VOC theory from other forms of neo-institutionalism,analysed above.

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The theory of comparative institutional advantage developed by Halland Soskice systematises previous theoretical arguments and empiricalfindings and builds on trade theory, and in particular on Ricardo's lawof comparative advantage, which states that countries specialise inthe production for which they have a (relative) comparative advantagein trade. In VOC works, comparative advantages arise from differentinstitutional configurations, or different ‘national models oforganisation’ (Quack et al., 1999). More precisely, institutions (or webof institutions) endow firms with different capacities to innovate.Coordinated market economies, for instance, are characterised byinstitutions (apprenticeship, work councils, house banking) thatencourage long-term, incremental innovation; liberal market economies,by contrast, are characterised by institutions (stock-markets, flexiblelabour markets…) that encourage radical, short-term innovation(Hall and Soskice 2001).

The second progress accomplished by Hall and Soskice (as comparedwith earlier works on comparative political economy) consists inexplaining why and how such comparative advantage persists – inother words, why national capitalisms remain distinct. Hall andSoskice formulate two key assumptions: on the one hand, moderneconomies are based on institutional complementarities that producespecific sets of constraints and incentives for economic actors, whichmake institutional change very difficult. On the other hand,institutions are path dependent – hence the resilience of nationalcapitalisms over time. The second assumption will be discussed insection three, since it is a core feature, not only of VOC works, but ofnew institutionalist approaches in general. The first assumption isanalysed in detail in the following paragraphs, along with theinstitutional approach used in all four theories mentioned above.

Institutional interdependence, or institutional interlock, consists inthe fact that, as Soskice puts it, “each element of the institutionalframework reinforces the other” (Soskice, 1999, p.110); and, onecould add, each element calls for the other, or makes it necessary.In other words, institutional interlock is not the contingent outcomeof heterogeneous forces; it is functional. For instance, in Germanyvocational training (a property of the skills production sub-system)requires both long-term finance (a property of the corporate financesubsystem) and corporate control by stakeholders, including creditorsand workers (a property of the corporate governance subsystem)(Soskice 1999; Hall and Soskice 2001).

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Here the authors build on previous works showing complementaritiesbetween various institutions, especially employment contracts andlong-term finance (Aoki 1994).

Within such a framework, external pressures to change (i.e.macroeconomic shocks) are mediated by internal institutions whichmitigate its impact on single firms; even as one piece of theinstitutional framework (for instance, corporate governance rules orcorporate finance behaviour) tends to change, other pieces remainmore or less stable; therefore, on the whole, firms face a stableinstitutional environment which prevents a massive shift in corporatebehaviour. In dynamic terms, adjustment patterns vary betweencountries because each national economy is embedded within aspecific web of inter-related institutions. In other words, firms adjustto a shock (and thus change their behaviour) but within theboundaries of the various institutions that determine their behaviour;hence the different outcomes brought by adjustment to similarexternal forces.

Both Verdier’s theory of the origins of universal banking and theworks on banking and finance inspired by neo-institutional (and inparticular VOC) theories of change suggest, therefore, two relevanthypotheses for our two cases. The first hypothesis is that varieties of(savings banks’) adjustment patterns are caused by the idiosyncraticand systemic characteristics of institutions surrounding actors andshaping their behaviour through a stable set of incentives andconstraints. The second hypothesis is that resistance to change isreinforced over time, either through “strict” path dependency orthrough political intervention (protection) – the latter beingreconductible to Verdier’s mention of interest group politics (Verdier2002). Although very useful, this combined theoretical frameworkpresents several weaknesses that are addressed in the followingsection.

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2.1.3 The weaknesses of the neo- institutionalist story

Neo-institutionalist works rightly emphasise the role of institutions in shapingindividual firms’ response to external shocks and determining aggregateadjustment paths. Furthermore, one critical contribution of such literatureto our understanding of the functioning and evolution of nationalfinancial systems lies in its insistence on the role of politics and publicpolicy in the production of incentives and constraints that shape, in turn,(banking) firms’ behaviour. However, such approaches also present twoweaknesses that become apparent when applying them to our cases.

• Overlooking organisations

First, such analyses overlook the organisational dynamics at playwithin (banking) firms’ adjustment strategies. This is all the moreapparent when looking at two similar sets of firms (savings banks),placed in similar institutional environments (state-administered creditsystems) and exposed to similar external pressures, who embark ondifferent adjustment strategies. Given institutional similarity, variety ordivergence cannot be solely attributed to institutions and institutionalconstraints and incentives. In other words, there must be some othervariable that produces such different outcomes. Such variable might befound within firms (banks) themselves, that is, within their organisation.

Yet most neo-institutional works do not pay attention to theorganisation, and focus on institutional change at a systemic level(Soskice 1999; Vitols 1999, 2001; Thelen 2001) even as some of them(in particular Hall and Soskice 2001) claim to put the firm at thecentre of their analysis. In fact, those works seem to mistakeinstitutions for aggregate patterns of behaviour. More fundamental,however, are the theoretical problems associated with newinstitutionalism. First, neo-institutionalist theory is unable to modelagent’s behaviour independently from institutions. There is no room,in this model, for understanding agency other than a simple reactionto institutional change (or persistence). More recent works haveinstead emphasised the autonomous role of firms and managers inchoosing the adjustment paths (see, in particular, Morgan 2005).

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Secondly, institutions always end up being treated as an exogenousvariable. Institutions shape the external environment of firms.As Hancké argues, firms are seen as institutions-takers – notinstitutions-makers (Hancké, 2002). This view might be correct whenlooking at small firms in large economies; it is not, however, whenanalysing large French firms’ adjustment patterns, as Hanckéconvincingly shows (Hancké, 2002). In recent works this interactionhas been more systematically analysed (Morgan 2005).

• Problems with neo-institutionnalists’ theory of change and use ofnarrow path dependence theory

Comparative political economists are not only interested in cross-country variation; they also aim at understanding the trajectories ofone political economy over time. Most comparative political economyworks, as shown above, rely therefore on descriptive accounts ofhistorical trajectories (of countries, sectors, firms). The problem is thatthey rarely theorise these trajectories – why do they take the turn theyseem to have taken? Is the dynamic endogenous? What are themechanisms ensuring the reproduction or the transformation of asystem/institutional configuration over time?

This under-theorisation of change is common to many works in socialscience, which not only treat timing and sequence as irrelevant(see Pierson, 2000a, for a critique), but also make longitudinalinferences from cross-country comparisons (Tilly, 1984). As Piersonconvincingly argues, “it is not the past per se but the unfolding ofprocesses over time that is theoretically central” (Pierson 2000a: 265).Neo-institutionalists, however, have made a strong effort to integratesuch a conceptualisation of historical change in their theories. To mostof these authors, the key dynamic behind institutional resilience is pathdependence. Broadly speaking, path dependence theory (henceforthPDT) consists in the argument that past events, however small inimportance, may have large consequences – and that particularcourses of action, once started, can be difficult to reverse.

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As mentioned above, the early objective of the neo-institutionalistliterature was to confront the convergence thesis. Neo-institutionalistscholars showed the opposite was true: capitalisms persist in theirvariety. This early concern, however well-founded, built into a flawedbinary vision of change in modern economies: a system either convergesor diverges (that is, it remains the same). Path dependence theoryhelped buffer the divergence thesis. In a sense, the neo-institutionalistliterature developed the assumption that national economic systemsare homogeneous and consistent over time, i.e. they present similarstatic characteristics that evolve in the same direction. In Crouch andFarrell’s words, users of PDT emphasise “coherent logics of ordering”(Crouch and Farrell, 2002).

This assumption raises a double issue: at the empirical level, it doesnot account for contradictory evidence (simultaneous change andnon-change). Taking, again, the German example, one quickly noticesthat not only is the financial system dual; its various sub-systems aremoving in different directions: large banks are converging on aninternational model, while small public banks follow the same oldpath. There is, therefore, convergence and divergence at the sametime (Deeg, 2002). This modified version of PDT is not alien to thenarrow formulation provided by Pierson, who specifies in his seminalarticle that “change continues, but it is bounded change – untilsomething erodes or swamps the mechanisms of reproduction thatgenerate continuity.” (Pierson 2000: 265) At the theoretical level,moreover, change does not have to be necessarily associated withconvergence, that is, with a process of adjustment towards a singleefficient outcome. There are other types of change than changingpaths: there is change within the path, there are changes off thepath… The trouble with path dependency is that one can alwaysconceptualise a broader “path” that would contain any observedchange. Attempts to sketch alternative possibilities are numerous butremain underdeveloped by the literature. Kitschelt et al., for instance,speak about ‘refracted divergence’, in which “some of the pastpatterns of diversity disappear, are replaced by new ones, reflectinginstitutionally mediated responses to the challenges posed by the newenvironment” (Kitschelt et al. 1999b: 442). Similarly, Deeg has tried,in successive works, to endogenise change – or to find endogenousbases for incremental change. Such attempts are not fullysatisfactory; a better solution would be to go back to the originalformulation of PDT (see next section).

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2.2 The role of organisation and timing in the dynamicsof change

Neo-institutionalism, and neo-institutional theories of change are good atexplaining (i) the origins of cross-country variation in economic structuresand (ii) the reproduction mechanisms that help perpetuate variation overtime. However, as seen above, they present significant weaknesses, whichare all the more apparent when they apply to the case of French andItalian savings banks. Indeed, differences in the institutional frameworkdo not seem to be at the root of different adjustment patterns in the twocountries; change has occurred, but it seems that it has taken a muchmore complex form than the bilinear convergence/divergence possibilityassumed in neo-institutional theories of change. Those weaknesses mightbe overcome by (a) emphasising the organisational dimensions of changeand (b) adopting a more flexible use of path dependence.

2.2.1 Organisation, governance, strategy as the dependent…and independent variables

The twin hypothesis developed here is that firms (savings banks) (i) areinstitution-takers AND institution-makers (Hancké, 2002); (ii) areorganisations, and are influenced by organisational dynamics and powerstructures. First, firms are institution-takers and institution-makers.In other words, they sometimes have to adjust to exogenously-inducedinstitutional change; and they sometimes can induce institutional changethat upholds their own behaviour. For instance, large firms in France inthe early 1980s were exposed to dramatic shifts in their external,institutional environment (nationalisations); over time, however, theybuilt on that changed environment (the arms-length relationship withtheir benevolent public owner) to shape the institutions that conditionedtheir successive redeployment (Hancké, 2002). An important implicationis that firms face different types of institutions, on which they havedifferent degrees of influence. Specifically, for instance, individual firms orsectors might be unable to influence macroeconomic policy or industry-wide regulations, but they might be capable of shaping sector-wideregulations and policies directly affecting them. Hence the multi-facetedrelationship between institutions and firms’ behaviour.

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The second hypothesis developed here is that firms and sectors areorganisations, and are therefore influenced by organisational logics andpower structures. This hypothesis has a double implication. First, it meansthat individual banks’ and banking sector’s organisation constitute agood dependent variable – in other words, it might be useful to analysechange at the organisational (sector, firm) level rather than at a broaderinstitutional level. Several authors acknowledge the important role oforganisation at the level of the banking firm. Gardener points out thatpaying attention to organisational design helps to respond to twofundamental drives in modern firms: specialisation and coordination(Gardener, 1994).

In particular, Gardener argues that the kinds of organisational changeshe studies (the rise of marketing functions within banks) are “in largepart the product of a greater demand orientation in banking strategies”,adding that “a bank’s organisational structure may be seen simply as a kindof interchange system between the external (outside) environment and theinternal resources of the bank.” (Gardener, 1994: 61.) Similarly, Morison’swork on organisational changes in UK clearing banks emphasises the linksbetween external and internal change. Morison argues that organisationalchange is peculiar (both difficult and interesting, as he puts it) in banking,given that industry’s specificities, namely: the pace of change, theinterdependencies between the different parts of banking business, andgeography (Morison, 1994). He, like Gardener, takes organisationalchange as the dependent variable, arguing that it results from changes inbanks’ environments and shifts in banks’ strategic priorities. Morison arguesthat changes in British banks’ environments during the 1980s – mainlyregulatory changes, technological changes and changes in demand –were both driven by and the cause of “increased pressures on industryprofitability and increased concern to enhance financial performance,where necessary by radically reconfiguring the business beingundertaken” (Morison, 1994: 81). Morison insists that the causalitybetween structure and strategy (and performance) is blurred – and hisarguments implicitly pave the way for introducing path-dependent-likedynamics, such as, for instance, feedback effects. Morison sees fivephases in the organisational evolution of “a typical clearing bank”, whichare historically contingent: from the unit bank to the multi-branch bank,from trust companies to refocused banks in the 1970s and product-driven banking groups in the early 1990s.

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Beyond the organisation within individual banks, the organisation ofcoordination at the sector or industry level constitutes a key factor behindthe peculiar structure of national banking systems and, beyond, ofnational production systems. VOC scholars themselves have emphasisedthe role of coordination in the conceptualisation of their ideal-types ofvarying capitalisms: liberal market economies, where competitionprevails, on the one hand; and coordinated market economies on theother, where non-price coordination prevails (Soskice 1999). Both formsof coordination, Soskice argues, “tend to encourage the development oflong-term cooperative relations, between one company and another,between companies and employees, and between companies and theirowners” (p.106). Sector and group coordination shape the variousinstitutions that form, in turn, the particular framework of constraintsand incentives faced by firms – corporate governance, corporate finance,industrial relations. In a sense, then, sector and group coordination could beconsidered as ‘meta-institutions’ – institutions shaping other institutions.The organising principles characterising coordination are thus the coreelements of the specificities of national capitalism. For instance, Deegshows how the federal organisation of German public and savings banksis key in structuring sector coordination (Deeg 1999)35. In that case, theterritorial rooting of coordination is a constitutive element of Germancapitalism both as the ‘shape’ of coordinated action between actors andas a form of economic organisation per se (in other words, it is boththe wine and the bottle of wine). Similarly, Quack and Morgan (1999)emphasise variation in the institutionalisation of sectors. Such argumentsfit well with Verdier’s thesis about the linkages between statecentralisation and banking market segmentation (Verdier, 2003).

Sector coordination is a key component of European savings banks’history. Sector organisations have long helped maintain the cohesion anddistinctiveness of savings banks. Such organisations are not poised todisappear. In Germany, for instance, where, by 2005, savings banks willlose the system of guarantees provided by their public owners, there is arenewed emphasis on savings banks’ own sector support mechanism,through the giro association, which will constitute the basis for rating36.

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35 The importance of such ‘primary’ organising principles for patterns of institutional creationis also mentioned by Skocpol et al.’s recent work on NGOs in the United States (Skocpolet al., 2000).

36 See “Basis of ratings for Germany’s Sparkassen set for change”, The Banker, September2002, p.16.

Understanding how these meta-institutions work and change is thus animportant part of understanding institutional change and persistencewithin national financial systems. From a convergence standpoint, onewould expect banking de-segmentation to have put an end to the ancientsector organisation of savings banks and to have replaced it with morecompetition. From a divergence standpoint, by contrast, coordinationshould have been maintained, keeping its specific features in eachcountry. Again, then, our task is both to understand what happened andwhy it happened.

In the research the issue of organisation has been broken down intotwo main elements. The first one is what I call “shift in savings banks’corporate boundaries”. This is obviously in reference to ‘orthodox’ andWilliamsonian views of the firm, which ignore its boundaries - focusinginstead on the bundle of contracts the firm is supposed to be. These viewsof the firm are, I argue, central to the divergence literature. By focusingon shifting boundaries I am assuming, by contrast, that there is such athing as corporate boundaries – and, indeed, changing those boundarieswas one of the most problematic issues of the 1990s, both for policy-makers and savings banks actors.

The second element is concrete sector organisation, through hard (orformal), as opposed to soft (or informal) institutions: mainly, sector banksand associations, which were a strong feature of both the French andItalian banking system in the 1970s. This second part is closely relatedto the first one, since it deals with the ‘interior’ of sector boundaries(as opposed to the definition of firm and sector boundaries mentionedabove). This dialectic questions Hollingsworth’s distinction betweenbottom-up and top-down sources of sector change, and more preciselyhis categorisation of sector boundaries as a ‘top-down’ mechanism, alongwith the imposition of rules by public authorities (Hollingsworth 1994).

• Balance of power within the organisation: the issue of ownership andcontrol

From what has been said above, the role of organisational dynamicsappears to be central in shaping firms’ institutional strategies andcorporate behaviour. Organisational dynamics, in turn, can be linked tothe evolution of the balance of power within firms, and in particularthe evolution of ownership and control. Patterns of corporateownership and control are among the key characteristics of nationaleconomic systems.

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For many economists (and policy-makers), an efficient market for corporatecontrol guarantees good economic performance. This relationship,indeed, stands at the core of a rich literature that emerged in the1990s, building on Eastern Europe “transition economies” and onprevious works on corporate ownership and control (see La Porta etal., 1999 and 2001, for a review). The aim of most studies belonging tothat strand of research is to explain differences and variation in firms’and nations’ performance by looking at legal and social institutions,such as the patterns of ownership rights, the effectiveness of lawimplementation, legal culture and structure and so on. Discussing thisliterature is, however, outside the scope of this study.

What interests us, rather, is to understand the evolution of savingsbanks’ corporate governance patterns in France and Italy. Again, theanalysis aims at uncovering transformations in a comparative way, soas to understand the differences the two countries may or may notcontinue to exhibit at that particular level of organisation. Beyond thefact that, as mentioned above, control and ownership patterns areoften seen as key factors in a country’s economic development, thereare two further reasons to focus part of our analysis on this issue.The first one is that banks’ ownership and control is and has been acentral issue in both the reforms of the banking sector and thedebates around it (see chapter 5). The second reason is that corporategovernance is perhaps the single institution where political economyscholars locate the major source of resistance to convergence.Indeed, quite similarly to those economists interested in the role ofcultural factors in explaining economic change and non-change,many works within the Voc literature try to assess the role of specificinstitutions in preventing or facilitating the drive towards acompetitive market for corporate control (see, for instance, Soskice1999; Casper 1997).

This study will explore the evolution of savings banks’ corporategovernance to understand the relationship between institutionalchange, organisational change and shifts in ownership and control.The hypothesis explored here is that there are multidirectionalrelationships between those three levels of analysis: institutionaland organisational change shape patterns of ownership and control,while patterns of ownership and control influence institutional andorganisational change.

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3.1 The rise of savings banks

3.1.1 Origins and diffusion throughout Europe

The first savings banks were created in Europe in the late XVIIIth – earlyXIXth century. Indeed, “the savings bank concept is a European idea”(Kohler 1996), which first took root in continental Europe. According torecent works, the world’s first savings bank was the Ersparnisklasse derAllgemeine Versorgungsanstalt (savings section of the PrudentialInstitute), created in Hamburg in 1778 (Wysocki 1996). In the late XVIIIthcentury several similar institutions were founded in Northern Germany:the Leihekasse der Grafschaft Lippe (now Sparkasse Detmold), in Detmold;the ancestor of the Landessparkassen zu Oldenburg in the city of Oldenburg;and Kiel’s savings bank, all three created in 1786. The savings bank movementthen spread throughout all German territories, reaching a number of110 banks in 1825. Savings banks were established in Switzerland at aroundthe same time, with a Dienstenzinskasse (employees’ cashier) founded inBern in 1787, the Caisse d’Épargne et de Dépôt founded in Geneva in1789, another one in Zurich in 1805 and then in other cities.

But the savings banks movement took its real impulse in Great Britain,from which it then spread to the entire world. Some local savings bankswere created in the late XVIIIth century by British aristocrats. Savings banksgained ground in England and followed a rapid expansion path duringthe first decades of the XIXth century: there were 289 savings banks inGreat Britain in 1820. Savings banks gained official consent in 1817 witha bill that created the trustee savings banks system. In 1841, the BritishIsles had 555 savings banks. From Great-Britain, the savings bank movementthen reached Denmark (with its first savings bank created in Holsteinborgin 1810), Ireland (Kilkenny, 1816), the Netherlands (with two savings banksestablished in 1817: in Workum and Haarlem), Scandinavia (Norway,Sweden, Finland) in 1820.

3. THE ROLE OF SAVINGS BANKSIN THE EUROPEAN ECONOMIESIN THE XXTH CENTURY:THE CASES OF FRANCE AND ITALY

France and Italy followed suit, respectively, with the establishment of asavings bank in Paris in 1818 and in Padua in 1822 (see next section).Savings banks were then established in Belgium (Tournai, 1825), Spain(Madrid, 1838), Portugal (Lisbon, 1844) and Luxembourg (1853). By themid-XVIIIth century, therefore, savings banks were established and operatedthroughout most of Western Europe. The savings banks movement thenreached other parts of the world, such as the United States (first savingsbank created in 1816) and the British Dominions (Australia in 1835,New Zealand in 1847).

3.1.2 The early developments of savings banks in France and Italy

The first French savings bank was the Caisse d’Épargne de Paris, foundedin May 1818 by Benjamin Delessert, a philanthropist and member of theprotestant high bourgeoisie. As Duet notes, however, at first the expansionof the savings banks movement in France was quite slow: only two Caisseswere founded in 1819 (Bordeaux and Metz); one in 1820 (Rouen); fourin 1921 (Marseille, Nantes, Brest and Troyes); two in 1822 (Lyon andLe Havre); one in 1823 (Reims), none from 1824 to 1827, one in 1828(Nimes); two in 1830 (Toulouse and Rennes): thirteen new Caisses intwelve years.

The process of expansion accelerated after 1833: 257 Caisses were createdwithin five years, which brought the total number of French savingsbanks to 284 in 1839. That number reached 364 in 1848, 536 in 1880,546 in 1900, and 560 in 1930. The number of savings banks stabilisedafter the Second World War, at around 556 Caisses. The stabilisation ofthe creation of new savings banks was compensated by the rapidincrease in savings banks branches (see section 2.2.1).

In Italy, the first savings banks were founded in 1820s in the moreeconomically-advanced, Austrian-ruled regions of Lombardy (Milan) andVeneto (Padua, Rovigo, Venice, Udine, Castelfranco Veneto). The patternthat followed the creation, in 1823, of the Cassa di Risparmio delleProvincie Lombarde, or Cariplo, is typical of many cases throughout Italy:first, a “central charity committee” (Commissione centrale di beneficienza)was set up by the Austrian authorities during the 1816 famine tocoordinate assistance measures intended for the victims of the famine;the committee was asked to set up a savings bank for the region, whichit did in 1823.

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The savings bank, originally aimed at “craftsmen, workers and the less rich”,soon attracted upper middle-class clients in search of rare investmentopportunities. Cariplo grew fast, and within a year it had branches inseven out of the eight provinces of Lombardy.

Following Lombardy and Veneto, savings banks were then founded inPiedmont and Tuscany, with the Casse di risparmio of Turin (1827) andFlorence (1829); savings banks soon mushroomed throughout the GrandDuchy of Tuscany: Prato (1830), Pistoia (1831), Siena (1833), Pisa (1834)…A savings bank was founded in Rome, in the Papal States, in 1837,followed by Bologna (1837) and Ferrara (1839). The regions of Romagna(which belonged to the Papal States) and Marche were soon speckledwith savings banks: Forli (1839), Ravenna (1840) and Rimini (1841) onthe one hand, Pesaro (1840), Ascoli Piceno (1842), Macerata (1845) andJesi (1846) on the other hand. The Duchy of Modena had two savingsbanks founded in those years: first in Carpi (1843), then in Modena(1846). The total number of savings banks rose from 25 in 1840 to 60 in1850 and 91 in 1860 – but more than half of deposited funds (86 millionlire), by that date, were held at Cariplo in Lombardy.

Only belatedly did the savings bank movement reach the Southernregions – only, in fact, after the fall of the Bourbon rule over the kingdomof the two Sicilies. Interestingly, Southern savings banks were founded,unlike their Northern counterparts, by the State: in Palermo, the CassaCentrale di Risparmio Vittorio Emanuele per le Province Siciliane was setup in October 1861 by order of the king, and was controlled by the Statethrough its regional representative, the Prefect, who appointed boardmembers. In Naples, the savings bank was similarly created from the top, in1862; but, after a few years of operation, it was merged with the Banco diNapoli, the multi-secular issuing bank, and became a division of the latter.

3.1.3 The peculiar identity and purpose of savings banks:Philosophy…

At the root of the savings banks concept were the ideas of self-helppromotion on the one hand (the idea that individuals should be educatedto manage their funds in a sustainable manner) and access to lending onthe other (the idea that poorer borrowers should be freed from usury).The latter had already led to the establishment of pawnbrokers inXVIth century Spain and Italy (the “Montes Pietatis” and “Monti dipieta”, respectively).

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But savings banks differed from pawnbrokers on many accounts, amongwhich lie the freedom to save whatever amount of money, the paymentof interest and the liquidity of deposits. Moreover, and more importantly,pawnbrokers did not emphasise self-help and individual emancipation:these were teachings from the Enlightenment, and they impregnated theorigins of savings banks.

The philosophy at the origins of the savings bank movement helpsexplain why the creation of the first savings banks in all countries was aprivate, localised initiative. Duet speaks of congruence between the initiallocalised organisation of savings banks and their mission37. Local initiativewas not limited to wealthy individuals: local authorities became involvedtoo – this was the case in Italy and the Netherlands, but especially inGermany. In Belgium, the first savings banks were founded as part of aninitiative to create a network of municipal savings banks.

Beyond individual bankers and philanthropists, however, the “public order”potential of savings banks explains why the State later on played an activerole in promoting the establishment of savings banks. Early successes inattracting a considerable volume of savings also shed much light on thepotential benefits such institutions could accrue to the State. Postal savingsbanks were founded in Great Britain in 1869, France38 and Italy in 1875.Most of these state-owned savings banks were very successful inattracting a sizeable proportion of savings; in Belgium, for instance, theCaisse Générale d’Épargne et de Retraite (CGER), a public entity createdin 1865, accounted for 90% of all banking deposits as early as 1890(Vanthemsche, 1996).

Finally, the philosophy at their origin gave savings banks a peculiaridentity whose main components they kept throughout the XXth century.These core components of savings banks’ identity include: (i) savingsbanks’ social responsibility; (ii) savings banks’ local rooting and (iii) theirfocus on private individuals (mainly low income earners) and on small andmedium-sized businesses.

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37 The same author notes, quite interestingly, that the creation of savings banks presented aparadox: while they were locally rooted (bottom), they were founded from the country’ssocial elites (top) (Duet, 1999).

38 Postal savings banks, helped by their diffuse network reaching out to those remote ruralareas yet deprived of savings banks, soon proved to be savings banks’ fiercest competitors.In Great Britain, for instance, by 1900 the Postal office savings banks had 5 times thenumber of depositors of the Trustees savings banks, with more than twice as much deposits.

Savings banks’ particular mission led to or was tied to a peculiar way ofdoing business, on both sides of the balance sheet. On the liability side,savings banks differed from existing commercial banks (up to the middleof the XIXth century) in that the funds they managed did not come fromtheir own funds or from the deposits given by a small group of wealthyindividuals: they mainly came from small savings. In that regard, the initialfunds provided by savings banks’ often wealthy founders did not intendto be invested, but were an investment in themselves, geared towardsallowing the nascent institutions to start collecting savings from modestclients. Indeed, savings banks’ corporate identity built first and foremoston savings deposits, which constituted in many cases and for a long timetheir core liability (they remain so for the French savings banks). As Wysockipoints out, when they were first introduced, savings deposits representeda true product innovation, since they were not offered then by otherfinancial intermediaries (Wysocki, 1996).

Savings deposits were conceived for small amounts of money – the kindof savings commercial banks were uninterested in, since they implieddiseconomies of scale and did not allow for a flexible policy on the assetside. In other words, lending money on the basis of small deposits wasnot an attractive business for XIXth century bankers. From the depositors’point of view, savings deposits represented the first medium tailored totheir needs – the first entry into the world of credit. In addition, savingsdeposits presented three characteristics that made them attractivewhen compared to the alternative (that is, keeping the money at home):(a) they were interest-bearing deposits (although the interest rates paidon savings deposits were, and have ever been since, small in comparisonto other types of banking products, they were still better than no interestat all); (b) they were secure (both because lending was at first eitherforbidden or strictly regulated, and because many savings banksbenefited from public or State guarantee); (c) they were liquid (upon ashort period of notice).

Beyond savings deposits, savings banks faced limitations on theirliabilities at the outset, especially ceilings on deposits (in Great-Britain,under the 1817 Trustee Savings Bank Act; and in France and Italy insuccessive regulations). However, over the years (but at different points intime in different countries), savings banks opened themselves to otherforms of liabilities – such as sight deposits, generally along with thedevelopment of payment procedures, and in particular cashless paymentprocedures (checks and money transfers).

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Germany was an early starter, with a 1908 law that allowed savings banksto issue checks, and with the 1909 creation of the first giro association inSaxony. By 1924, savings banks covered the entire territory through theirgiro network. Denmark quickly followed suit, introducing savings banks’checks in 1914. In all remaining European countries, however, thisdiversification of business on the liability side took place much later:Greece in 1953, UK and Ireland in 1965. France stands among the latecomers with the authorisation to draw checks dating back to 1978.

On the asset side, savings banks differ from one period to the next andfrom country to another. Most savings banks faced early limits on lending– mostly articulated in savings banks’ statutes, before being included instate regulations. Danish savings banks did not engage in lending untilthe 1840s. Nor did the French savings banks; the latter were allowed byan 1829 Decree to invest part of deposited funds into savings accountsheld at the Treasury. The Act of March 1837 entrusted the administrationof such funds to the “Caisse des dépôts et consignations” (CDC) – theFrench Treasury’s financial arm, which invested most of its assets in long-term government securities. The transfer of funds was nothing but anoption, left to the choice of local savings banks – but they all chose thatoption at the exclusion of others (such as investments in industry).Therefore the Decree of April 15th, 1852, which made it mandatory forall funds collected by savings banks to be transferred to the CDC merelysanctioned a de facto restriction.

The preferred asset, for most European savings banks during the XIXthand early XXth century, was government securities. According to a 1817act, British savings banks’ trustees were required to invest their funds ina special account with the British Commissioners for the National Debt,who paid a guaranteed fixed annual interest. Investment in governmentstock and other public debt securities (such as local government loans)was not limited to British savings banks – it was a widespread practice inFrance, Denmark and Italy . Such reliance on public bonds was oftenassociated with legal or regulatory provisions in savings banks’ statutes.They could also be interpreted, as Wysocki contends, “as a measure forthe precautionary securing of liquid resources where the possibilityexisted for such instruments to be used as collateral for advances at timesof sudden increased demands for payment.” (Wysocki 1996:18).

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When savings banks were allowed to engage in lending activities, theyusually turned to mortgage loans, which to this day represents a typicallending activity for savings banks. As Wysocki argues, mortgage loanscombine the high security requirement for the use of savings depositsand relatively simple administration. In many cases, mortgage lendingoffered a secure alternative for government securities, or vice versa.In Italy, for instance, mortgage loans did not take off until the late 1870s(when government securities reached a low point), and represented upto 56% of savings banks’ total assets in 1960, then declining in favour ofgovernment securities; in Germany, government securities were slowlydethroned by mortgage loans as the main asset at the turn of the century.

Beyond government securities and mortgage lending, savings banks didnot, at first, engage in other forms of lending, with the exception ofGerman and Danish savings banks, which, in the early XIXth century,offered personal loans, bill businesses (Germany) and loans, guaranteesand bills (Denmark). In the 1830s and 1840s, ministerial decrees in Prussiapromoted the establishment of district savings banks to provide personalloans and to meet the need for credit of industry and agriculture.However, an 1838 bill restricted lending to mortgages and the acquisitionof public sector securities, and put ceilings on small loans.

3.2 Evolution of the role of savings bankswithin European political economies

3.2.1 The run-up to the 1900s: expansion and (limited)modernisation

In the final decades of the XIXth century, European savings banksexperienced large fluctuations associated with the fluidity of financialsystems at that time. In France, both the number of savings banks andtheir turnover grew at a rapid pace.

Despite this expansion, however, French savings banks remained, as a whole,reluctant to diversify their business or to adopt modern banking techniquesalready used in other countries. The growth that followed their “start-upphase” (until 1875-1880 according to Moster and Vogler) did not bringforward modernisation. Indeed, according to most observers (Duet 1999,Moster and Vogler 1996, Thiolon 1979), from the late XIXth century untilthe mid-1960s French savings banks remained “fossilised” within anarchaic business model and under a stringent relationship with the State.

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This is not to say, however, that the “savings banks world” washomogeneous in its reluctance to change. There were modernisers, suchas Eugène Rostand, chairman of the savings bank of Marseille at the turnof the century, who attempted to link the growing collected funds tolocal economic development and social cohesion (through targetedinvestment programs); but their attempts at modernising savings banksfailed (see next section).

In Italy, the number of savings banks doubled from 91 in 1860 to 183 in1880, mainly in the Marche and Southern regions (where the newlycreated savings banks were mainly small institutions). Total deposits atsavings banks grew fast as well, increasing tenfold in forty years; by 1904,total deposits amounted to ITL 1,777 million. Cariplo still led the fray,however less dominantly, with ITL 688 million in 1904, or 39% of the total.Cariplo’s balance sheet was second only to that of the main issuing banks(Banco di Napoli, Banco di Sicilia). Tuscan savings banks followed with11.5% of total deposits, then Veneto, Emilia, Piedmont. Southern savingsbanks, although numerous, represented only 9% of total deposits.

Savings banks’ trademark activity, on the asset side, was mortgagelending – as in other European countries, with the notable exception ofFrance. In 1860, it is estimated that 56% of Italian savings banks’ totalassets were made up of mortgage credit. By the third quarter of the XIXthcentury, virtually all savings banks granted mortgage-secured loans,especially in agriculture. However, successive State regulations constrainedthe mortgage lending business through market segmentation: an 1866Act limited mortgage bonds issuance to four major banks and twosavings banks (Milan and Bologna). Each bank was assigned a territorywhere it was able to offer such products. Eventually, other bankinginstitutions were invited to join in other parts of the country. In 1884, anew law abolished territorial monopolies and allowed authorised creditinstitutions to extend their mortgage credit activities over the wholenational territory; among savings banks, the only one to take up thatopportunity was Cariplo. A few years later, in 1890, the State created theIstituto Italiano di Credito Fondiario (Italian mortgage credit institution),which became, besides Cariplo, the sole institution authorised to offermortgage credit on a national basis. As a whole, by the end of the XIXthcentury, mortgage lending had decreased in importance. It remained amarginal instrument for financing investments in agricultural production– although for some banks, it represented a sizeable part of business:Cariplo, for instance, dedicated 64% of its mortgage lending, from 1866to 1885, to finance the acquisition of agricultural land.

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Despite its decreasing importance, however, mortgage lending hadenabled savings banks to develop credit and lending functions which,according to Clarich, successfully shielded them from competition fromPostal savings banks after 1875 (Clarich, 1984: 22).

In the final third of the XIXth century, Italian savings banks, like otherbanks, turned more and more towards public securities, which accountedfor 9% of total assets in 1860, 46% in 1880 (against 20% for mortgageloans) and 56% in 1904. These changes, as Hertner notes, mirroredprofound transformations in the economic structure of the country, withthe State and public corporations taking a leading role in fostering“heavy” investments in infrastructure and industry (Hertner 1996).

Apart from (decreasing) mortgage lending and securities, most savingsbanks did not venture into other types of investments until late in theXIXth century. Cariplo, for instance, did not propose bill discounting toordinary clients until the turn of the century – whereas the latter constituteda widespread business outlet among large, non-savings banks. Only a fewsavings banks in the Emilia and Romagna regions made an exception,with the Cassa di risparmio di Parma, for instance, whose lending madeup 60% of its assets in 1890 – mainly consisting of credit discount toagriculture. Overall, however, savings banks’ business strategy remaineddriven by its liabilities – small savings. That is why the new generation ofcooperative banks that appeared in the late XIXth century, the BanchePopolari, reaped immediate success and were called by some observers“improved savings banks” since, beyond collecting small-scale savings, theyalso made sure to invest those funds into productive undertakings by theirmembers (see Clarich, 1984: 21). On the other hand, savings banks preciselyand repetitively boasted their careful lending strategy, a cornerstone inthe stabilising role they aimed to play within the financial system.

3.2.2 Regulation at the turn of the century

In several countries, savings banks’ self-regulation prevailed until the lastdecade or so of the XIXth century, which witnessed government regulatoryintervention39 in banking, and in particular in the savings banks sector.Germany, again, was an exception, since Prussia passed a Sparkassen-reglement as early as 1838, which became the “basic law” model forsavings banks throughout German states; so did the United Kingdom,with the 1817 Bill that founded the Trustee Savings Bank system.

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39 By contrast with direct state intervention through setting up public or quasi-public banks.

The late XIXth century expansion of savings banks met closer scrutinyfrom public authorities, in a period of stricter regulations on banking andfinance. In many European countries, the 1880s saw the first wave ofregulatory efforts towards savings banks: Denmark’s 1880 Savings BanksAct, which created a supervision authority; the 1904 Savings Bank Actin Great-Britain, which eased the restrictions on deposit (ceilings) andlending; the 1895 law in France and the 1888 law in Italy.

• France

During the XIXth century, French regulatory authorities (i.e. the Treasury)were especially concerned with the rapid growth in deposits that,since they were mostly invested in public debt, risked inflating Statedebt and reducing its creditworthiness. In the preamble of the Lawof July 20, 1895, reference was made to the “threatening expansion”of deposits. There were two ways of dealing with such expansion.One was to diversify the use of funds. The other was to impose limitson deposits. The first part of the alternative was at the centre of adebate that arose after 1885, when several law proposals werediscussed in Parliament – a debate known as the “quarrel on the useof funds” (see Duet, 1999).

That debate pitted reformists against the defenders of the status-quo.In addition, there were two groups of reformists: one moderate andone radical. The moderate reformists, headed by MP Hubbard, proposedthe diversification of the use of funds by the Caisse des Dépots –away from rentes d’Etat towards lending to local governments,chambers of commerce and other para-public entities. Under thisproposal, savings banks would have had the responsibility of“suggesting” the beneficiaries so that there be “a tangible linkbetween lending and the deposited funds” (cited in Duet, 1999: 48).However, that idea was not even discussed, its vindicationcorresponding to parliamentary recess. Yet it would lay the basis forthe Minjoz reform some 60 years later (see next sections).

The second group of reformists, more radical, was led by EugèneRostand, chairman of the Savings Bank of Marseille, lawyer andnewspaper director, a colourful character, who argued in favour ofthe free use of funds by savings banks - on the German and Italianmodel – mainly through mortgage lending, investment in bondsissued by welfare institutions and cooperative credit.

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Such proposal, in Rostand’s view, did not endanger the security offunds, since it circumscribed the political risks tied to rentes d’Etat;furthermore, it guaranteed a more efficient allocation of funds sinceprivate actors were, in his view, better equipped and had moreincentive to do so.

The 1895 law, however, marked the victory of the status quo. Eventhe slightly innovative proposals put forward by the law’s rapporteur(such as the possibility for the Caisses to use a fraction of collectedfunds to be invested in the local economy) were wiped away by theparliamentary debates. The law was mainly concerned withsustaining the value of the State pensions (rentes) and by imposinglimits on deposits. The latter - the second element of the alternativefacing regulators, constituted a constant in French regulatory policysince the early XIXth century: the ceiling on deposits was first set atFRF 3,000 in 1835, down to FRF 1,500 in 1845 and FRF 1,000 in 1851,raised to FRF 2,000 in 1881 and lowered again by the 1895 law toFRF 1,500, from which level it did not move until 1916. According toMoster and Vogler, therefore, the 1895 Act represented a“Malthusian choice” that “froze the whole system until 1945”(Moster and Vogler 1996).

The Treasury and the CDC were staunch defenders of the status quo.However, the 1895 restrictive regulatory regime cannot be seen asimposed by conservative State actors on reformist savings banks.Actually, most savings banks administrators (who then played theleading role in governing the Caisses) were strongly attached to thestatus quo and reluctant to diversify the use of funds, let aloneto actually manage them. At their 1890 Congress, which discussedthe Rostand proposal, only 5% of participants declared themselvesin favour, despite the former’s careful wording – the free use of fundswas only proposed as an option to savings banks and circumscribedto 25% of funds (Duet, 1999). Even local experimentation by threesavings banks was rejected at the same Congress. As Duet notes,such aversion to risk, or at least to innovation, was probably not onlycharacteristic of savings banks managers but also of their clients, who,even though many of them were small and medium entrepreneurs,did not demand another use of funds by the Caisses.

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There were two exceptions to the restrictive regulatory regime put inplace by the 1895 law: the regulations concerning the savings banksof Alsace and Lorraine and those concerning the Post Office SavingsBank (see above). After the 1871 German annexation of Alsace andLorraine, the most important savings banks of the Land wereauthorised, by an 1895 Act, to use freely 40% and 50% of the fundscollected in favour of local authorities. Subsequently, a 1912 Actprovided savings banks with largely independent management andlifted the ceilings on deposits from DEM1,000 to DEM4,000. The Actprovided that up to 20% of deposited funds should be invested insecurities, up to 50% in loans to local governments and other publicinstitutions and up to 20% in mortgage loans to individuals. After theFrench sovereignty was recovered, the same regime persisted until 1984,despite modifications.

• Italy

In Italy, the legislation governing the savings banks sector evolvedslowly over the years and presented numerous inconsistencies. Like inthe French case, regulation of savings banks was at first a matter ofself-regulation, mainly through the statutes – whose diversity preservedthe initial institutional pluralism among Italian savings banks. Only inthe second half of the XIXth century did the State and other publicauthorities start intervening.

Those statutes initially imposed strict limitations (ceilings and floors)on the volume of deposits and restricted the range of possible usesfor the funds collected (safety was the main concern) to publicsecurities, public bonds, and lending to local governments. Along theyears and with the transformation of savings banks’ clientele (withthe apparition of the middle-class), savings banks implementedstatutory changes that allowed them to differentiate among varioustypes of deposits (to which various ceilings, floors, conditions, …corresponded) and allow for more profitable use of funds.

With the increased economic relevance of savings banks came the endof the statutory freedom Italian savings banks enjoyed in their first fiftyyears of life. The first regulatory act specifically targeted to savings bankswas a Sardignia Law of 1851 that created fiscal incentives for savingsbanks to limit their lending and remain welfare institutions. A Piedmontlaw of 1851 treated savings banks merely as charitable entities; thatlaw inspired other regional regulations passed during the same decade.

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As seen above, some savings banks were also concerned withsuccessive legislation on mortgage bonds issuance and mortgagelending in general.

Those regulations all revolved around the issue of the exact nature ofsavings banks, their legal identity, and the regulatory authority thatshould monitor them. In 1876, a decision by the State Council(Consiglio di Stato, the highest juridical institution for administrative law)put savings banks on an equal footing with other credit institutions interms of constraints on lending and the use of funds. But that decisiondid not put an end to the ongoing debate on the nature of the Cassedi risparmio. In particular, it was unclear whether savings banks shouldlegally be assimilated to charitable institutions that, among otherthings, benefited from a favourable fiscal status – which explains whysavings banks, who rejected the qualification of charitable institutiongiven their economic role, did not embrace commercial banks’ statuseither. That debate provided the background to Italy’s first country-wide legislative act towards savings banks, the law of July 15, 1888,n.5546, “sull’Ordinamento delle Casse di Risparmio”.

Like in France, the State’s legislative intervention happened in a contextcharacterised, on the one hand, by the extension of the State’sinvolvement in the economy (especially through the realisation ofambitious and costly public works programs, such as the constructionof railways…), with a simultaneous rise in public spending financedthrough the issuance of bonds; and, on the other hand, by the State’sattempts to insert itself into civil society so as to crowd out thecompeting influence of the Catholic church40.

The 1888 Act, like France’s 1895 law, set up general guidelines for theentire sector, while giving savings banks “considerable freedom ofmovement within the confines of their own self-imposed statutorybasic rules”41. The 1888 Act drew largely from the first savings bankscongress, which was held in Florence in 1886. Like in France, savingsbanks’ top administrators did not agree on which direction regulatoryreform should take – although unlike France, the discussion was lessabout the substance of regulation than about its extent.

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40 Clarich compares the 1888 Law with a 1890 law on welfare institutions, the latter aimingto bring under the control of the State local welfare institutions founded by or linked tothe Church (Clarich, 1984: 34).

41 Ministero dell’Agricoltura, dell’Industria e del Commercio, Le Casse Ordinarie di Risparmioin Italia dal 1822 al 1904, Roma 1906, cited in Hertner 1996.

Against a “radical” group of savings banks that was firmly opposedto any state intervention at all, the 1886 Congress gave reason to amore moderate group of banks intent on playing the card oflegislative intervention precisely to protect savings banks from furtherencroachments from the part of the state. Both groups, however,strongly supported the supremacy of the status as a source ofregulation; and they were determined to defend savings banks’autonomy with respect to statutory design and changes.

The 1888 Law, therefore, confirmed savings banks’ nature as creditinstitutions; and it reinforced the emancipation of savings banks fromtheir founders. In particular, the law conferred legal personality tosavings banks, recognising the existence of such a thing as “Casse dirisparmio” (art.1 and 28 of the law); provided them with organisationalautonomy; submitted the creation of new savings banks to the approvalof the Ministry of Agriculture, Trade and Industry; obliged savingsbanks of “foundational” origins to differentiate savings banks’patrimony and administration from that of the founding entities(art.4); provided that the original contributions to savings banks’equity should be returned to the contributors.

A key part of the law was dedicated to what is now called the“corporate governance” of banks, and was aimed at freeing savingsbanks’ activity from the influence of private interests. The law put anend to the relationship between the holding of shares and the qualityof member of the board or the general assembly; and banned thepayment of dividends to stakeholders. These two dispositions (art.5and 6 of the 1888 law) effectively transformed, as Clarich notes, thegeneral assembly from the representative organ of shareholders intothe “place of confluence between all relevant economic and socialstakes within the community” (Clarich, 1984: 36).

In the same spirit of recognising both savings banks’ autonomy andtheir nature of credit institutions, the 1888 law did not imposeconstraints on savings banks’ use of funds, merely underlying theneed to avoid “imprudent business practices”42.

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42 Although Clarich notes that the terminology used in the law somewhat tempers thisrecognition of the banking nature of savings banks; in particular, art. 1 of the lawemphasises savings banks’ role in collecting savings, while it does not mention their roleand function as lenders (Clarich 1984: 40).

The law also emphasised the importance of small savings, and authorisedthe opening, by savings banks, of current account deposits43. For allother aspects the law referred to statuses, thus giving rein to savingsbanks’ autonomy of decision in the field of business operations.At the prospect of savings banks becoming fully-fledged creditinstitutions, the 1888 law also paid careful attention to patrimonialratios; in particular, in addition to the obligation of constituting a“fondo di dotazione” (own funds) at the moment of the constitutionof a new savings banks, the law provided that 90% of annual profitsshould accrue to a reserve fund of up to 10% of total deposited funds.In that way, according to Clarich, the legislators wanted to strengthensavings banks’ financial solidity, to enable them to face the greaterrisks involved by a more dynamic credit activity (Clarich, 1984).

The three application decrees signed shortly after the law, althoughthey contained several regulatory elements typical of the State’srelationship with charitable institutions, include dispositions that furtherasserted savings banks’ commercial raison d’être. Furthermore: accordingto Clarich, such regulations, taken together (the 1888 law and itsapplication decrees) actually paved the way for a legal recognition ofthe banking firm as such – while the 1882 Code of Commerceignored the specific role and functions of banks, apart from minorprovisions – which became a reality in 1893, with Italy’s first bankinglaw. In addition, at around the same time, even the Monti di pieta,those institutions that appeared in the XIVth century – their missionbeing to lend small amounts of money to poor households – wereseen as the predecessors of savings banks, and were graduallyacquiring banking characteristics – the Monti were submitted to the1888 law as well.

Overall, therefore, while the French and Italian reforms of the lateXIXth century express a common concern towards regulating savingsbanks and towards a greater monitoring from the state, the contentof the reform was quite dissimilar: restrictive in France, much “looser”in Italy.

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43 According to Pin (1973), that disposition was critical for the future of savings banks, in that itpaved the way for a transformation of the latter from non-monetary financial intermediariesinto monetary intermediaries.

Moreover, these reforms fit neatly within the framework of Verdier’sargument, examined in chapter 1: in France, centralisation led tofunctional segmentation, and the state pre-empted savings banksresources. In Italy, by contrast, a much weaker state (in a historically lesscentralised country) did not impede savings banks in the developmentof their business, especially on the asset side. These reforms had astrong bearing on the successive development of savings banks, aswe will see in the following sections.

3.2.3 The second period of expansion: 1900-1945

The first decades of the XIXth century saw a rapid growth of savingsbanks in most European countries. Such growth can be attributed tomany factors, among which: (i) strong economic growth following the1890s slump; (ii) a profound change in the social and demographicstructure of industrial societies (with growing working classesaccompanying the diffusion of industry); and (iii) the slow rise of realwages within the working class, leading to higher savings.

As Vanthemsche further noted, the late XIXth century also witnessedan important change in the practice and philosophy of savings. As seenabove, the conception at the core of the savings movement animated byphilanthropists was that savings were a long-term effort by the individual– and so should be promoted. From the 1890s on, however, other savingspractices emerged (short-term and collective) that crystallised into neworganisational forms – in particular, in Belgium and Germany, the consumercooperatives linked to the labour movement or to Catholic farmers.Those new organisations at first diverted sums from already establishedsavings banks. Soon, however, they created their own savings banks.

In some countries, the 1910s and 1920s offered savings banks newopportunities to diversify their business. In Germany, for instance, theFirst World War allowed savings banks to hold a foot in the securitiesbusiness; and a 1921 decree lifted the restrictions on deposit and currentaccount transactions, authorising them, in particular, to lend against billsand to purchase securities on behalf of customers. These were importantsteps in German savings banks’ path towards universal banking; in a fewyears, German savings’ total intermediated funds jumped from 1.5 billionReichsmarks (1924) to 16.5 billion Reichsmarks (1934). In this regard,France and Italy represent two contrasting situations.

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• France

In France, the first half of the XXth century did not witness significantgrowth or developments within savings banks. Duet showed thatthe volume of deposits in1950 of constant prices differed little fromthat of 1925 or even that of 1890. There were 585 savings banks in1952, a figure not very different from that of the late XIXth century,and 3,000 deposit-receiving agencies in 1946, up only 50% from thenumber four decades earlier. Several factors may account for suchstagnation. First among these was savings banks’ risk aversion,reinforced by the French state’s primary focus on public debt (and noton private investments – see previous section). Secondly, priceand monetary fluctuations from the 1910s up to the 1950s causedconsiderable swings in the value of deposits in constant francs.

The Postal savings banks (Caisse Nationale d’Epargne, or CNE) didbetter than its private counterparts, making up for its late start – andbenefiting from private savings banks’ lethargy. The number ofsavings accounts at the CNE rose from 5 million in 1904 to 10 millionin 1935 and 12,728,000 in 1945 – more than the savings accountsheld at private savings banks, which amounted at around 11,892,000that same year. The volume of deposits grew simultaneously fromFRF 1 billion in 1900 to FRF 5 billion in 1914 francs in 1933, to reachthe level of private savings banks in 1945.

Overall, according to Duet, CNE’s and private savings banks’ customersaccounted for nearly 60% of the population in 1955; and savingsdeposits accounted for as much as 33% of the country’s monetaryresources in 1938. Such “giant” deposit institutions were, however,“dwarves” in lending or even direct securities holdings.

• Italy

In Italy, the first decades of the XXth century were characterised byhuge swings in market shares and important innovations on the assetside (in contrast to France), and the permanence of high marketshares in savings deposits (like in France). On the liabilities side, savingsbanks maintained, until the late 1930s, the dominant market positionthey had secured since the mid-1850s: from 68% of total fiduciarydeposits (savings and current accounts) in 1870 (against 26% forcommercial banks and 6% for cooperatives) to 73% in 1900 (after aslight decrease during the 1880s), to 75.6% in 1932 (against 16% forcommercial banks and 8.4% for cooperative banks) (Polsi 2001).

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On the asset side, and despite the prevalence of public securities insavings banks’ assets at the turn of the century, most of the Casse dirisparmio also engaged in other types of assets. The 1893-94 bankingcrisis and the 1897-98 general economic downturn led to a newdynamism on the asset side from the part of savings banks. The latterwere also certainly stimulated by the rapid growth of new commercialbanks created in those years, such as the Banca Commerciale Italianaand the Credito Italiano. Even at Cariplo, which made no mystery ofits conservative investment policy (a “splendid isolation” according toConfalonieri), the proportion of public securities out of total assetsdropped from 68% in 1897 to 48% in 1913, while the bill portfolioincreased from 1.5% of total assets in 1897 to 7% in 1913. In Milan,the bill portfolio mainly consisted of loans to the railway andelectricity sectors and to major industrial firms. Moreover, Italiansavings banks played an especially important role in the developmentof agricultural credit.

In addition, savings banks became a resource often tapped by the centralbank or the regulatory authorities in times of crisis through, in particular,their participation into loan syndicates to sectors in difficulty (such asthe steel industry in 1911 or even the banking sector in 1907).Savings banks were also invited by the Treasury to contribute to thecapital of the central credit institution for cooperatives (the future BancaNazionale del Lavoro), created in 1913. In that sense, it has been arguedthat savings banks acted as “mute participants” in the constitution ofmajor public financial institutions (Conti and Ferri 1997).

The First World War had a huge impact on Italian savings banks’business. First, money printing and inflation eroded the propensity tosave; second, the issuance of public securities crowded out liquidsavings; both phenomena led to a fall in savings banks deposits, fromITL 2,730 million in 1913 to ITL 1,070 million in 1919. On the asset side,public securities again rose in savings banks’ balance sheets: from42.6% of total assets in 1913, public securities rose to 68% in 1919.

The 1920s marked a “return to normal”, with a renewed growth indeposits (which amounted to ITL 3,400 million in 1928) and a newdecrease in securities out of total assets (49% in 1920, 32% in 1928).However, the war years had taken their toll, especially on the assetside, and savings banks did not recover fast enough to compete withcommercial banks, which played the central role in the second phaseof industrialisation – while savings banks were still facing statutoryrestrictions when it came to financing industry.

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3.2.4 The 1930s regulatory changes and their impacton savings banks

The 1929 stock market crash and the ensuing financial and economiccrisis, which affected all industrial countries, led to a dramatic re-haul ofthe financial and banking regulatory regimes in all European countries.Savings banks also faced both general banking law reforms that affectedthem (see next chapter) and specific reforms aimed at the sector. The lattershowed similarities between countries.

First, stronger administrative regulation stood at the core of savings banksregulatory reforms. In several countries, the 1930s reforms made regulationsmore stringent and imposed on savings banks a series of obligations andrestrictions unknown before. In Belgium, a December 1934 Royal Decreeestablished a system of legal supervision that entailed authorisation forthe creation of new savings banks, minimal capital requirements, limitationson the use of funds, interdiction of shareholdings in trade or industry, andsupervision by an “Office Central de la Petite Epargne”, created thatsame year. In Denmark, a May 1937 law delimited savings banks’business and distinguished different categories of authorised investment.

In some cases, however, the 1930s regulatory reforms actually led toempowering savings banks by expanding their business horizons.In Germany, a first series of Presidential decrees in 1931 severed theorganic links between savings banks and local governments, by grantingbanks legal personality, transferring to new entities the ownership oftheir own funds, separating the board of directors from local government(while maintaining the system of local authorities’ guarantees). The 1933Banking Inquiry, which was prompted by the banking crisis and aimedat streamlining savings banks’ business (at the “instigation of theircompetitors”, according to Mura 1996), actually ended up legitimisingsavings banks’ extensive line of business, and especially short-term loansand giro transactions. Finally, the 1934 Reich Credit Act extended tosavings banks the regulatory regime applied to commercial banks

State control over banking in general and savings banks in particular werenot, however, circumscribed to authoritarian regimes. In countries such asGreat Britain, for instance, the financial strains imposed by the First WorldWar and then by public (mostly military) investment programs led to theissuance of War Savings Certificates managed by a War (then National)Savings Committee, competing with both the Post office savings banksand the Trustees savings banks to attract British subjects’ savings tochannel them into government treasury needs.

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• Italy

In Italy, the regulatory changes of the late 1920s and 1930s wereintertwined with the particular political economy of the fascists’authoritarian regime, put in place progressively after 1922. The newregime’s economic interventionism – which was not too dissimilarfrom state intervention in democratic countries – led to four majordevelopments concerning savings banks.

First, the 1926 Banking Act, the first of its kind, because it identifiedcredit and banking as a specific area for regulation. The law identifiedthe Bank of Italy as the sole and thus the central issuing institution;it imposed new requirements on all banks, including savings banks,and included (i) the introduction of an authorisation regime for thecreation of new banks, delivered by the Ministry of Finance; (ii) theintroduction of mandatory reserves; (iii) the introduction of anobligation of information; and (iv) the introduction of ceilings onloans to private individuals. Furthermore, the 1926 law created a newregulatory regime, whereby commercial banks were submitted tosupervision by the Bank of Italy and the Ministry of Finance – whilesavings banks remained under the supervision of the Ministry of theEconomy, formerly known as the Ministry of Agriculture, Industry andCommerce. Importantly, all other legal and administrative regulationsgoverning the savings banks sector were maintained, provided thatthey did not clash with the principles laid down in the 1926 Act.In fact, as Clarich argues, the 1926 law followed a logic close to theone that had prevailed in the 1888 law on savings banks; among thenew measures included in the 1926 law as steps towards ensuringthe protection of depositors, were minimum capital requirements andmandatory reserves, both of which had been first created for savingsbanks by the 1888 law.

For that reason, savings banks were relatively unaffected by the 1926law. The latter just extended to savings banks the more stringentsupervision rules applied to commercial banks, including theauthorisation regime.

A second major trend was the forced restructuring of savings banks.This, like the 1926 law, was a reaction to a rapid (“chaotic” accordingto Clarich) rise in the number of banks and bank branches in thepreceding years.

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The Legal Decree of February 10, 1927, n.269, disposed a radicalrevamp of the whole sector: savings banks with total deposits of lessthan ITL 5 million were required to merge with larger institutions,while savings banks with total deposits of between ITL 5 million andITL 10 million had the possibility of doing so. Further regulations in1938 disposed that savings banks with less than ITL 30 million indeposits should merge within the provincial capital’s savings bank.As a consequence, the total number of savings declined sharply:from 205 to 98 in one single year (1930), and then to 78 by 1939.The 1927 Act also forced savings banks to unite at either provincialor regional levels in Federations, each of which was required to set upa common guarantee fund to be used in the event of customer default.Finally, the 1927 Act also impinged on savings banks’ statutoryautonomy by transferring the power to amend those statutes fromthe annual general assembly to the administrative board – mucheasier to control for the state. A further 1938 reform (by decree)disposed that the appointment of the chairman and vice-chairman ofthe board of savings banks would be decided by the State supervisorybody, after consultation with the ACRI, savings banks’ association.

A third key component of the regime’s interventionist approach tobanking was credit segmentation. As early as October 1923, a RoyalDecree stipulated that savings banks could open new branches onlyin areas where they were already operating. Interestingly, this measure,which was a first step towards the territorial limitation of competitionin banking, was suggested by savings banks themselves at theircongress held in Trieste the previous year. Furthermore, the foundationof all new savings banks branches was to be subject, to approval,by the Ministry of Economic Affairs.

Further credit segmentation was introduced by the 1936 Banking Act,which re-organised the entire banking sector and introduced a strictdivision of business activities for various types of banks. This specificmeasure did not have a particular impact on savings banks, althoughthey were included under the category of “credit institution” for thefirst time. The 1936 Act also remodelled the regulatory institutionalframework, with the creation of a specific supervisory body withinspection powers, the Ispettorato per la difesa del risparmio e perl’esercizio del credito – an institution headed de facto by the governorof the central bank and dependent on the Bank of Italy for operationsand personnel.

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But despite those new institutional arrangements, which concernedsavings banks as well, the latter still abided by the 1888 regulationand their own statutory provisions – an ambiguous regulatory regimethat remained in place up until the 1980s. Finally, the authoritarianflavour of the 1927 reform was confirmed with the introduction, bya February 1938 legislative decree, of the government appointmentof the chairman and vice-chairman of the savings banks, upon aproposal made by the Ispettorato and after advice from the nationalFederation of savings banks.

Savings banks were therefore subject to an interventionist regulatoryframework that for the first time threatened their autonomy;and they collectively expressed their concerns at their sixth annualcongress in 1937. Ironically, the 1936 law also crowned their previousefforts to see their “banking identity” recognised, with theirassimilation to the broad category of “credit firms” (aziende dicredito). More importantly, a small passage of the 1936 law implicitlymaintained the authorisation given to savings banks by previouslegislation to lend medium and long-term through mortgage creditand lending to moral persons.

In fact, beyond the regulatory elements mentioned above, the 1936law left intact the previous regulatory framework and all measuresrelative to the organisation and functioning of the Casse di Risparmio.

3.2.5 Increased coordination at sector level: the role ofsavings banks’ associations

Around the turn of the century, savings banks started to organise atsector level within each European country. The most achieved example ofsuch sector organisation is, of course, Germany where, since the early1880s, savings banks created associations44 entrusted with the twin taskof promoting savings banks’ interests and diffusing the idea and practiceof savings among the population. The associational movement amongGerman savings banks set the stage for the establishment of the girosystem, which followed a 1908 state act that gave savings banks the rightto draw checks.

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44 The first one being the Association of savings banks in Rhineland and Westphalia, createdin Hagen in 1881.

As Mura notes, “the introduction of cashless payments by the savingsbanks proved to be a watershed for the development of the German‘savings banks units’” (Mura 1996: 108). The giro system was a clearingsystem, where regional giro associations, together with savings banks,acted as guarantors for the central giro institutions (“Girozentralen”)through which giro payments were cleared.

The first savings banks and giro associations were set up between 1920and 1925, as well as the Girozentralen, most of which later becameindependent banks45. During the late 1920s – 1930s, most Girozentralenmerged with state banks (Staatsbanken and Landesbanken), thus leadingto the emergence of powerful Landesbanken / Girozentralen at theLand level. The giro association was led by the Deutsche Zentral.Giroverband, which created savings banks’ central bank, or Girozentrale,in 1918. Finally, the Deutscher Sparkassen und Giroverband was createdin 1924, unifying at a national level the giro and savings banks networks.The association, as Mura notes, was set up as a public corporation, tobe able to function as guarantor for the liabilities of the DeutscheGirozentrale.

The role of the giro associations was to operate as savings banks’ regionalclearing institutions – holding cash deposits for savings banks, transferringliquidity to cash-deprived savings banks. One of the 1931 emergencyministerial decrees obliged savings banks to hold cash reserves at thegiro institution, further strengthening the role of the giro organisation.But the sector dynamics embodied in the giro system did not stop there.The association played a key role in making the savings banks sector morehomogeneous and powerful: in 1927, it enacted “status-types”, whichbecame the basis for further state regulation of savings banks; it createda research and a training institute (1928); it engaged into nationaladvertising campaigns, gave managerial instructions, and published journals.The association survived national-socialism, but after the war it wasreduced to guarantor of the Deutsche Girozentrale, while its associationalfunctions were transferred to another body in 194746.

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45 Giro central banks soon engaged in lending of their own – they started offering short-termpersonal loans in 1921.

46 The “Arbeitsgemeinschaft Deutscher Sparkassen und Giroverbande und Girozentralen”(Union of German Savings Banks, Giro Associations and Central Giro Institutions), laterrenamed into the “Deutscher Sparkassen und Giroverband e.V.”

From that time on, the association continued playing a key role defendingsavings banks’ interests (for instance, against threats by the occupyingpowers of abolishing the savings banks payments network) and(successfully) lobbying successive governments to shape banking regulationin favour of savings banks’ interests.

The strong sector organisations existing in Germany had but weakcounterparts in France and Italy.

• France

Up until the post-war years, French savings banks were looselyorganised at the regional and national level. At the regional level, the550 savings banks (in 1900) belonged to broad regional associations– there were seven of them in 1958, covering large territories andincluding several dozens of members each. These members wouldmeet once a year at a general meeting and a congress, whose agendareflected the concerns of the time (ceiling on deposits, interestrates…). At the national level, the regional associations belongedto the Conférence Générale des Caisses d’Épargne, a nationalassociation founded in 1911. The Conférence Générale wascompetent for concluding collective wage agreements; it set savingsbanks’ line of conduct for discussions at the Commission Supérieure(the regulatory authority - see below); and it represented savingsbanks at the institutional level.

Besides the “official” sector organisation, a Bureau Central des Caissesd’Épargne was created in 1906 as a private initiative and under theform of a partnership owned by the Laurent family. At first, the BureauCentral functioned as a marketing agency for the Caisses d’Épargne;it then extended its reach to sector publications (the Journal desCaisses d’Epargne) and even training activities (see below).

However, until the post-war years the truly effective sector organisationwas a corporatist body, the Commission Supérieure. The Commissionwas created by the 1895 Law as an advisory body working with theMinistry of Finance on the regulation of savings banks, and focusedon savings banks’ functioning and organisation. The CommissionSupérieure was composed of 22 members, 12 of whom representedsavings banks and were appointed by the Conférence Générale.

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Over the years and until the post-war years, the CommissionSupérieure worked as a platform for dialogue between savings banks,the Treasury and the CDC.

• Italy

In Italy too, coordination between and among savings banks first aroseas a reaction against the first attempts at state regulation, in 1881– savings banks then collectively presented petitions to the Parliamentagainst a law proposal that assimilated them to welfare institutions.That first aggregation led to the organisation of the first nationalcongress of savings banks, which was held in Florence in 1886and aimed at elaborating a common strategy to be submitted tothe Parliament. As mentioned above, the 1888 law largely drew onthose suggestions.

Meetings were then organised at the regional level, and a standingcommittee was created for purposes of representation and lobbying.Only in 1911 however, at their second national congress in Turin, didsavings banks agree to found an association, the Associazione fra leCasse di Risparmio Italiane, or ACRI, which was officially born in April1912, with its headquarters in Rome and 150 members (out of the184 then existing savings banks). ACRI’s original mission was toprovide advice to its members on matters relating to legal, financialand fiscal issues. It soon became, however, the central political organof savings banks, some of whom regularly asked to have the ACRIsystematically associated to any state regulation towards the sector.In 1912, the association started publishing a Bulletin, which becamethe Rivista delle Casse di Risparmio in 1926. In 1938, ACRI founded aguarantee fund, called “fondo per anticipazioni a casse di risparmio”.

In 1919, savings banks undertook a significant step in furthering theircoordination at the sector level, through the creation of a financialumbrella organisation, the Istituto di Credito delle Casse di Risparmio(ICCRI) – the official creation took place in October 1921. Conceived onthe model of the German Girozentralen, the ICCRI was set up as apublic corporation whose capital was entirely owned by savingsbanks. The mission of the ICCRI was fourfold: (i) to permit moneytransfers between savings banks; (ii) to work as a lender of last resort;(iii) to function as a clearing centre and (iv) to engage in lending activities.

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In the first years after its creation, the ICCRI subscribed to governmentsecurities on the behalf of savings banks. The ICCRI was the firstamong banking categories’ central institutes (in the following yearsthe Banche Popolari’s central institute was also founded), andremained the most important in financial terms.

The ICCRI’s first success was the introduction of checks (assegnibancari di categoria), which it supervised, and which successfullyappealed to savings banks’ clientele throughout Italy. The peculiarityof such checks was that the ICCRI committed to fulfiling its clearingobligations even when those checks were issued by single savingsbanks (against a deposit). With savings banks’ extensive networkthroughout Italy, check holders, even clients of the smallest savingsbanks, held a means of payment universally recognised and accepted.

Beyond these two institutions, savings banks also created severalIstituti di credito fondiario (land credit institutions), while savingsbanks in the Veneto region created in 1929 a consortium to integratetheir lending activities in the agricultural sector (called “IstitutoFederale delle Casse di Risparmio”, or Federalcasse). The latter gotits inspiration from the 1927 decree and the local and regionalFederations, which, however, probably because of their top-down,government-imposed origin, remained inactive for a long time.

Interestingly, the gradual constitution of an autonomous financialsystem around savings banks occurred simultaneously with thegradual erosion of the private identity of the sector, both throughgovernment intervention and through jurisprudence (Clarich, 1984).In several key decisions, from 1907 to 1930, the court of cassation,the highest judiciary authority for civil law, definitely confirmedsavings banks’ public nature and submitted conflicts within the sectorto the Council of State, the highest organ for administrative law.Besides, many elements in savings banks ‘regulation (their non-profitaims, the use of benefits for philanthropy, the public appointment ofboard members) concurred to define them as public entities.Throughout the years, therefore, and until the late 1980s, savingsbanks were considered as part of the broad category of public creditinstitutions (Istituti di Credito di Diritto Pubblico).

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In both France and Italy, therefore, the creation of sector institutionsand the strengthening of sector coordination were closely linked withstate regulation and intervention; on the one hand, savings banks’first national congresses and efforts at coordination coincided withthe growing awareness of a community of interests and of the needto have those interests recognised and guaranteed at the state level.On the other hand, in both countries the state’s need for savingsbanks’ resources and support led to the cooptation of savings banksinto some form of corporatist organisation (such as the CommissionSupérieure of the late 1890s in France) that, subsequently, fosteredsector coordination and cohesion. However, there were differences inthe degrees of sector cohesion, individual savings banks’ productionand management of network externalities, which were muchstronger in Italy.

3.3 Savings banks in the post-war political economyof France and Italy

3.3.1 From the periphery to the centre of the credit system

During the decade following the 1930s regulatory reforms, savings banksdevelopment and growth was, like those of other banks, considerablyaffected by the preparation of war and by war itself. Expansion sloweddown, and public securities started to rise again as a proportion of totalassets. Immediately after the war, therefore, savings banks focused onlifting such constraints. The post-war years saw again, in many countries,the growth and expansion of savings banks – in terms of deposits: inBelgium, for instance, annual growth rate of savings fluctuated between10% and 22% until the mid-1970s; savings deposits at Belgian savingsbanks increased six-fold from 1944 until 1959 and six-fold again from1960 until 1974. In Germany, savings banks’ turnover increased fromabout 8 billion DEM in 1950 to 56 billion DEM in 1960 and 188 billionDEM in 1970.

During the post-war period savings banks’ business not only expanded:it also changed considerably. On the liabilities side, there was a decline indeposits, and especially savings accounts, in favour of savings certificatesand bonds. On the assets side, there was a decrease in lending to thepublic sector (54% of all assets in Belgium in 1947) and a parallel increasein mortgage credit, while savings banks started diversifying their marketand product strategies.

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• France

Savings, and in particular the funds collected by savings banks, playeda key role in financing the reconstruction of France. Savings bankswere then part of the “Treasury circuit”, the financing circuit controlledby the French State, and helped transform financial maturities – a taskwhich the weak capital market could not fulfil. The circuit worked asfollows: savings banks collected savings (liquid funds), then transferredto [them] the CDC. The CDC converted those funds into medium andlong-term financing (illiquid investments), granting loans directly tothe local authorities and financing housing construction (through theCrédit Foncier de France, a state-owned mortgage credit institution)and making productive investments through the Crédit National(a state-owned credit bank).

Because of savings banks’ role within the Treasury circuit, boththe Caisse des Dépots and the Treasury opposed any diversificationof savings banks’ business, either through direct use of funds or theintroduction of checking accounts. According to Moster and Vogler,“both used the argument of the social mandate, legal form andthe diversity of the savings banks, their excessively loose organisationas an association and their lack of banking experience” (Moster andVogler 1996: 82). The tax exemption on first savings accounts and thestrict regulations preventing savings banks from entering the bankingbusiness were conceived by regulators as balancing measures whichcorresponded to savings banks’ dual nature. As François-Xavier Ortoli,Minister of Finance in 1968, put it, “the privileged position of savingsbanks is connected with both the particular origin of their funds andthe customary use of funds.” (cited in Moster and Vogler 1996: 91).

But neither were savings banks convinced of the need for diversificationor modernisation. In the post-war years French savings banks were“more concerned about the supply of funds than their use.” (Moster andVogler 1996: 82) Therefore their main worries were the ceilings ondeposits and the interest rate. The ceiling was raised regularly, almostevery two years, from 1944 to 1958. By 1960, the maximum amountedto 10,000 new francs, and was raised again to 15,000 francs in 1964– to the disappointment of the savings banks’ association, theConférence Générale, which has asked for more.

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In the two decades following the Second World War, most savingsbanks staff and managers could perhaps agree with that negativedefinition by René Laurent, head of the Bureau central: “it is an errorto maintain that savings banks are banks. (…) In particular, savingsbanks do not, by themselves, invest the funds entrusted to them bythe depositors. By contrast with banks, they engage in no transactionother than collecting deposits and paying interest on them. (…)[In addition], it is the characteristic of savings banks, as non-profit-making institutions, to carry out activities of a social nature. The socialwork characteristic is substantiated by the honourary activities of theboard members, the use of the surplus for social purposes and thebelonging to the broad family of prudential institutions.” (quoted inMoster and Vogler 1996: 91)

In the late 1940s, however, there was some debate at the ConférenceGénérale about the need to amend Article 1 of the July 1895 law,which disposed that all funds collected by the savings banks shouldbe channelled to the Caisse des Dépots. Some savings banks actorspleaded for the introduction of a (limited) free use of funds, on themodel of what had been done in Alsace-Lorraine’s savings banks,whose derogatory regulatory regime, inherited from their forty yearsstay within the German Empire, was further confirmed by a 1954 law.

In October 1947, therefore, the Conférence Générale submitted apetition that aimed to “grant the normal savings banks the possibilityof direct investment of their deposits up to 30% in loans to the localauthorities and up to 10% in mortgage loans”. This petition wascarried over by Jean Minjoz, – then a socialist member of Parliamentand chairman of the savings bank of Grenoble, - and gave birth to theso-called “Minjoz law” passed in June 1950. The Minjoz Law did notgive savings banks the autonomy to manage part of their collectedfunds; rather, it authorised them to “propose” to the CDC loans tolocal authorities representing up to 50% of the annual increase indeposits. Loan applications were submitted and approved by a committeeformed in each department and chaired by a representative of theCDC. The CDC then gave a fixed fee for savings banks for eachsuccessful loan application – substituting the interests savings banksmight have earned had they had the right to make loans directly.The Minjoz was an immediate success, and led to a renewed effort bysavings banks to increase deposits. The latter rose from FRF 47 billionin 1951 to FRF 219 billion in 1955.

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Another timid step towards business diversification was the authorisationto open savings-for-home-ownership accounts, granted by an April 1953law. Under such schemes, the special deposits opened at individualsavings banks or at the Caisse Nationale d’Épargne were forwardedby the CDC and placed at the Crédit Foncier for granting loans.These schemes, however, did not meet with the same success as theMinjoz law loans: after five years, by the end of 1957, only 90 savingsbanks (out of 583) had opened just 944 savings-for-home-ownershipaccounts with FRF 328.9 million of deposits. A further innovationtook place in 1955, with the same limited impact: in that year, theCommission bancaire, the banks’ regulatory body, authorised savingsbanks to invest part of their own funds (called “fortune personnelle”)in personal social loans – loans targeted to low-earning individuals.After three years of the new regime, only 20 savings banks hadventured into that new possibility.

• Italy

During the 1930s and 1940s, Italian savings banks were, like allcommercial banks, first encouraged, then (during the war years)forced by the state to include large quantities of government debtsecurities in their investment portfolios. Thus, in 1930, securitiesaccounted for 31% of total assets; by 1938, that figure had risen to44.2%, and reached 57.6% in 1945. Meanwhile, prices soared, aninflation fed in part by the almost exclusive reliance of the Italian stateon printing banknotes for financing the war effort. It is estimated thatin the second half of 1947, consumer prices had risen to 40 timestheir 1938 level.

In this context, savings collapsed: in 1938, the total savings perdepositors amounted to ITL 95 lire (in 1913 gold prices); by the endof 1947, that figure had fallen to ITL 17. Savings banks were thehardest hit by the war economy, since their depositors – lower-incomegroups – were the most affected by the crisis. In addition, savingsbanks had had to compete with the Post Office Savings Bank who wasallowed by the Italian government in 1927 to increase the interestspaid on the treasury certificates (“buoni fruttiferi”) it issued, thusattracting savings away from private savings banks. Moreover, the1936 banking reform, which had installed the segmentation of thebanking market, ended up steering commercial banks towards short-term borrowing (en lending), which led them to compete with savingsdeposits at savings banks.

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For all these reasons savings banks’ market position declined: theirmarket share fell from 32.2% of total deposits in 1938 to 20% in1945. Savings banks’ concerns in the aftermath of the war weretherefore to get back on their feet and address the needs of theirtraditional clientele – rather than trying to expand into new markets.

It is in this context that savings banks completed their transformationinto full-fledged banks, operating strategically on both sides ofthe balance sheet – and not any longer focused solely on liabilities.During the 1950s, 1960s, 1970s savings banks increased theiractivities on the assets side at the local level. In particular, severalstudies have shown how savings banks emerged as the first lendersto small business in the areas that in the successive decades (the1970s and 1980s) would become the industrial districts, thecornerstone of the “Third Italy” (Conti and Ferri, 1997). From the1930s through the 1980s, indeed, savings banks held a 30%-moremarket share in the lending market in townships comprised in theindustrial districts areas (Conti and Ferri 1997). Economic dynamismalso translated into the territorial expansion of savings banks.Although, by the end of 1960, the number of savings banks remainedsteady at 79 (their 1940 level), the number of branches had risen fast:from 240 in 1940 to 506 in 1940 to 2,465 in 1960. It is important tonote that those branches were concentrated in the Northern (1,336branches) and central part of the country (796) while the Southernregions savings banks numbered only 178 branches47.

Such modernisation bore fruit. During the mid-1950s, surfing thewave of the economic boom, savings banks started inverting thenegative trend that had affected them since the late 1930s. Indeed,between 1950 and 1960, the annual growth of the Italian GDPamounted on average to 5.9%, second only to West Germanyamong Western European economies. The economic boom led tohigher savings and more deposits. In only five years, from 1955 to 1960,total deposits at savings banks rose from ITL 781 million (1913 prices)to ITL 8,346 million, and in the same period, deposits per capita rosefrom ITL 17 to ITL 163. This impressive growth was not, however,limited to savings banks – therefore, it did not radically improvesavings banks’ market position. Savings banks’ market share of totaldeposits rose from 21.6% in 1955 to 24.4% in 1960.

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47 But in those regions, as Hertner rightly points out, the two former issuing banks – namely theBanco di Napoli and the Banco di Sicilia – did carry out similar functions as savings banks inother regions; and the former could count on a sizeable branch network (Hertner 1996: 210).

Such expansion was facilitated by a series of favourable regulationsadopted by successive governments in the late 1940s and 1950s.Since right after the war, the governor of the central bank, whoreceived in 1947 the responsibility for the whole supervision of thebanking sector, had advocated support for small and medium-sizedbanks and local credit institutions. From 1948 on, such banks (whichincluded savings banks) were given preferential treatment for theauthorisation of new branches – such authorisation, as we will see inthe next chapter, was a key part of the “subjective” regulatory regimein place up until the early 1980s. Successive governments shared thecentral bank’s concern with small and local banks, and therefore withsavings banks. In August 1947, when minimum reserve requirementswere introduced as part of a policy package aimed at guaranteeingmonetary stability, savings banks were explicitly exempted. In 1949,savings banks were authorised to issue interest-bearing treasurybonds, so that they had some long-term capital to fall back on.In November 1953, the Treasury Ministry issued a decree lowering theinterest paid on Post Office treasury certificates that, as mentionedabove, constituted an attractive competitor of savings banks’ savingsdeposits. Two months later, the government approved an increase inthe interest yields on savings accounts.

3.3.2 Organisation of savings banks in the 1960s and 1970s

The post-war expansion of savings banks’ business, their central role inthe reconstruction of France and Italy, and their important political roleled to a strengthening of sector coordination and organisation, comparableto what simultaneously happened in other European countries (with, forinstance, the creation of the Groupement Belge des Banques d’Epargnein Belgium in 1945, of the Danmarks Sparekasseforening in Denmark,founded in 1947).

• France

In France, the regional associations (the Conférences Régionales)became in post-war years more effective in voicing their claims.They started submitting petitions to the CDC and to the Ministry ofFinance, expressing their concerns over issues such as interest rates,deposit ceilings, but also the Minjoz loans, banking competition…

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Such a petition did represent effective layouts for future regulatoryefforts by the government (such as the 1950 Minjoz law). Technicalcoordination also took place at the regional level, through theGroupements d’Études Techniques (technical working groups): suchgroups gathered managers and organised exchanges on a range oftechnical matters, including marketing and advertising, accounting,data processing and personnel. At the national level, the Conférencegénérale started organising national annual meetings where, from1967 on, the Finance Minister was a regular participant.

The Bureau Central, under the leadership of René Laurent, also furtherdeveloped savings banks’ sector coordination and identity. In 1949, itpublished all the regulations regarding savings banks, which becamethe savings banks code in 1952; it opened, in 1942 and then in 1945,an École de l’Épargne (savings school), which provided courses forsavings banks’ executives and then for new employees; in 1957, aCentre de Recherche sur le budget familial (family budget researchcentre) was set up, its mission being to spread out savings ideasthrough, mainly, family associations and schools. The Bureau centraleven started publishing a children’s magazine, “Dominique”(187,000 copies in 1966), dedicated to encouraging the “spirit ofsavings” among the young.

Savings banks’ sector organisation underwent rapid changes in thelate 1960s – early 1970s. First, following the Racine Commission’sworks (see below), the Conférences régionales and the Conférencenationale became, respectively, the Unions Régionales and the Unionnationale – with unchanged mandates. More important, however,was the creation of the GREP and the CTIR.

The GREP, or Groupements Régionaux d’Épargne Populaire (regionalsavings groups), were set up by decree in December 1969. They wereowned jointly by local savings banks and by the CDC. Their role wasto issue savings certificates, thus diversifying the collection of liquidsavings, to fund the personal loans which savings banks started to givein 1971. The GREP were, in effect, savings banks’ “regional competitors”:despite being partly owned by them, they were, in practice, mostlycontrolled by the CDC (who staffed most of the GREP with its ownpersonnel) and did compete with savings banks on the market forliquid savings. Moreover, through advertising and training withinsavings banks (especially on all aspects pertaining to lending), theydid exert some kind of guardianship on them.

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At the same time, however, savings banks gave themselves the meansto coordinate more effectively and regulate better the financial flowsbetween them, the GREP and the CDC. During the 1960s, localsavings banks grouped together to create regional informationtechnology centres (Centre techniques informatiques régionaux, orCTIR), conceived to facilitate data processing and the exchange ofcomputerised information between banks. Interestingly, in contrast tothe GREP, the CTIR were bottom-up creations, formed on the basis ofexisting computers and in connection with planned new investmentsin information technology. The first CTIR was created in Nantes in1966; others followed quickly (Lyon 1967, Limoges and Toulouse1968, Roubaix 1969…). By 1972 there were 15 CTIR recognised bythe Union nationale, which numbered 406 member savings banks,representing 83% of deposits. Computerisation brought about theformation of savings banks’ inter-bank payment system, through aclearing centre created with the help of the CDC.

• Italy

Cooperation and association between savings banks increasedconsiderably during the post-war era. ACRI, the Italian Savings Banks’Association, played an especially important role in this regard. First, thenational congresses organised every two or three years offered savingsbanks the opportunity to exchange views and, more importantly, tolet themselves be known to the regulatory authorities, who were almostsystematically represented at such congresses with their highestrepresentatives (the governor of the central bank and the Minister ofthe Treasury). ACRI was also very active as an interest group, andsucceeded in achieving preferential treatment for savings banks atseveral occasions – such as the 1972-73 tax reform, which exemptedsavings banks’ earned interests from taxation. The ACRI did not havea direct say in the central bank’s decisions; but collectively, savingsbanks were the major holders of shares of the central bank’s capital.

The ICCRI (savings banks’ financial institute), on the other hand,became during the 1970s a major lender to the public sector, mainlyat the local level. The ICCRI received funds from savings banks, whichthey paid at a high interest rate. In the late 1970s, statutory changesauthorised the ICCRI to lend to the private sector as well, andincreased savings banks’ grip on the Institute.

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In 1972, the ACRI and the ICCRI (savings banks’ clearing institution),together with the major savings banks, created the Institute for theAutomation of Italian Savings Banks (Istituto per l’Automazione delleCasse di Risparmio Italiane, or IPACRI), which became the drivingforce behind the computerisation of savings banks.

3.3.3 Modernisation trends in the savings banks sectorduring the 1960s and 1970s

In the 1960s and 1970s, some savings banks continued their modernisation:in Germany, for instance, the savings banks’ labour union successfullypushed for reforms encouraging the further transformation of savingsbanks into modern, autonomous business units, with the clear separationof labour between the board of directors and the administrative board,and the right for savings banks to manage their own staff. In Germanystill, the lift of restrictions on the opening of bank branches in 1958 andthe subsequent liberalisation of interest rates (in 1967) led to increasedcompetition within the banking sector, with savings banks successfullyholding to, and even expanding their market shares. Again, however,savings banks’ post-war development differed between countries andregulatory regimes.

• France

In the late 1960s, a renewed effort of modernisation came through.These efforts were preceded by a few regulatory reforms aimed atspurring competition in the banking system: the authorisationgranted to non-savings banks for opening savings accounts (1957)and the generalisation of saving-for-home-ownership schemes to allbanks in 1965. These regulatory reforms ended up increasing thecompetitive pressure on savings banks, which still benefited, however,from tax exemption on interests applied to savings accounts.Furthermore, non-savings banks’ access to the market for liquidsavings was not compensated for by the possibility of savings banksto open check accounts.

Faced with growing competition on their own market, savings banksstarted seriously considering the idea of an extension of their ownbusiness to include other areas. A first issue, of course, was that ofthe free (autonomous) use of funds – outside the Treasury circuit.

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This issue was addressed in 1965: in the same year that banks gainedaccess to saving-for-home-ownership schemes (SHOs), savings banksgained autonomy on the management of such schemes. In otherwords, starting that year, savings banks were authorised to grantloans under those schemes, pending agreement with the CDCensuring the smooth functioning and financial stability of the system.In practice, as Moster and Vogler note, savings banks “entered thelending business under the supervision and mediation of the Caissedes Dépôts” (Moster and Vogler 1996: 87-88). Alongside the mainSHOs loans, savings banks were authorised to grant additional loansfinanced from secondary savings accounts, and not exceeding aquarter of the annual growth in such deposits.

In early 1968, a “Commission on the modernisation and developmentof savings banks”, composed of representatives of the savings banksand of State institutions (Treasury and CDC) was set up, with themission to propose reforms to modernise savings banks. The RacineCommission (named after its chairman, Jean Racine) submitted itsreport in May 1968, in which it proposed three main measures.The first and the third of such measures consisted in the abandoningof the tax exemption of the Livret A savings accounts against theextension of savings banks’ business to other areas. The second,alternative measure consisted in a temporary maintenance of LivretA’s favourable fiscal status and the gradual extension of savingsbanks’ business. The Racine Commission, importantly, alsorecommended reducing the number of savings banks, mainly throughmergers and acquisitions. In 1967, out of the 568 existing savingsbanks, most were mono-branch institutions; only 118 banks hadmore than ten branches, and many were open only two or three daysa week. Subsequent regulatory evolution (during the 1970s) showeda preference, from the part of the state and of savings banks, for thesecond solution suggested by the Racine commission: the gradualexpansion of savings banks’ business.

French savings banks’ lending business picked up in 1971 with thefirst “personal loans”, outside savings-for-home-ownership schemes,which gave savings banks complete freedom in risk assessment andchoice of borrowers. Personal loans were aimed at financing housingconstruction of the acquisition of consumer goods (“family loans”).They were financed from secondary savings accounts and from theaccrual of resources from savings certificates issued by theGroupements Régionaux d’Épargne et de Prévoyance (see above).

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• Italy

In the first half of the 1970s, Italian savings banks were still clearlydistinct from the rest of the banking system in terms of their balancesheet structure: in 1973, 51.4% of all deposits at savings banks werein savings accounts, whereas in other banks the latter representedonly 38.5% of all deposits. On the asset side, savings banks hada negligible international lending activity, with foreign currencyoperations and overseas credit representing 0.9% of total assets in1973, against 21% in other credit institutions (on average). In parallel,savings banks placed a sizeable proportion of assets into publicsecurities, which even increased during the 1960s to reach 38.1%in 1973. Finally, savings banks lent more, in relative terms, than otherbanks to households and to public institutions – even though, overall,almost two thirds of their lending was made to business duringthe same period.

However, by the mid-1970s, savings banks had undergone considerablechanges. Starting in the late 1950s, Italian regulatory authoritiesgradually allowed the alignment of savings banks with other creditinstitutions, thus (slowly) reversing the preferential treatment given tothe former at the end of the war. In 1956, the taxation of savingsbanks had been put in line with that of other credit institutions.Two years later, the minimum reserve requirements were extended tosavings banks – but the minimum was set at a lower level than forother categories of banks. That last provision was repealed in 1975.In 1962, the Interministerial Committee for Credit and Savings(Comitato Interministeriale per il Credito e il Risparmio, or CICR)decided to allow branches of two different savings banks to set up inthe same local market. In 1966, the CICR adopted a standard statutefor savings banks (the “statuto tipo”), which aimed at harmonisingsavings banks’ business practice and governance. In particular, thestatuto-tipo allowed savings banks to invest 40% of their resources inmedium-term lending or assets. This loosening of the separation ofmaturities, which had applied since the mid-1930s, was thenextended to other credit institutions, in 1972, albeit with less freedom– since the latter could invest medium-term only 8 to 10% of theirresources. In 1973, when the central bank introduced ceilings on thevolume of lending, it applied the measure to all categories of banks.

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Furthermore, since the early 1960s Italian savings banks operated afundamental change in the structure of their assets – while theyconsistently, until the late 1970s, relied on deposits for more than70% of their assets, they gave increasing weight to sight deposits. In1958-62, savings deposits at savings banks represented 75.5% oftotal deposits, against 24.5% for sight deposits – the highestproportion of savings deposits in any banking category; in 1977, bycontrast, savings deposits and sight deposits represented, respectively,44.9% and 45.1% of total deposits – while both cooperative banksand ordinary banks had a larger proportion of savings deposits ascompared with sight deposits48!

By the late 1970s, Italian savings banks held an important positionwithin the credit system. Collectively, their lending amounted to morethan a fifth of total lending by banks (21.7% in 1978, right behind“ordinary” banks at 27.6% but before public and cooperative banks);and they had the highest number of clients on the asset side. They heldsizeable shares of the deposit market – 27.7% of total deposits, against25% for ordinary banks and 20% for public banks.49 Their strongestposition was on the market for savings deposits. In addition, quiteinterestingly, several studies have shown how savings banks were thefirst banks of industrial districts (Conti and Ferri, 1997;)

Conclusion: Italian and French savings banks in the 1970s

The compared history of French and Italian savings banks from their originsuntil the 1970s raises three observations. First, by the late 1970s Frenchand Italian savings banks had developed along two seemingly differentpaths. Italian savings banks were of a much lesser number and largeraverage dimension than their French counterparts; French savings bankswere mostly savings collecting institutions, while Italian savings bankshad developed into quasi-universal banks, despite and above marketsegmentation. Network externalities were, in France, mostly borne by thestate (through the Caisse des Dépots); in Italy, they were managed by thesavings banks themselves, through their sector organisation.

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48 Source: Banca d’Italia, Bollettino, various years.49 Data is from Banca d’Italia, Bollettino, various years.

Beyond those differences, however – this is the second observation,French and Italian savings banks still resembled each other. The firstsource of similarity is common to other savings banks throughout Europe,and it has to do with savings banks’ enduring peculiar identity. By the late1970s, savings banks in France and Italy were still distinct as comparedwith other categories of banks. Such distinction built on five key features,which mirrored their origins: (i) savings banks’ non-profit nature andsocial responsibility (exerted through the redistribution of revenues tostakeholders); (ii) savings banks’ ad hoc legal nature (in both France andItaly they were considered as public, non-state entities); (iii) savings banks’peculiar business profile (specialisation in savings product on the collectside; in mortgage and loans to local government on the lending side);(iv) savings banks’ territorial rooting (both in governance structures andin lending preferences); and (v) savings banks’ sector organisation –which made them exist as true sectors.

A second source of similarity between French and Italian savings bankssets them apart from other European savings banks: it is their insertion,since the post-war period, within a state-based credit allocation system.Such a regime was put in place during the 1930s and 1940s, and endedup maintaining savings banks, in both countries, under the authority ofthe state. The Next chapter will further analyse this aspect.

A final observation is that savings banks, even in France where they seemto have been “frozen” in their development by regulatory authorities,have displayed signs of transformation, both in their organisationand their operations, long before the top-down changes in regulatoryregimes brought in the 1980s and 1990s. This aspect will be analysedin chapter 5.

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Introduction

France has a well-explored tradition of state interventionism in theeconomy (see Shonfield, 1965; Zysman, 1983; Hall, 1986; Schmidt, 1989).Such tradition has pervaded the financial system throughout the XXthcentury, leading scholars to conceptualise an ideal-typical state-administeredcredit system, represented by France, as opposed to bank-based andmarket-based systems, respectively epitomised by Germany, the UnitedKingdom and the United States (Zysman, 1983). State-administeredcredit systems are characterised by (i) the administrative setting of thevolume and price (interest rates) of lending and (ii) the dominant roleplayed by state or para-statal institutions in the allocation of credit.

Several other countries, alongside France, experienced state-administeredcredit: Korea, Spain, Japan, all resorted to state control over credit allocationto finance their economic development in the post-world war II years.Italy might be associated with this group of countries as well, although atfirst sight it appears, historically, as a bank-based system – with banksplaying the prime role in financing firms. However, from the late 1930s untilthe late 1970s, the Italian state enforced strict control over the allocationof credit, making its financial system become strikingly similar to that ofFrance and the other state-administered credit systems just mentioned.

During the 1970s, however, several factors severely altered the functioningof state-administered credit systems – both external and internal. At first,governments responded to such pressures to change by strengtheningthe state’s grip over credit allocation. The failure of such attempts, however,led to the gradual but rapid dismantling of state-administered credit systemand the end of “credit activism in interventionist states” (Loriaux, 1991;Loriaux et. al., 1997). The French and Italian financial regulatory regimeswere durably transformed, which led to the transformation of thefinancial system itself.

4. THE UNRAVELLINGOF ADMINISTERED CREDITSYSTEMS AND ITS IMPACTON BANKING

As mentioned in chapter 3, savings banks played an important role insuch systems, both as stabilisers and as sources of funding for state-administered credit. This dual role mirrored the ambiguity of state policytowards savings banks, acting both as a regulator and an actor of thecredit system. The dismantling of state-administered credit systems,therefore, had important consequences on savings banks themselves,through the direct changes brought to their institutional environment(much more market-oriented). Savings banks reacted with the revamp oftheir own regulatory regime (analysed in chapter 5). The present chapterwill thus explore the origins and nature of state-administered creditin France and Italy; and its initial strengthening and then dismantlingin the context of the 1970s crisis. It will then explore the implications,for savings banks, of the dismantling of state-administered credit in thelate 1970s and early 1980s.

4.1 The origins and functioning of state-led creditallocation in France and Italy

4.1.1 The crisis of the 1930s and its consequenceson the banking system

The 1929 stock-market crash and its aftermath led to a complete upheavalof credit and banking regulations in France and Italy.

• Italy

In Italy, a late comer in terms of industrial development when comparedto France and Great-Britain, in the absence of an autonomous capitalmarket or of institutional investors banks were directly involved in thecapital accumulation process (see Gerschenkron 1962 for the linkagesbetween late industrialisation and bank- or state-based credit allocation).In the last quarter of the XIXth century, large private banks thereforeplayed a key role in supporting the nascent national industry, eitherthrough acquiring and selling shares in industrial firms, or throughgranting medium and long-term loans. Two banks played aparticularly important role in financing industry – especially export-oriented industry: the Società Generale di Credito Mobiliare Italianoand the Banca Generale. These banks had been modelled after theCrédit Mobilier, a bank founded in France by the Pereire brotherswhich financed industry through the acquisition and sale of bonds.

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In 1893-94, a serious economic and banking crisis led to the demise ofthe Credito Mobiliare and the Banca Generale, and their substitutionby mixed banks, created on the German model by a pool of Italian andforeign bankers (mostly Austrian and German). Those mixed banks– the Banca Commerciale Italiana, later called Comit; the CreditoItaliano, later called Credit; and the Banca di Roma - were conceivedas an improvement of the credit mobilier type of banks: besides theacquisition and sale of bonds and stocks, they would draw ondeposits to finance their operations.

Mixed banks became, over the years, highly exposed to industrialfirms who, in turn, were highly leveraged and depended on risingprofits to be able to pay their debts. The 1929 stock-market crash, thesubsequent collapse of the gold standard in 1931 and the ensuingeconomic and financial crisis, which depleted business firms’ revenuesand stocks’ value, therefore seriously affected the banking systemand especially the mixed banks. Italy had already faced a smaller-scalebanking crisis in 1921 with the bankruptcy of the Banca Italianadi Sconto, one of Italy’s foremost commercial (mixed) banks. In thefollowing months, bank runs led the state to a first attempt atadjusting the regulatory framework to perceived new threats to thestability of the financial system. Those attempts culminated in the1926 reform, mentioned in chapter 3. However, that reform leftunchanged the root of systemic instability: the bank-industry nexus.The 1930-31 crisis, moreover, was of a much larger scale.

The impact of the unfolding international crisis was so stronger thatsince 1927, the Italian currency had been pegged to the Britishpound50, and was therefore exposed to the strong fluctuations inexchange rate that followed the end of the convertibility of thepound into gold. Italy went through a severe balance of paymentcrisis. Firms’ solvency shrunk. Comit and Credit saw the value of theirindustrial shareholdings fall as their principal “clients” ran into trouble– such large firms as Montecatini in the chemical sector, Edison inthe energy sector, Fiat in the automobile industry, Pirelli, Ilva, Terni…The mixed banks system was threatened. Bank runs multiplied,leading to many bank failures – especially among the small rural andcatholic banks (Ferri 1992).

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50 Since the famous “quota 90” speech by Mussolini, where the dictator, apparently movedby impulse, decided to anchor the lira to the pound.

Total collapse of the banking sector was avoided in part because ofdirect state intervention. First, the state created an Istituto di Liquidazioni,which then became, in 1933, the Istituto per la Ricostruzione Industriale(Institute for Industrial Restructuring, or IRI), which took control, in1933-34, of the three former mixed banks (Comit, Credit and Bancodi Roma) and their industrial shareholdings. Secondly, as mentionedin the previous chapter, the state proceeded to radically change theregulatory framework governing credit institutions. Such effortsculminated in the Legal Decree of March 1936, converted into law inmarch 1938. As Clarich notes, the 1936 reform was the concreteapplication of the principles of “interventionism” then in vogue infascist circles – but not only. It represented “one of the most coherentand complete examples of administrative planning based onsegmentation” (Clarich 1984: 56).

• France

In France, the economic depression was less pronounced than in Italy,but it lasted longer. The relative low intensity of the depression can beattributed to the mildness of the banking crisis of 1931-33 in France,which was the consequence both of limited foreign financialcommitments in 1931 and of the traditional caution of most majorbanks in their relationships with manufacturers. In fact, there were670 bankruptcies in the banking sector from 1929 to 1937, but thosewere mostly local banks. Only one major bank (the Banque Nationalede Crédit) failed, and a rescue operation organised by the Treasury,the Bank of France and the other banks succeeded in avoiding apanic. The banking crisis took a dramatic turn only with the outburstof several financial scandals involving politicians (the Ostrik andStavisky scandals of 1932 and 1933). Therefore banking regulationwas not changed until regime change in 1940-41.

At the centre of the policy interpretations of the crisis of the 1930sin both countries lie the close links between banks and industry.Indeed, the bank runs of 1930-31 led to a credit squeeze to heavilyindebted firms who could not, therefore, repay their loans to banks;at the same time, the stock-market crash meant that banks’ industrialshareholdings lost their value, and banks were unable to facedepositors’ demands. The first policy response to the crisis wastherefore the severance of those bank-industry links, so as to shieldsavers from risks inherent in industry.

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4.1.2 The new regulatory regime of the late 1930s:market segmentation, tighter regulation andstate intervention

• Market segmentation

The 1936 and the 1941 reforms in France and Italy, respectively, werefounded on three pillars: market segmentation, tighter regulation andstate intervention in the credit system. Market segmentation primarilytook the form of functional specialisation, which consisted in theseparation between short-term, medium and long-term liabilities. Thebasic assumption behind functional specialisation was that thematurities of assets should correspond to the maturities of liabilities,so as to ensure the liquidity of banks’ balance sheets and, ultimately,prevent bank runs and protect savings. Regulatory authorities heldthat short-term lending should be exclusively dedicated to help firmsface cyclical downturns (cash-flow problems); while long-termlending should finance productive investment. In both countries,therefore, banks were to specialise in specific segments of thebanking business. The primary goal of functional specialisation was toshield deposits from the risks associated with corporate lending.

In France, a series of reforms passed in 194151 defined bankingoperations according to their maturity, and distinguished among banksthat were allowed to conduct them all or in part: deposit banks,merchant banks and financial institutions. In Italy, the 1936 lawsimilarly distinguished between those banks that collected short-termsavings (called in the law “aziende di credito”, or credit firms) and thosethat collected medium and long-term savings (the so-called “istituti dicredito speciale”, or special credit institutions).52 The law also providedthat the possibility to offer medium and long-term credit53 dependedon the authorisation of the central bank. The former mixed bankswere excluded from that possibility and barred from holding stocks orshares in industrial firms, while the special credit institutes received alegal monopoly on long-term lending. In effect, most of the lendingoffered by credit firms was to take the form of cash-flow financing.

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51 Laws of June 13 and 14, 1941.52 This distinction is made explicit in articles 5 and 6, and parts V and VI of the 1936 law.53 Short-term assets and liabilities bore maturities up to a year; Medium-term assets and

liabilities bore maturities comprised between one and five years; and long-term assets andliabilities bore maturities longer than five years.

In addition to functional specialisation, the Italian and French bankingregulatory regimes of the late 1930s were characterised by themultiplicity of statuses, laws and bylaws that divided the bankingsystem in several segments, or sub-sectors. This fragmentation of thebanking sector in both countries was increased in the post-war periodwith the creation of a series of new (public) financial institutions.Thus by the early 1950s the Italian banking sector was composed offive broad segments. The first segment consisted of “ordinary”deposit banks (“banche ordinarie di credito”) that operated on theshort and medium term. These banks were constituted as joint-stockcompanies and operated mainly on local banking markets (at theexception of the largest ones, such as the Banco Ambrosiano, Bancanazionale dell’Agricoltura…); supervision of those banks was theresponsibility of the Banca d’Italia.

A second segment included local and regional cooperative banks– the Banche popolari and the Casse rurali ed artigiane. These bankswere prevalently local and addressed the needs of specific clienteles –craftsmen, workers and small industry and commerce for the former,small firms for the latter. Smaller cooperative banks have longbenefited from a benevolent attitude from the part of regulatoryauthorities, both regarding their regulatory obligations (less stringentthan for other banking categories) and the regime governing theircreation and territorial expansion.

A third segment included “public” banks, which consisted in fact ofthree distinct bank categories: savings banks, state-owned nationalinterest banks and public law banks. These three categories sharedthe characteristic to be legally considered as public entities and to bedirectly controlled by the government, which appointed executivedirectors in savings banks, the whole board in the case of the othertwo categories. “National interest banks” (“banche di interessenazionale”, or BIN) were the three former mixed banks that had beenacquired by the state through IRI (Comit, Credit, Banca di Roma)54.Public law banks (“Istituti di credito di diritto pubblico”, or ICDPs)were large banks deemed to fulfil public interest missions. They were:Banco di Napoli, Banco di Sicilia, Banco di Sardegna, Banca Nazionaledel Lavoro, Monte Paschi di Siena, Istituto San Paolo di Torino.

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54 The BIN category was created ad hoc in the 1936 law.

A fourth category included the so-called special credit institutions(“Istituti di credito speciale”, or ICSs). Those institutions were the onlyones authorised to offer long-term financing. ICSs could take two forms.First, they could be created within existing banks as autonomous“sections” (sezioni), that is, business units – for instance, the BNL hadsections specialised in lending to the small and medium industrialfirms55, the movie industry and tourism. Other important sectionswere those of the Banco di Napoli and of the Banco di Sicilia. ICSs couldalso take the form of specialised financial firms. Those were, mainly,the IMI (Istituto Mobiliare Italiano), Mediobanca, Efibanca, Interbanca,Centrobanca and the IRI which, beyond owning the three BIN,managed their former shareholdings in industrial firms and bond-financed the big industry.

The fifth and final segment consisted of financial institutions createdby the state apart from the banking system to serve the needs ofspecific territories or industries56: the Cassa per il Mezzogiorno (Cassaper le opere straordinarie di pubblico interesse per il finanziamentodello sviluppo del Mezzogiorno, or Casmez), created in 1950 tomanage the funds given by the International Bank for Reconstructionand Development to foster economic development in the Southernregions; the Mediocredito centrale, created in 1952 to finance smalland medium industrial firms, along with regional institutes; and theweb of regional and interregional institutes created by local andregional banks and firms, supported by the state and financed in partby the Mediocredito centrale and the Cassa per il Mezzogiorno. In thesouthern regions, for instance, those were the IRFIS (Istituto regionaleper il finanziamento alle medie e piccolo industrie della Sicilia, createdin 1950), the CIS (Credito Industriale Sardo, created in 1953), and theISVEIMER (Istituto per lo sviluppo economico dell’Italia meridionale,created in 1938).

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55 The only such section in Italy to be a distinct legal entity from the founding bank.56 The state-promoted creation of those institutions corresponded with the strong reluctance

of monetary authorities to have industrial investment financed by the banking sector.

The French banking system, in the post-war years, was similarlysegmented in four parts. The first segment included commercial banks(deposit banks, medium and long-term credit banks, merchant banks)and private financial institutions (stock-trading houses, creditinstitutions…), who received an authorisation from the national creditcouncil (Conseil national du crédit, or CNC)57; were controlled bythe central bank; and monitored by the banks’ control committee(Commission de contrôle des banques, or CCB).

The second segment of the French banking system consisted of bankswith specific legal statutes – mainly, networks of cooperative banks,such as the Crédit populaire, the Crédit agricole mutuel, the Créditmutuel agricole et rural, the Crédit cooperatif, the Crédit mutuel,the Banque Française du Commerce Extérieur. These banks, whichoften had their own central financial institutions, were also endowedby the state with public interest missions, and could distribute state-subsidised credit to their members. For this reason such banks werenot monitored by the central bank or by the CCB, but by variousMinistries, among them the Ministry of Finance, which delegatedtheir control to the Department of the Treasury.

The third segment of the banking system was composed of financialinstitutions belonging to the public sector and, under the control ofthe Treasury, were in charge of financing specific business sectors.The Crédit national financed lending to industry; the Crédit foncierand the Comptoir des entrepreneurs offered real estate andmortgage lending; the Crédit Hôtelier lent to the tourism industry,etc. These institutions were often private firms but because of theirpublic service missions, were controlled by the state who appointedtheir executive directors.

Finally, the fourth segment of the post-war French banking systemincluded public institutions – mainly the Caisse des dépôts etconsignations (CDC) and its subsidiaries – that managed publiclending portfolios. The CDC was monitored by a parliamentarycommittee and attached to the Treasury. Among its subsidiaries werethe Caisse d’aide aux collectivités locales, the Caisse de prêts auxorganismes d’habitations à loyer modéré…

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57 Those banks were registered with the CNC and hence were also called “registered banks”.

The network of the savings banks, as well as the Postal savings banks(the Caisse Nationale d’Epargne) were directly under the CDC’s authority.Finally, the Post and Telecommunications administration managed thepostal checking accounts, under the supervision of the Treasury; andthe Treasury and the central bank itself managed deposits and weretherefore part of the public segment of the banking system.

As seen above, banking market segmentation in both countries wasthe fruit both of historical evolution (with the creation of specialisedinstitutions along the years) and of the regulatory regime of the1930s and its sequels – functional specialisation and the multiplicityof legal statuses and categories. Such a structure survived until the1980s in France and 1990s in Italy.

• Tighter banking regulation

The second pillar of the 1930s reforms was tighter regulation.The regulatory powers of existing regulatory agencies were increased;and new regulatory agencies were created. In Italy, the 1936 lawreorganised the regulatory apparatus around three institutions: theCommittee of Ministers (and the Ministry of Industry), the Ispettoratoper la Difesa del Credito e del Risparmio (Ispectorate for the defenceof credit and savings), and the central bank. The law then gaveextensive and discretionary powers to those three institutions, whichreduced to a large extent the autonomy enjoyed until then by banksand credit institutions. Banks’ information obligations were especiallyincreased, starting with the obligation to deliver accountingdocuments twice a year to the central bank. The Ispectorate wasgiven the power to perform inspections and inquiries; that power wastransferred to the central bank after the war, when the wholeIspectorate was re-located within the Banca d’Italia.

In France, the 1941 reforms instituted a banking license and submittedbanks to the monitoring powers of the Ministry of the Treasury.These reforms were confirmed after the war, together with thenationalisation of the central bank, the Banque de France, and of thenation’s first four deposit banks. A 1945 law confirmed the segmentedstructure of the banking system and delineated the principles ofbanking regulation. Inspection powers were similarly assigned to thecentral bank, and banks were submitted to information obligations.

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• The interventionist role of the state in credit allocation

The third pillar of the 1930s banking regulatory regime was, beyondmarket segmentation and tighter banking regulation, the directintervention of the state within the allocation of credit. As seen above,by the late 1930s a consistent part of the credit system was owned orcontrolled (either indirectly or directly) by the state. Before the war,state intervention took two forms: ownership of banks or financialinstitutions on the one hand; and control of ad hoc credit instruments onthe other hand, directly linked to the government or to public agencies.

State intervention was not simply the outcome of authoritarian regimes(fascism in Italy from 1922 on; in France, petainism since 1940). First ofall, many democracies (such as Great Britain or the United States)simultaneously adopted similar policies or regulatory regimes – includinga stronger state intervention in the economy. Secondly, even in Italy“fascist” creations were the continuation of the experience launchedbefore and during the First World War by a group of key politicalplayers from various origins and ideological affiliations – such asFrancesco Saverio Nitti and Alberto Beneduce. These actors sharedthe conviction that, to foster Italy’s industrialisation and modernisation,one needed the work of a “visible hand” transforming savings intoproductive investments; that such work request state intervention,given savers’ low trust into medium and long term financialendeavours; and that, finally (and crucially), this intervention shouldhave taken place outside of the administration’s traditional realm,namely through ad hoc entities, in which Barca sees institutionalinvestors ante litteram (for a short review of the Nittian bases of Italy’spostwar economic structure see Barca 1997). In sum, once functionalspecialisation was in place Italy renounced to resort to banks for thefinancing of industry.

These ideas, and the men behind them, therefore led to the creationof public institutions specifically designed for collecting savings tofinance medium and long-term investments: the INA (Istitutonazionale delle assicurazioni, or national insurance institute) in 1912,the Consorzio per Sovvenzioni su Valori Industriali in 1914, theConsorzio di credito per le spese pubbliche in 1919, the Istituto diCredito per le Opere di Pubblica Utilità in 1924 and the Istituto dicredito navale in 1928.

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With the crisis of the 1930s, and the collapse of the mixed bankmodel, the fascist government accelerated the trend, as seen above,through the creation, first, of the Istituto mobiliare italiano, or the IMIin 1931; and, second, of the IRI in 1933 – which then took control ofthe three national mixed banks. The IRI at first was conceived as akind of temporary bad assets management company, dedicated tothe ridding of those bad assets. Already in 193658, however, the IRIbecame the owner of the entire capital of the three BINs and theowner of their industrial shareholdings – which represented, by thelate 1930s, 21% of the capital of all joint-stock companies existing inItaly. And in 1937 the IRI lost its temporary nature.

In addition the Italian government created or helped create a numberof special funds or financial institutions to help ailing industries.These institutions were either owned or controlled by the state, whoalso appointed board members in legally distinct entities such as theCasse di risparmio (since 1936). Regulatory authorities in both countrieswere, in addition, the places where the interventionist state woulddirect credit allocation through specific regulations, specific incentives,tax and legal loopholes. Such state intervention would be strengthenedby post-war “developmentalist” concerns.

4.1.3 State-led credit allocation in post-war France and Italy

The banking regulatory architecture put in place in the late 1930s in Franceand in Italy was substantially left unchanged in the post-war years, evenas both countries changed the form of their government. Rather, policy-makers in the 1940s and 1950s reinforced the interventionist role in thecredit system assigned to the state during the 1930s. In both countries,indeed, reconstruction needs and political change helped put in place a“developmentalist industrial policy” (Loriaux 1991) that relied on state-led credit allocation and an accommodating monetary policy.

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58 With a decree of May 25, 1936 (n.1042).

• France

Post-war industrial policy was characterised in France by subsidies,credit controls, indicative planning and intervention in state-ownedindustries. In 1945-46, successive governments nationalised severallarge firms in key industries – among them the four largest depositbanks: Crédit Lyonnais, Société Générale, Banque Nationale pour leCommerce et l’Industrie, Comptoir d’Escompte de Paris. Industrial firmsthat were nationalised included the car-maker Renault, the chemistand pharmaceutical firm Rhone-Poulenc and utilities such as theCompagnie Générale d’Electricité. Eventually, the state used itsownership of those companies to direct (and fund) strategicinvestment and production choices. To a large extent, the Fordistaccumulation regime – characterised by mass production ofstandardised goods - that emerged out of the 1950s was a state-sponsored one.

Indicative planning was the second key instrument of industrial policy,starting with the Monnet Plan of the late 1940s and successivefive-year plans. Planning gave public priorities for investment researchand development, and set prices and interest rates. During the 1960s,France’s industrial policy was still characterised by ambitious cross-sector programmes, epitomised by the Fifth Plan (1965-1970), theConvention État-sidérurgie in 1966 and the Plan Calcul in 1967.When, during the late 1960s – 1970s, planning lost its importance,state-owned firms became instrumental in directing investment andproduction, mostly through ownership and financing of privateindustrial firms. Public firms set up joint-ventures with private ones:so did EDF-GDF with Thompson; Paribas with Elf-Aquitaine…

The last years of the De Gaulle presidency were marked by the state’swill to help create national champions, namely large firms capable ofcompeting on the world markets. So the government participatedin the constitution of large industrial groups through mergers andacquisitions: Saint-Gobain-Pont-à-Mousson, Rhône-Poulenc, Péchiney-Ugine-Kuhlman, Thomson-CSF… State-owned banks were associatedwith such restructuring process, which concerned the banking sectortoo – as with the merger in 1966 between the Banque Nationale pourle Commerce et l’Industrie and the Comptoir d’Escompte de Paris,resulting in the creation of the Banque Nationale de Paris.

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During the 1970s, industrial policy shifted from supporting nationalchampions to supporting specific sectors or niches – telecommunications,aircraft, electrical generators, and arms. In addition, the state multipliedrescue operations towards ailing industries and firms, or “lame ducks”.So the state created the Institut de Développement Industriel (Institutefor Industrial Development, or IDI), originally designed to take overcompanies in difficulty and then return them to the private sectorprofitable enterprises. In 1975, public support to private industryreached 126 billion francs, or 9% of France’s GDP. Of this amount4.1 billion francs in subsidies and 334 million francs in loans were fortargeted sectors, 149 million francs in subsidies and 8.6 billion francsin loans went to restructuring (Bellon, 1980).

State-directed credit allocation, together with national industrialplanning and nationalised industries, constituted the cornerstone ofthe post-war dirigisme rule. Subsidies were first and above all providedthrough the Fund for Modernisation and Equipment (Fonds deModernisation et d’Equipement, or FME), which became in the late1960s the Fund for Economic and Social Development (Fonds deDéveloppement Economique et Social, or FDES), financed directlyfrom the budget. The FME was originally created to manage thefunds received under the Marshall Plan, and was directed at financinginvestment by large industrial firms. In 1949, the French state financed41% of industrial investment (against 20% for self-financing,26% for short-term bank loans, 6% for medium-term bank loans,7% for bonds) (Hautcoeur, 2003). Such policy represented a rupturefrom the pre-war pattern of state economic intervention since, asSchmidt put it, “during the Third Republic, the state was morefocused on maintaining the balance among social groups andprotecting established interests than on promoting economicgrowth” (Schmidt 1996).

However, this centralised system gave way to large fiscal deficits andrising inflation. Hence the decision, in the early 1950s, to increasinglyrely on state and para-statal institutions, such as the Caisse desDépôts et consignations, within the Treasury circuit already evoked inchapter 3. The “Treasury circuit” had been put in place since theXIXth century, but it really acquired its centrality in Frenchdevelopmentalism only in the post-war era. The circuit had been builton the premise that the state was better able (than financial marketsand private banks) to (i) mobilise savings to finance long-terminvestment and (ii) offer cheap money to investors.

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The Treasury circuit built on three layers (Zerah, 1993). The first layerconsisted of a series of state and para-state financial institutions offeringlow interest-bearing loans to specific sectors. Those institutions includedthe Caisse des Dépots et Consignations (CDC), who financed localgovernments; the Crédit National, specialised in industrial loans; andthe Crédit Foncier, which issued mortgage loans. All those state andpara-state institutions were required by law to deposit part of theirresources at the Treasury. The second layer of the Treasury circuit wascomposed of the Post Office and the savings banks, which weremainly collect institutions geared to collect savings from households.The Post Office was required to deposit the collected funds at specialaccounts at the Treasury; while the savings banks, as seen in Chapter3, had to deposit the resources drawn from the Livret A accounts atthe CDC. The third layer of the circuit was made up of public andprivate banks, which had to hold a part of their mandatory reservesin Treasury bonds. In addition, banks could offer loans guaranteed bythe state at certain conditions.

At the centre of the circuit stood the Treasury, which could “draw onmultiple accounts to finance public spending without issuing bondsor relying on deficit spending, transforming short-term deposits intolong-term loans and subsidies.” (Loriaux, 1991) Loriaux further notesthat, since the money borrowed by the Treasury from those institutionsto pay off the state’s creditors ultimately found its way back to thebanks, the post office or one of the financial institutions thatcomposed the Treasury circuit, “the Treasury had the unusual capacityto feed its “reserves” with money of its own creation” (Loriaux 1991:65-72). Therefore, the Treasury circuit offered policy-makers a toolthat they could use to redistribute money while avoiding the dangersof inflationary financing as well as the political liabilities of increasingstate income through higher taxes (Patat and Lutfalla 1986: 140-41)

In the mid-1960s, De Gaulle government’s fiscal conservatism put heavyconstraints on the Treasury circuit, leading to the 1966-67 bankingreforms59. The reforms led to a disengagement of the Treasury fromindustrial policy while keeping the interventionist logic of the Treasurycircuit.

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59 The so-called “Debré decrees” of January 25, 1966; December 23, 1966 and September 1st,1967.

In effect, the reforms shifted the responsibility of financial transformation(of short-term capital into long-term loans) from the Treasury to banksthemselves – among whom, to a limited extent, savings banks (Patatand Lutfalla 1986: 140-41). The reforms encouraged banks to lend atmedium-term to certain sectors by extending the eligibility of suchloans to rediscounting at the central bank. Simultaneously, however,the state discouraged the banks from making other types of loans byplacing quantitative restrictions on the overall growth of credit –mechanisms known as “l’encadrement du credit”. The State couldtherefore direct lending to a sector by lifting credit restrictions on it.In addition, the state could make medium-term loans to such sectorseligible for discount at the central bank, thus reinforcing theattractiveness of such sectors.

The banking reforms led to a gradual loosening of bankingsegmentation. Deposit banks were authorised to receive depositswith a maturity superior to two years, and merchant banks wereallowed to receive deposits. The Debré decrees similarly loosened theconditions imposed on deposit banks’ shareholding in business firms.Simultaneously, the regime of authorisation for the creation of bankbranches was loosened as well; the number of bank branchesdoubled between 1967 and 1975.

• Italy

In Italy, too, the immediate post-war era was dominated with“developmentalist” concerns that drove much of fiscal, monetary andindustrial policy until the late 1980s. However, in contrast to France,those concerns were continuously balanced with concerns for theexternal and internal stability of the currency. Such views have beenassociated with key figures in Italian post-war policy-making: LuigiEinaudi (governor of the Central Bank, then Minister of the Treasuryin 1948), Donato Menichella (his successor at the head of the Bank ofItaly), Guido Carli (Menichella’s successor), the liberal party... As inFrance, industrial policy in Italy relied on public subsidies, state-ownership, credit controls and indicative planning (“programmazioneeconomica”). The latter took rise in the fifties with the “SchemaVanoni” of 1954 and the 1952 law, both of which gave economicpolicy the twin goal of modernising the economy and reaching fullemployment. However, planning never achieved a prominent role ineconomic policy-making – and its practical achievements are rare(Graziani, 2000).

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In Italy, state-led industrial development primarily relied on state-owned enterprises. The Italian state owned, in large part through thepublic holding IRI60, controlling stakes in many large firms in keysectors – such as Finsider in steel, Agip in oil and gas, Autostrade inhighways, SME in the agro-business… Another large public holding,the Ente nazionale idrocarburi, or ENI, was created in 1953 to ensureItaly’s full control over oil and gas production and compete with the“seven sisters”, the seven major oil multinationals61. As seen inprevious sections, upon its creation the IRI was conceived as anextraordinary, temporary instrument to rescue Italy’s ailing industries;before the war, however, the IRI was made permanent. In theimmediate post-war, moreover, the IRI evolved into a large publicholding with the mission to promote Italy’s industrialisation.

Interestingly, therefore, in contrast to France, state-led industrialdevelopment in Italy did not occur through nationalisations62, butthrough the transformation (the institutionalisation) of rescueinstruments and temporary bailouts into stable instruments of statecontrol over the industry, and state financing of industry (Barca, 1997;Barca and Trento, 1997). State-ownership was indeed conceived so asto allow the allocation of cheap credit to public and private industry,while giving managers of public firms a large margin for themanoeuvring they might not have had with private owners (Barca andTrento, 1997). Indeed, the IRI and ENI were public but autonomousbodies (“enti pubblici”). In addition, as Barca and Trento argue, theIRI’s central offices functioned more as a financial heart than as acontrol centre. This peculiar configuration embodied the doublerefusal that marked Italian post-war politics: the refusal of a pervasiveand direct control of the state on economic matters (a refusalcertainly fed by the rejection of the fascists’ authoritarian regime ofthe previous decades) and the refusal to let national industry (andcredit) fall into the hands of the markets. On the one hand, marketmechanisms were rejected because of (a) the absence of financialmarkets, (b) the historical reluctance of savers to finance industrialinvestments and (c) for fear of conflicts of interests and of exposureto conjonctural crises.

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60 IRI was controlled by an ad hoc administrative board where the main economic ministrieswere represented: the Ministry of Industry and the Ministry of the Treasury.

61 The ENI was created by law in February 1953 (law n.136 of February 10th, 1953).62 Apart from the nationalisation of electricity in 1963 with the creation of the Ente nazionale

Energia Elettrica (ENEL), a public holding.

On the other hand, the public administration was rejected for itsperceived rigidity and inability to manage credit allocation – and sincein Italy, more than in France, “liberal” economists and politicians, suchas Luigi Einaudi or Donato Menichella, disposed of a strong policyinfluence. That choice formed what Barca coins as an “extraordinarycompromise” (compromesso straordinario), which “avoiding bothstatalism and hyper-liberalism, paved the way for the mobilisation ofsavings and financial resources, entrusted to hands capable ofcompleting the industrialisation of the country” (Barca 1997: 12).

The path chosen was a half ground, although arguably closer tostate-led development patterns than market models. All politicalforces agreed about the leading role the state should play infavouring and supporting development and about the need to avoidhaving the state bureaucracy manage those large firms that hadended up within the public realm. This solution (relying on public butautonomous entities financed by public or semi-public creditinstitutions) was all the easier as the managers already in place wereknown to be capable and dedicated to the modernisation of thecountry - such as Enrico Mattei, the charismatic founder of ENI andits first president; Donato Menichella (at IRI until 1946, successively atthe Bank of Italy); Oscar Sinigaglia (Finsider); Gian Lupo Osti (Terni)…These characters often played a key role in establishing the post-warcompromise. Such “agreement”, although never, of course, formalised,it took place within the Christian-Democracy, which became the locusof the compromise (see Barca, 1997).

The credit system was designed to support Italy’s industrialisationwithout putting savings at risk and, therefore, was within theboundaries of the 1936 banking law. The first layer of the post-warstate-led credit allocation system was the IRI and ENI, through whichthe state channelled funds to the firms they owned and controlled(public firms) and the private firms with whom they had establishedstrong links. For instance, Comit, Credit and Banco di Roma held noncontrolling but important stakes in Falck, Fiat, Montedison, Olivetti,SNIA, Bastogi…(see Ferri and Trento, 1997). In addition, Mediobanca,the private merchant bank created by the three BINs (and hence acreature of public entities) played a major role in supporting theemission of bonds by large private firms in the 1960s, 1970s and1970s. As Barca notes, it is the staff of the IRI that, in the late-1940s,drafted Italy’s official proposals to use US imports and Marshall funds.

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In 1948-1949, the latter were prevalently used to acquire productivemachinery, through the intermediation of IMI and with the largestindustrial firms, such as Fiat, as main beneficiaries. Within a few years,credit allocation and investment financing in strategic sectors such assteel, oil, telecommunications, and highways, all fell within the sway ofthose large public institutions – most of whom were the IRI and the ENI.

Beyond the IRI and ENI’s roles, state-led credit allocation took successiveforms, and two periods can be distinguished in the establishment ofthe post-war credit system. At first, until 1948, national unitygovernments63 insisted on the direct participation of both banks andthe state in the reconstruction process. On the state side, this policyemphasised the role of subsidies. Various instruments were createdthat were directly financed by the Treasury. A 1946 law64 madeavailable 13 billion lire to finance long-term investment needs in largeindustrial firms. In 1947, a Fund for the financing of the mechanicindustry (Fondo per il finanziamento dell’industria meccanica, or FIM)was created within the IMI (but liquidated three years later).

The second consequence of the credit policy implemented in theimmediate aftermath of the war was that, in order for banks to bedirectly involved in reconstruction, the rule of functional specialisationput in place by the 1936 law had to be loosened. Banks should beallowed to finance industrial investments. Interestingly, however, thatpolicy decision did not lead to the abandonment of the 1936 law;the political support for the banking regulatory regime inherited fromthe fascist era was too strong to be overruled. Therefore the breachof the 1936 law took the form of the autonomous “sections” foundedby individual banks (see previous section) and authorised by law.Those sections were to lend on a long-term basis to industrial firms,while being organically separate from the banks’ other businesses.They benefited from a large state guarantee on the funds lent – around70% on average; and the state paid part of the interests charged onthe loans. The state guarantees and interest contributions drew onthe Marshall Funds managed by the Treasury.

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63 Governments with the participation of most political parties, including the Communist Party.64 D.lgs 449 of May 8, 1946.

The first of these was the section for the funding of small and mediumindustrial firms, created at the BNL in December 194765, which wasendowed with 2 billion lire paid by the Treasury; following thesections created that same year within the Banco di Napoli (endowedwith 1 billion lire), the Banco di Sicilia (endowed with 2 billion lire) andthe Banco di Sardegna.

After 1948, however, and with the advent of a centre-right government(still headed by De Gasperi) and the appointment of Luigi Einaudifirst, then Donato Menichella, as governors of the Banca d’Italia, thestate-led efforts to revamp the credit system changed direction.The government’s monetary and credit policies were now explicitlygeared towards protecting savings and the financial rents of themiddle classes on the one hand, and maintaining the external stabilityon the other. One pillar of the compromise was, indeed, the aim tosolidly anchor middle classes within the economic and political system,drawing on the fascist experience (where disenfranchised middleclasses, ruined by the successive financial and economic classesmassively joined the ranks of the fascist party). Moreover, the stabilityof the currency represented a way to maintain the country’s credibilityand rigour in the context of export-led growth and development.

The aim was to keep banks and industry separate (and thus return tothe spirit of the 1936 law), while allowing for an effective transfer ofresources to industry, small and large firms alike. At the same time,there was a consensus both on the leading role the state should playin the new organisation of the credit system and on the need to keepcredit allocation outside public administration. The solution that wasadopted then consisted in the creation of new financial institutions,and the strengthening of existing ones that would serve as buffersbetween deposit banks and industrial borrowers, and financetheir lending through bonds, state guarantees and subsidies, whilebenefiting from special discounts at the central bank. Those institutionsoperated at two levels: regional and national.

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65 D.lgs 1419 of December 1947

At the regional level, one found the 11 regional credit institutes(“Mediocrediti regionali”) and their central refinancing institution,Mediocredito centrale, created in 1950 and 1952 – all operating inthe centre and northern regions; and the southern regional institutes,namely IRFIS in Sicily, CIS in Sardegna; and ISVEIMER for the wholesouth. The latter were autonomous from Mediocredito centrale:they received public (state) funds and funds from the Cassa per ilMezzogiorno, which was created in 1950 (Peluffo 1997).

At the national level stood the “special credit institutions” that hadbeen created outside the banking system in the 1930s and 1940s.First among them was the IMI, created, as we have seen above,in 1931. The IMI played an important role in managing specific fundsfor industrial investment, such as the FIM. In addition, in 1950 thegovernment authorised the use of 10 billion lire from the Europeanrecovery program (Marshall Plan) to finance productive investmentsby small firms. This sum was managed by the IMI and another specialcredit institution, Arar-Spei66. Besides the IMI, other special creditinstitutions were created after the war, by banks or groups of banksbut with the support of the state: Mediobanca was founded in 1950by the three national interest banks, together with the publicinsurance companies INA, Generali and RAS, and Bastogi and theBanca d’America e d’Italia. Efi, which then became Efibanca, wascreated by the BNL and played an important role in financing exportlending. Centrobanca was founded by the Banche popolari andInterbanca by ordinary banks.

As in France in the 1960s, the rise of developmental concerns in Italywas accompanied by a gradual loosening of functional specialisation.Credit segmentation had already been circumvented by banks’practice in the 1960s (Monti 1983). Moreover regulatory authoritiesthemselves recognised the “mixed” nature of large deposit banks.As early as 1944, a ministerial decree67 authorised public creditinstitutions to finance long-term loans to industry. That same year,savings banks were authorised by regulatory authorities to lend long-term, provided that they operated within statutory boundaries.Savings banks were also authorised to offer medium-term liabilities,which, after all, constituted their true raison d’être.

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66 Law 258 of April 18, 1950.67 Decree n.367, Nov. 1st, 1944.

In 1972, the Ministry of the Treasury authorised ordinary banks andBanche Popolari to offer long-term lending for up to 8-10% of theirassets68; in 1975 the ceiling was raised to 15%69. In 1977, theintroduction of fidi bancari (bank guarantees) extended the range oflong-term operations by banks.

4.2 The crisis of the 1970s and the unraveling of stateadministered credit systems

4.2.1 The underlying weaknesses of state-led credit allocationsystems: moral hazard in the overdraft economy

The first weakness of the French and Italian state-administered credit systems,which appeared in the early 1970s, lies in the moral hazard created by the“overdraft economy”. Indeed, French and Italian state-led developmentpolicies had given rise to what French economists called an ‘économied’endettement’ or overdraft economy, according to which hikes in interestrates had little or no impact on business demand for credit (see Loriaux,1991, for an exhaustive analysis on France). Businesses, operating underthe policy-induced expectation of assured borrowing power (or otherfinancial support), responded to increases in the cost of credit simply byasking for more credit (higher interest rates produced cash-flow problemsthat firms addressed by borrowing more). This created a moral hazard.The expectation of assured borrowing power impeded the government’sefforts to use interest rate policy to slow monetary supply growth andthus regulate the supply of money to currency markets.

In that sense, therefore, as Loriaux noted, and quite paradoxically“the politics of easy credit did not breed a moral hazard. It is, rather, themoral hazard that bred the politics of easy credit” (Loriaux, 1991). This isa paradoxical view since a moral hazard could seem to be the outcomeof a state-led credit allocation system. In such system, indeed, as post-warFrance and Italy had experienced, banks and markets did not have theincentive to exert substantive monitoring on credit allocation; whileborrowers had the insurance of obtaining cheap money through stateguarantees and subsidised prices or interest rates.

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68 Decree of March 23, 1972.69 CICR Decision of May 27, 1975.

In fact, moral hazard led to a strengthening of state-administered credit,since it became politically difficult, if not impossible, to allow for thefailure of indebted banks or firms. Therefore “the French state wasgenerous with its credit policy because it feared the political costs ofparsimony.” (Loriaux, 1991). Such a system could work insofar as themain beneficiaries of state-led credit allocation – large firms – couldcontinue to grow and to improve their productivity. Once, however,productivity slowed down and firms’ debt grew state-administered creditwould run into serious problems.

Moral hazard was aggravated by the multiplication of objectives assignedto industrial policy in the 1960s – hence to state-led credit allocation:rescuing ailing firms or sectors, investing in less developed sectors orterritories. In addition, in Italy “the assignment to state-ownedenterprises of objectives other than profit (…) made inevitable the mixingbetween public firms and political parties” (Barca and Trento, 1997: 217)

The second weakness of state-administered credit originated in theabsence of the external constraint and the availability of monetary policyas an adjustment tool. In France, as Loriaux has argued, the “overdrafteconomy” of the post-war period, with its lax monetary policies linked tothe state-administered credit rationing system, had enabled firms toprosper despite a high level of indebtedness by allowing high rates ofinflation that governments would periodically counter through aggressivedevaluations of the franc against the dollar, which in turn would giveFrench firms a comparative advantage (Loriaux, 1991). In addition,while Italy and France both embarked on an export-led industrialstrategy during the 1960s (once reconstruction was over and Europeancurrencies had been made convertible again), they suffered fromunfavourable specialisation within the international division of labour:they produced low-capital intensive consumption goods and did notproduce the means for their production (machinery, tools), which theyimported from countries such as Germany. Such specialisation presenteda contradiction with the Fordist accumulation regime: while sustaininginternal demand required high wages, the two countries’ tradespecialisation demanded low wages so as to lower the prices of exportedgoods. The only way out was to resort to devaluation, which alleviatedthe pressure on wages while effectively lowering the price of Frenchand Italian export goods.

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Devaluation was not new to France: successive governments often resortedto devaluation during the 1950s and the 1960s. In addition, some of theirtrading partners, notably Germany, chose to re-valuate their currencies.Devaluations, however, have sustained effects only when used as atemporary measure to save time (through a boost in exports) so as toadjust industrial capacities in the meantime and, in the medium term, tochange a country’s trade specialisation (towards higher capital intensivegoods). This was the path chosen by Germany and Japan in the 1950s:they chose an undervalued currency precisely as a way to shield theirexports during the re-qualification of their industrial apparatus. Such wasnot the strategy behind the French devaluations. Most importantly, theresort to devaluation was possible only insofar as exchange rates werefixed and capital was not very mobile. In other words, the survival ofstate-administered credit was dependent upon the functioning of theBretton-Woods system of fixed exchange rates.

The case of Italy was different in this respect: both the Bank of Italy and keyfigures of economic policy-making made sure that the stability of the lira wasrespected, even during the difficult years of 1963 and 1964. The stabilityof the lira earned itself the title “Oscar of the currencies” in the late 1950s.

The third weakness of state-administered credit was its reliance on politicalcompromises that were dependent on stable industrial relations andcontinuous growth without inflation. In France, that comprise involvedaround (i) civil servants dedicated to developmentalism; (ii) the gaullists,who were determined to strengthen the state’s capacity to steer theeconomy; (iii) the Communist Party and unions who limited their claimsto a fair redistribution of the “fruits of growth”; (iv) business classes whoaccepted increases in real wages in exchange for increases in productivity.In Italy, the main components of the compromise – a “compromise withoutreform” (Barca 1997) – were (i) the “Nittians”, or the elite followers of Nitti,who believed in the unrivalled capacity of private managers of publicinstitutions to manage credit allocation and favour productive investments;(ii) the free-market economists school, who rejected any form of stateintervention in the economy; (iii) the Communist Party, which made, asearly as 1945, a “developmentalist” choice (Barca speaks of a “productivist”option) favouring reconstruction and industrialisation over more immediatepolitical gains that might have been earned through more aggressive, pro-labour policies; (iv) Catholic politicians and intellectuals with socialleanings; (v) large and medium business interests, although divided onmany issues; (vi) what Barca calls the “Washington option” – the USinterests in a pacified and allied Italy.

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The stability of such compromises was predicated upon a series of specificexternal conditions. In particular, the views held by unions and theCommunist party on the one hand and by business and centre or right-wing political parties on the other, depended on continuous economicgrowth and the smooth redistribution of the fruits of growth. Once growthslowed down (as it did in the late 1960s) redistributive conflicts occurred,leading to the unravelling of compromise. Moreover, the power held bythe Gaullists in France and the Nittians in Italy (both in administration andpolitical circles) was threatened by generational and ideological changes.

4.2.2 The twin crisis of the 1970s: the crisis of the Fordist modeland the collapse of the gold exchange standard

The early 1970s was characterised by a twin crisis that affected mostindustrialised economies: an internal crisis – that of the Fordist accumulationregime; and an external crisis, provoked by the collapse of the goldexchange standard and the rise of exchange rate instability, along withgrowing trade and financial interdependence (what in France is known asthe contrainte extérieure, or external constraint). This twin crisis adverselyaffected state-administered credit in France and Italy by undermining thefragile balance on which such a system was predicated.

• The crisis of the Fordist regime of accumulation

The Fordist accumulation regime, experienced by the United Statessince the 1920s, and in post-war Europe, was based on mass production(and consumption) of standard goods and services by large firms andunskilled workers, low unemployment, redistribution of productivitygains to both labour and capital, and accommodating monetary andfiscal policies. The crisis of the Fordist regime, which started in the late1960s, was both an industrial and labour crisis (on the Fordist regimeand its crisis, see Aglietta 1976; Boyer et al. 1978 and Boyer, 1990,for a synthesis). The industrial crisis was essentially a crisis of capitalover-accumulation. With the use of productive capacities at theirmaximum, and the catching-up of real wages, capital in the late1960s was increasingly unable to find productive outlets. The Fordistcrisis led, on the world market, to the shift of competitive advantagefrom mass-production industries to manufacturers able to producespecialised, high-quality goods, often in small, customised batches,and to undertake continuous innovation and to target high value-added market niches.

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Not anticipating such a shift away from Fordist firms, capitalists (andthe state) in both France and Italy invested heavily in non-productivesegments and employment: services of course (hence the rapiddevelopment of the tertiary sector in the late 1960s – early 1970s),but also monitoring jobs in factories, where workers’ behaviour hadbecome openly defiant of existing working conditions and discipline.Sales, health, building, and real estate were the favourite destinations ofdomestic capital, feeding what was known in Italy as the “rent inflation”(inflazione della rendita). In addition, in those years domestic capitalwas increasingly attracted by profit opportunities abroad, giving riseto what is known in Italy as the “fuga dei capitali”.

A successive strategy, tried out in France in the second half of the 1970s,was to aggressively promote an outward-oriented industrial strategy(acquisitions of foreign factories by French groups, for instance),while encouraging dualism at home – i.e. the outsourcing of parts ofthe production process to small firms staffed with unskilled labour,often migrant workers. Such dualism was, however, defensive ratherthan offensive and did not create the conditions for the emergenceof an alternative industrial structure (See Berger and Piore, 1982).In Italy, for historical reasons small and medium firms had played a moreimportant part in the country’s development; and in the mid-1970s itappeared clear that those firms were better able to sustain the newexternal environment than large firms, to a large extent because ofsmall firms’ reliance on their own funds (in contrast to large firms’high levels of indebtedness). The late 1970s saw, simultaneously, anincreased interest in small firms from scholars – this is when theliterature on industrial districts started to appear (see Beccattini,1977; and Bagnasco, 1978). However, at that time the externalpressure was so strong, and public deficits so high that any large-scaleindustrial restructuring strategy would have appeared too risky.

Beyond that crisis of over-accumulation, the second main componentof the crisis of the Fordist accumulation regime was the rapidlydeteriorating industrial relations. This deterioration had two origins:on the one hand, unions had successfully capitalised on collectivewage bargaining during the 1960s, and reaped significant results interms of real wages (which caught up during that decade, bringingan improvement in workers’ purchasing power); on the other hand,with the slowdown of productivity in the late 1960s, firms put inplace new strategies to increase the output-per-worker, and workersbecame less and less satisfied with working conditions.

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Such dissatisfaction culminated in 1968 and the three followingyears. It is estimated that on average, from 1967 to 1969 France lost52 million working days per year because of strikes – against1.8 million in 1965-1966. Italy, in 1969, lost 200 million working daysto strikes. 1969 marked the beginning of the so-called “hot Autumn”– rising tensions in industrial relations (De Rosa 1990). Within a fewyears, work stoppages increased sharply, and union membership roseas well; as a consequence, product wages rose 13 and 10 percentin 1970 and 1971, contributing to a severe profit squeeze in theItalian industry.

The slowdown in productivity, the rise of unproductive capital usesand labour unrest led to a sharp decline in economic growth duringthe early 1970s. In 1973 industrial output in France and Italy wasactually lower than it had been the previous year. At the same time,the rise in monetary wages led to an upsurge of inflation, fed bya wage-price spiral. In Italy, successive labour agreements led to thefull indexation of wages on prices (the so called “scala mobile” and“punto unico di contingenza”) Even before the oil shock (and itsdramatic consequences on domestic price levels), therefore, inflationwas on the rise. The crisis of the Fordist model undermined theFrench and Italian state-administered credit systems: the moral hazardgenerated by the overdraft economy was aggravated by the fall inproductivity, revenues, and inflationary pressures. Therefore, the debtand productivity crisis in large firms threatened the very basis ofFrance’s and Italy’s development strategies. Secondly, state-ledFordism (and credit allocation) relied on a political compromise (seesections above) that depended on the stability of industrial relationsin large firms. In France the statist pattern of economic policy-makingrelied on close relationships between top civil servants and topmanagers at large businesses (Schmidt 1996). With the outbreak ofsocial tensions, the political compromise was in trouble: the CommunistParties of both countries were outflanked by left-wing movements,which in turn radicalised the Communists; and the financial andindustrial elites felt disenfranchised and embarked on a strategy thatopenly broke away from the political compromise of the 1940s-1950s.

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• Balance of payment crises and the rise of the external constraint

The crisis of the Fordist accumulation regime at home coincided withchanges in “hegemonically structured international political economy”abroad (Loriaux, 1991; 2003). Post-war exchange-rate stability reliedon the Bretton-Woods system of fixed but adjustable exchange rates.That system, once the convertibility of European currencies wasre-established in the 1960s, depended in turn on the willingness ofthe United States government to forbid internal adjustment throughthe manipulation of the dollar’s external value. As Loriaux has noted,American monetary and fiscal policy in the 1950s supported new,post-war international trade and monetary arrangements that sought tomake Keynesian policy possible under free trade. But American policybegan to turn more “nationalist” (in Loriaux’s words) in the 1960s inresponse to international and domestic conflict. Nationalism inmonetary affairs – refusal to address inflation in the key internationalcurrency – brought down the Bretton Woods in 1971 (See Loriaux,1991; and Helleiner, 1991). The demise of fixed exchanged ratesoccurred within a context of rising cross-country capital flows.Increased capital market interdependence, variable exchange ratesand the two oil shocks created high levels of exchange rate instabilitythroughout the seventies. The demise of fixed rates left the Frenchand Italian political economies in a difficult situation.

Indeed, French and Italian developmentalism had arisen withinthe framework of a forgiving international monetary environment.The possibility of multilateral ratification of change in fixed monetaryparities internationalised the inflation that developmentalism tendedto produce. But the post-1973 non-system of floating rates madethat kind of internationalisation impossible. The cost of price inflationwas borne entirely by the inflationary country’s balance of payments.For trade dependent countries like France and Italy the cost was high.Floating rates generated the threat of vicious circles of inflation andcurrency depreciation. Inflation depleted the demand for French andItalian exports. But the demand for certain imports, notably petroleumand other raw materials bought in dollars, and proved insensitive toprice hikes occasioned by depreciation. Imported price hikes aggravatedinflation as they percolated through the economy, further sappingmarket confidence in the currency.

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As a consequence of exchange rate instability, trade balance rapidlydeteriorated during the early 1970s, while neither France or Italycould attract enough foreign capital to repay their foreign debt.This unbalance led to severe balance of payment crises during thoseyears. While the crisis of Fordism had put pressure on French andItalian developmentalism (and state-led credit allocation) from the inside,exchange rate instability put external pressures on both countries.

Of course, the balance of payment crisis was triggered by the 1973oil shock, which followed a gradual rise in the price of naturalresources in the previous decades. The four-fold increase in oil pricesin the autumn of 1973 had a particularly strong impact on oil-dependent countries such as France and Italy, and created a hugecommercial deficit that was not compensated by capital inflows.

4.2.3 The first responses to the crisis: from monetary restrictionto strengthening the credit administered systems

The oil shock, the collapse of the Bretton Woods system in the earlyseventies, along with the decline of the monetary hegemony exercised bythe United States made it impossible for France and Italy to continueusing inflationary growth strategies as they had done in the past, and, asfar as France is concerned, to use periodic aggressive devaluation toadjust for inflation. The first policy response to the balance of paymentcrisis was, therefore, was the resort to restrictive monetary policy in 1973.That policy reversal did not last and was itself reversed as early as 1975.It is not before the late 1970s and the early 1980s that restrictivemonetary policy made its come-back in both countries. The restrictivemonetary policy practiced in 1973-75 in both countries led to astrengthening of state’s grip over credit allocation, giving birth to“l’encadrement du credit”, or state-administered credit. This movereflected the belief that further state control of credit and investmentcould help shield the domestic economy from destabilising forces bothabroad and at home. Interestingly, state-administered credit did notfalter with the return to an expansionary monetary policy in 1975-76.It survived its birth as a temporary adjustment tool, and actually cameto embody the paroxystic version of state-led credit allocation that hadbeen practiced since the late 1930s in both countries.

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• France

In France, the first reaction to the crisis was a restrictive monetarypolicy. In late 1973, monetary market interest rates were raised to arecord 15%. The impact on French industry was dramatic: investmentin industry declined by 9.5% in 1975; that same year, bankruptcieshad increased by a fourth as compared to 1974. At the same time,if inflation in 1975 was effectively lower than what it had been inlate 1973, it was still higher than France’s trade partners (notablyGermany). These results, together with the election of a newpresident of the Republic in May 1974 (Valéry Giscard d’Estaing), putan end to that short-lived restrictive monetary policy and led to aKeynesian “relance”. Priorities were now set on revitalising domesticdemand, through an expansionary policy mix characterised by(i) renewed public investments (and, therefore, rising fiscal deficits)into industrial programs such as the nuclear power plant constructionprogram; and (ii) an expansionary monetary policy, with monetarymarket interest rates falling from a maximum of 14% in 1974 to aminimum of 6.5% in 1976.

Such a policy failed to improve a domestic demand that had beendurably affected by the uncertainties unleashed by high inflation ratesand exchange rate instability since the early 1970s. It did, however,worsen the external balance. France’s trade balance deficits increasedin 1975, leading to the French franc’s exit from the “snake”70 and a10% devaluation – which deepened the crisis by increasing inflationwithout improving the trade balance. The deterioration of externalbalance, together with a shift in internal politics (the demise of thepresident’s Gaullist allies) led to another policy shift, this time towardsausterity, characterised by the Barre government’s decisions to removeprice controls in some sectors; provide tax incentives to encourage theacquisition of shares (to stimulate the growth of financial markets anddecrease the dependence upon banks as a source of funding)71;institute with large public firms development contracts that directlytied state subsidies to market performance. Monetary policy was,again, tightened to reach and maintain external balance.

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70 The snake was the monetary system established in 1974 by members of the EuropeanCommunity to shield their currencies from exchange rate instability. It consisted of aloosely fixed exchange rate regime, where currencies were allowed to appreciate/depreciate by a margin of 2.5%, then increased to 5%.

71 The “Monory package” of 1977-78, after the name of the Minister of the Economy.

The restrictive monetary policy of the early 1970s led to theestablishment of “l’encadrement du credit”, or administered credit,which had its roots in the 1966-67 banking reforms (see previoussections). In the previous years, traditional “developmental” policieswere seen to have met their limits, and French policy-makers renewedthe financing instruments at their disposal. First, the Pompidouadministration revived the Fonds de Développement Economiqueet Social (FDES), whose importance had shrunk under De Gaulle(Loriaux 1991). The Fund was mobilised to channel billions of francsinto key industries, such as steel and automobiles. Besides the FDES,a series of new instruments were created in those years to channel fundsinto ailing sectors or strategic firms: the Interministerial Committee forIndustrial Restructuring (Comité Interministériel pour les RestructurationsIndustrielles, or CIRI), set up in 1974, whose mission was to help ailingsmall and medium firms; the Interministerial Orientation Committeefor the Development of Strategic Industries (CODIS), which subsidisedinvestment in innovative technologies, especially at large firms;the Institute for Industrial Development (Institut de DéveloppementIndustriel, or IDI), whose mission was to help skill adjustment and jobtransfers in declining industries; later, the Special Fund for IndustrialAdaptation (FSAI), set up in 1978 to support investment in regionswith high unemployment, which was particularly active in shipbuildingand automobiles; the National Agency for the Promotion of Research(ANVAR), whose mission was to support small and medium size firmsthat invested in innovative products or technologies. Most of thoseinstruments were put to the service of an industrial policy thathad shifted from supporting national champions to creating andsustaining “lame ducks”.

Secondly, administered credit took the form of administrative controlsand ceilings on the volume and price of credit. In other words,through the various instruments mentioned above, the governmenthad in effect the power to set interest rates – and especially to setfavourable interest rates for the specific sectors or firms it aimed tohelp or finance (the lame ducks). Moreover, the government imposeda series of ceilings on the volume of credit to be offered by banks andfinancial institutions; in effect, to support one sector it had only to liftthe restrictions imposed on lending to that sector. By the late 1970s,therefore, banking and lending rates were mostly set by governmentor government agencies. For instance, the interests earned by theFrench savings banks on their savings deposits were set by decreesigned by the Minister of the Economy.

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Industrial policy under De Gaulle involved the restructuring of largefirms through vertical integration and horizontal diversification.Such policy was not limited to public firms; private firms were alsoencouraged to grow through financial incentives: subsidies and loanstargeted to regional development, research, foreign exchangeguarantees… (Bellon 1980). In 1975, according to some estimates,public support to business (including public purchases and direct aid)amounted to 126 billion francs, 9% of French GDP (Bellon 1980).In the seventies, the increasing reliance of the government on votesof shopkeepers and small firms led to increased subsidies to smallfirms. The Seventh Plan, for instance, set 816 million francs to beallocated to SMEs.

The ultimate upturn of state-administered credit was the nationalisation,in 1982, by the newly-appointed Socialist government, of 5 industrialgroups72, 39 banks73 and 2 financial firms (Compagnie financièreParibas; Compagnie financière Suez). The 1982 law74 disposed thenationalisation of all banks with deposits amounting to more than abillion francs; in addition, the law suppressed private shareholdingsin state-owned banks (BNP, Société Générale, Crédit Lyonnais)75.There had been a vivid debate, among Socialists, on the extent ofstate control over the neo-nationalised firms (from 50 to 100%).The 1982 nationalisations led, actually, to a variety of situations: somefirms were 100% controlled by the state; others were controlled bythe state, but with minority shareholders; yet other firms wereindirectly controlled by the state through other public firms (such asthe Banque Paribas, owned at 75% through the CompagnieFinancière de Paribas). As a whole, by the end of 1982, the publicbanking sector included 146 banks and 157 financial firms (Lacoue-Labarthe, 2001). As a result of these nationalisations, by the end of1982 89.7% of total deposits were held at state-owned banks; and84.8% commercial lending and 82.5% of banking staff belongedto the public sector (Lacoue-Labarthe 2001).

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72 Compagnie générale d’électricité, Compagnie de Saint-Gobain, Péchiney Ugine-Kuhlmann,Rhône-Poulenc SA, Thomson-Brandt.

73 Among those 39 banks stood merchant banks such as Banque Worms, Banque Rothschild,Banque Hervet; large commercial banks such as Crédit du Nord, Crédit Commercial deFrance (CCF), Crédit Industriel et commercial (CIC)…

74 Loi 82-155 of February 11, 1982.75 Private shareholdings had been authorised by a 1973 law up to a 25% ceiling, for national

banks’ staff. The 1982 law led, therefore, to a re-nationalisation of national banks.

• Italy

In Italy, a severe balance of payment crisis occurred in 1973, leadingto the signature, in early 1974, of a standby agreement between theItalian government and the International Monetary Fund (IMF).This agreement provided for a 1.2 billion dollar loan from the IMF toItaly to solve its balance-of-payment crisis; in exchange, the Italiangovernment committed to limit the expansion of domestic lendingthrough the setting of a ceiling of 22,400 billion lire to the growth of“total internal credit”76, a new target agreed upon by the IMF andthe Italian government. This agreement predictably led to an increasein interest rates and a decrease in banks’ lending to firms; it also– non incidentally – provoked the demise of the government that hadnegotiated the agreement in March of 1974.

With the ceiling on total internal credit, the Bank of Italy, for the firsttime since the 1950s, shifted its focus from interest rates to thevolume of lending in the economy; and it used a target for aggregatelending to pursue a restrictive monetary policy. That landmarkchange, however, did not last: in 1975, monetary policy turnedexpansive again. Several factors explain this short-lived change inmonetary policy. First, new forms of shop-floor representation andworkers’ rights led to an overhaul of the scala mobile in 1975 and thesetting up of a Workers’ Statute, which indexed wages on inflationfor 90 % of workers. Plant-closure legislation was eliminated, andfirms’ ability to lay off workers for disciplinary reasons was virtuallyabandoned. Labour activism led the central bank to expand credit bythe second half of 1970. According to Epstein and Schor, socialexpenditures constituted a crucial link in the cycle of labour militancy/ fiscal growth / monetary accommodation in the 1970s (Epstein andSchor 1989). Secondly, the CTI target never represented the mainmonetary instrument used by the Central Bank; the exchange ratepolicy was that instrument. In those years, taking advantage ofthe continuous devaluation of the dollar via-a-vis the deutchemark,the Bank of Italy practiced a double-faced exchange rate policy:devaluations vis-a-vis the deutschemark (the deutschemark arearepresented Italy’s first export market) and stability, even slightreevaluations with the dollar (the dollar area representing thecountry’s primary import market).

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76 Total internal credit was an aggregate measure that included private and public lendingto firms.

So, after one year of restrictive monetary policy, by 1975 monetarypolicy became expansive again. However such expansion was entirelyabsorbed by public finance needs, and did not alleviate lendingrestrictions bearing on firms since the early 1970s. The oppositehappened: with the shift of objectives from stable interest rates to thecontrol over the volume of lending, rising public deficits automaticallyled the central bank to increase constraints on lending (the“massimale sugli impieghi”) and, therefore, reduce lending to largefirms. Interestingly, both the 1974 monetary restriction and the returnto monetary expansion worked towards the strengthening ofstate-administered credit. Already in 1973 the Treasury circuit hadbeen strengthened with the twin imposition of ceilings on bank loansand of portfolio constraints forcing banks to hold a percentage ofthe increase in their deposits in fixed-rate securities77.

The portfolio constraint was at first set at 6% (at least) of fundsdeposited in savings and current accounts; most of those funds weresupposed to go to bonds issued by IMI and IRI, but also those issuedby major public utilities (the state-owned electricity and oil concerns– ENEL and ENI, respectively). The portfolio constraint was frequentlymanipulated over the years: in 1975, 1976, 1978, 1979, 1980,1981, 1982, the CICR regularly intervened to change the level andthe destination of constrained funds (see Fenucci, 1996: 102-106).On average, more than a third of the increase of bank deposits wasdestined to the acquisition of public securities. The destination variedthroughout the years; they included the IMI and IRI, CREDIOP, publicutilities, Treasury bonds, bonds issued by “special credit sectionsfor public works”, bonds issued to finance agricultural credit,highways… Importantly, the Bank of Italy managed to have somediscretionary power over the distribution of securities. In effect, thecentral bank acted as a merchant bank to the service of the Treasury.

The 1973 changes were aimed at insulating the bond market fromdestabilising forces in the domestic and international economies.They also led to a reorganisation of financial intermediation.

During the previous decade, the weight of banks in credit allocation– especially ordinary banks – had markedly increased. Deposits as apercentage of household financial savings rose from 27.9% in 1963 toa peak of 55.4% in 1977 (Bank of Italy, Annual Report, various years).

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77 CICR decision of June 18, 1973.

Increased banking intermediation was favoured by the central bank’ssupervision, which, especially in the late 1960s (under the governorshipof Guido Carli), loosely interpreted the law forbidding banks to engagein medium-term lending (Nardozzi 1983). The portfolio constraintreduced the interest differential between bonds and deposits, therebyencouraging households to buy bank deposits. This created a kind of“double intermediation” (Epstein and Schor 1989): banks collectedsavings from households, and either invested those funds in publicbonds, or lent them to the Treasury and to special credit institutions,who in turn funded firms’ financing needs. From 1972 to 1981 bankssupplied around 70% of the resources of special credit institutions.The Italian Treasury circuit was thus markedly reinforced – and thepotential development of financial markets (where households andfirms could have exchanged bonds and other types of financialinstruments) was impaired.

The smooth working of the public overdraft economy (or, moreprecisely, the continuous postponement of the crisis) was predicatedupon low interest rates and high inflation. The latter allowedcontinuous nominal public deficits to be almost totally compensatedby the depreciation of the real value of financial assets (includingpublic bonds): although nominal public sector deficits remained highduring the late 1970s (they averaged –10% over the period 1975-1980), their real value became positive in 1976 and 1979, reaching +2.3% of GDP in 1980 (against a nominal value of –8.6%)! Of course,that same year the real value of households’ financial assets becamenegative (at –0.7%), while their nominal value had been consistentlypositive over the past decades. This paradoxical situation meant thathouseholds were “penalised” for holding lending capacity, paying theso-called “inflation tax” to borrowers. But not only did the inflationtax not represent a sustainable solution to rising public deficits; it alsoprevented solving the crisis of the Fordist production andaccumulation regime; and high inflation rates became a source ofconcern for monetary authorities, who became more and moresensitive to monetarist thinking.

Beyond these shifts in monetary policy, successive governments triedin the second half of the 1970s to rationalise the industrial policyframework, characterised by an overlap of subsidies and supportmechanisms and institutions. Renewed efforts were made to jump-start industrial productivity.

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A law passed in 1976 instituted a “Fondo nazionale per il creditoagevolato al settore industriale” (fund for facilitated credit toindustry), destined in priority to the Mezzogiorno78. That law integratedexisting mechanisms for “facilitated credit”. However, it borrowedthe traditional instruments for the management of subsidies: singlesubsidies were decided by the Ministry of the Industry upon aproposal by an ad hoc ministerial committee, then distributedthrough special credit institutions.

In sum, the same vicious circle identified by Loriaux in France(overdraft economy – moral hazard – administered credit – moremoral hazard) was at play in Italy. As De Cecco has argued, the 1970scrisis increased even more the rigidity of the “Beneduce system”,which “should have been declared obsolete ten years before.”,adding that “the bailout of ailing industrial firms (did) weigh on thefinancial system, as (did) the necessity to substitute private capitalsthat had fled abroad with new loans guaranteed by the state so as toavoid bankruptcy and unemployment. Inflation makes it convenientfor firms to grow debts and send their capital abroad; and the statebecomes indebted to maintain public and private employment”.(De Cecco, 1997)

4.2.4 The deepening of the crisis and the definitive abandonof administered credit

The macro and micro-economic situation in both France and Italy didnot improve during the 1970s. In 1975, the growth of the ItalianGDP became negative for the first time since the early 1940s: annualgrowth rate that year reached -3.6%. In the successive years, economicgrowth remained at low levels; industrial investment declined throughoutthe 1970s, as did firms’ profitability. Inflation, in the meantime, kepton rising – especially in Italy where it reached two-digit levels in thelate 1970s, substantially higher than other industrialised countries.State-administered credit was clearly not a sustainable strategy.

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78 D.P.R. n. 902, 1976.

Three other factors condemned state-administered credit as an adjustmentstrategy in both France and Italy. First, the external pressure that hadappeared in the 1970s became a permanent threat to the two countries’balance of payment, which significantly reduced monetary policy’s roomfor manoeuvre. In the early 1980s, ‘reaganomics’ – i.e. the peculiarcombination of monetary rigor and deficit spending in the United States,– raised interest rates globally79, together with the exchange value of thedollar (which was still the currency of choice in international transactions).Such trends reinforced the external pressures on French and Italian policy.An expansive policy mix pursued in isolation had become almost impossible,as the French learned in 1982: then the neo-Keynesian policy put in placeby the neo-elected Socialist president, Francois Mitterrand, was defeatedby world stagnation and capital outflows. According to Loriaux,indeed, the external pressure had a decisive role in the dismantling ofadministered credit systems: “because credit activism was abandoned almostsimultaneously in five such dissimilar countries (France, Japan, South-Korea, Mexico, Spain) one can reasonably infer that the force driving theprocess was common to all of them and must have had roots in theevolution of the broader global political economy”(Loriaux, 1998a: 1).

This overemphasis of the external source of domestic crisis has beencriticised, especially, in France, by economists belonging to the regulatoryschool (see Boyer, 1978; and Lipietz, 1984). According to them, inflationand low growth were structurally produced by the crisis of the Fordistaccumulation regime (mentioned above), characterised by a crisis ofproductivity, a shift in industrial relations and a shift in the industrialstructures of each country. These were not the result of an excess demandand therefore could not be effectively addressed with the sole use of theinterest rate as an adjustment tool. These two explanations are notexclusive one of the other; rather, it seems that the external and internalcauses worked together to the demise of state-administered credit.A third factor behind the definitive abandon of administered credit wasthe growing importance of financial markets. In particular, fixed interestrates became increasingly unsustainable in the face of market conditionscharacterised by the offer of variable rates financial instruments; and, in acontext of high inflation, the need from public financial institutions (Treasury,banks, special credit institutions in Italy) to finance their loans with (rising)variable rates. As a consequence, in Italy fixed rates led to shorter maturitieson loans offered by SCIs (since they could not commit themselves to thelong-term), and further weakened the financial situation of indebted firms.

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79 Since the US were a large and powerful economy with a sound financial reputation,reaganomics created a high level of demand for money to the world’s markets, which ledother industrial countries to increase interest rates.

4.3 Shifts in regulatory regimes and the end ofcredit activism

The limitations of early state-led responses to the crisis (the strengthening ofstate-administered credit), led to the consider consideration of alternativesolutions – and in particular the dismantling of state credit. The newstrategy was implemented in the 1980s: it entailed radical shifts in themacroeconomic as well as the industrial policy regimes. These shifts wereradical and systemic: they concerned all aspects of economic policy.

4.3.1 The transformation of industrial policy

• France

As seen above, under Valéry Giscard D’Estaing’s presidency, industrialpolicy was given sensibly different goals than those that had prevailedin the previous decades. The priority was, especially after 1977 andthe failure of Keynesian demand-led policies, to encourage nationalchampions only in certain segments (créneaux) where they werealready competitive; and to re-deploy resources towards strongergroups. With the Socialists’ arrival in power in 1981, and until thereturn of a right-wing government in 1986, the state shifted from“promoting rising sectors and leaving declining sectors to the market,to rescuing the declining sectors and leaving rising sectors to themarket” (Schmidt 1996; p.85). The first Socialist government relied ondirect state intervention to fulfil their goals – with the nationalisationof all large banks and industrial firms. At that time indeed, Frenchfirms were both highly indebted and not profitable; therefore, creditpolicy could not be mobilised to push for the structural adjustmentsthat were needed – hence the resort to share ownership by the state.But nationalisation did not mean that the State should assume thestrategic direction of large firms; its intervention was circumscribed tore-capitalisation and protection from market forces. In particular, thestate reduced firm debt and funded industrial restructuring programsthat lowered production and operating costs (see Hancké, 2002).

Moreover, nationalised firms did not remain within the orbit of thepublic sector for a long time. In 1986, the right-wing governmentthat won the elections launched an ambitious privatisation program.

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The first privatisation law80 listed 65 firms to be privatised within a5-year period. That list included all banks (with the exception of theBanque de France) and insurance companies that had beennationalised in 1945 and 1982. Half of those firms were effectivelyprivatised before the fall of the centre-right government after the 1988general elections: three large industrial firms (Saint-Gobain, CGE-Alcatel,Matra); two small banks and six large banking groups (Paribas,Sogénal, Société Générale, the Crédit Commercial de France, Suez,CNCA – see next chapter for more details).

Loriaux, among others, claims that these shifts in industrial policy wereall inspired by the same developmentalist ideology, still widespread inpolicy circles (see Loriaux, 1991; also Schmidt, 1996). What changedin those years was not the ultimate goals but the instruments ofdevelopmentalism: from budget-funded subsidies in the 1960s to bank-based credit controls in the 1970s to state ownership in the 1980s.As Loriaux further argued, “the instrumental change we observemust be weighed against the permanence of a developmentalistculture and the strength of representation of that culture at centresof economic and political decision-making” (Loriaux, 2002). Even theBarre government’s apparent pro-market policies did not mark theend of interventionism, just a different form of interventionism.

• Italy

In Italy, a first attempt at rationalising the fragmented industrialpolicy-making institutional framework took place in 1977 with thelaw n.675, which set up the CIPI (Committee for the Coordination ofIndustrial Policy), whose mission was to plan and coordinate thestate’s policies towards industry. That attempt failed for manyreasons, two of which have to do with the CIPI’s weak administrativeinfluence (being located at the weak Budget Ministry) and its “lowinsulation from politics” (Ferrara 1989) especially from parliamentarypolitics. State incapacity to design and implement a reform ofindustrial policy contrasted with public enterprises’ determination tolead the restructuring process throughout the 1980s. Privatisation tookoff in 1983, the year in which, for the first time since the war, thepurchase of enterprises by the IRI holding group was inferior involume to the sale of enterprises (the ratio was 1 to 20).

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80 The law of July 2, 1986; followed by a law of August 6th, 1986.

By the mid-1980s, policy-makers shared the concerns of top-managersof public companies towards restoring profitability to large firmsthrough restructuring. As a report presented in the Italian Senate putit, “economic development cannot be pursued through demand-ledpolicies, with industrial policy taking the back seat to ensure thesatisfaction of demand. Now industrial policy must take the driver’sseat [in the absence of demand-led policies]”81. The emphasis wasput on a supply-side industrial policy. In 2000, the IRI was finallyliquidated, and its remaining shareholdings (in the national carrier,Alitalia; the public TV holding, Rai; and the manufacturing firm,Finmeccanica) were passed on to the Treasury.

4.3.2 The transformation of monetary policy

During the 1980s, in both countries, a profound transformation occurredin the realm of monetary policy. There are different interpretations ofsuch change. According to Epstein and Schor, foreign exchange crisesrepresented “convenient” opportunities for the central bank to engagein restrictive policies (Epstein and Schor), in contrast to the structuralthesis developed by Loriaux et al (1997). What is not discussed, however, isthat the aims of monetary policy changed dramatically during that time.

Between 1979 and 1980, both countries entered the European MonetarySystem, which had been conceived as a looser and smaller Bretton-Woodsregime anchored on the deutschemark (beyond the ECU). Both Franceand Italy adhered, it seems, to impose external discipline on domesticactors (firms and policy-makers).

The transformation of the aims of monetary policy was simultaneous toa change in the institutional framework of policy-making. The latterconsisted first and foremost in the emancipation of the Central bankfrom the sway of the Treasury; and in the subsequent redistribution ofregulatory powers with the creation of autonomous regulatoryauthorities. The latter were inextricably linked to the content of monetarypolicy since, as Epstein and Schor have shown, independent centralbanks pursue more restrictive policies and are associated with lower ratesof inflation – since they are disenfranchised from the interests of labourunions and labour parties and more prone to be dominated by bankersand investors (Epstein and Schor 1986).

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81 Cited in De Rosa (1988).

• France

To combat the vicious circles associated with the overdraft economy,French authorities started, by 1974, assigning a high priority tostabilising the currency. France’s 1979 decision to join the EuropeanMonetary System was motivated by the government’s new monetarypolicy objective: to reduce inflation by pegging the franc to the DeutscheMark. As argued by Loriaux and others, for France to regain controlover its economy, it had paradoxically to relinquish its independencein monetary policy. The French consolidated their commitment tocurrency strength in the early 1980s following three devaluations(within the European Monetary System). The shift of emphasis inmonetary policy brought reform to French finances. In the mid-1980s,under a Socialist government, France implemented far-reachingliberalising reforms in order, first, to wean business off state-controlledbank credit and direct it to the market for stocks and bonds and tointernational lenders, and, second, to make the French economyattractive to foreign capital so that foreign investment might compensatefor the reduction in state-sponsored or supplied funds. As Loriaux putit, “France (and other nations) multiplied liberalising reforms to makeits economy more appealing to – and better able to compete for –international capital.” (Loriaux 2003) The radical character of thereforms reflects the perceived need to eradicate moral hazardthrough the alteration of expectations by economic agents.

Such changes in strategy entailed change in instruments. Up until theearly1980s, monetary policy instruments, such as interest rate policy,were mobilised to sustain the state’s industrial policy. With the increasedpressures associated with the “external constraint”, in 1982-83, interestrate policy was assigned to the defence of the exchange rate of theFrench franc – with the “franc fort” policy, in other words the alignmentof the franc on the Deutsche Mark. The nascent money market becamethe principal locus of central bank efforts to control interest rates.

Institutional changes accompanied this new policy, with the centralbank gradually leaving the orbit of the Treasury, which had, until 1990,“legislative power” over monetary affairs. The Banque de France gainedindependence in 199382 and, simultaneously, control over monetarypolicy – which had for long been abandoned as an autonomouspolicy instrument. In 2000 most of the Banque de France’s monetarypowers were surrendered to the European Central Bank.

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82 With the law of August 4th, 1993.

As for industrial policy, it has been argued that the adoption of arestrictive policy-mix, first under Giscard, then under Mitterrand,was less a conversion to supply-side macroeconomics than theattempt to restore state control over the economy, in a dirigiste spirit(Schmidt, 2001). What matters here, however, is the outcome of sucha strategic shift: a profound change in the instrumental andinstitutional nature of monetary policy in France.

• Italy

In Italy, the institutional features of monetary policy-making werechanged, too. The major change occurred in 1981 with theemancipation of the Bank of Italy from the Treasury, the so-called“divorce”. Until then, the central bank was statutorily obligated tofinance all fiscal deficits; the 1981 reform lifted that obligation.

During the 1950s and 1960s, under the governorship of Guido Carli,the Bank of Italy had been able to accommodate credit demandswithout risking excessive inflation and real wage increases – since, asEpstein and Schor argue, the working class was in a weak positionduring those years. The Bank did this by pegging the interest rate ongovernment securities until 1969, after which it targeted monetaryand credit aggregates. The central bank had for long voiced its desirefor independence. Two important steps had already been taken inthat direction: in 1969, the Bank of Italy was freed from unlimitedfixed-rate financing of the Treasury. More precisely, the central bankremained the residual acquirer of unsold BOTs; but it was freed fromselling and acquiring, on the secondary market, those bills whichwere above the required reserve level for banks. Treasury bills, in otherwords, lost their assimilation to the monetary basis.

The second step took root in the failure of the 1969 decision to createan effective market for Treasury bills. Thus a ministerial decree of April1975, acting on the advice of the CICR (Interministerial Committeefor Credit and Savings) of the same year, changed the rules of auctionin tendering Treasury bills. From then on, access to auction was extendedto non-bank financial intermediaries; the central bank, while remainingthe residual acquirer of tendered bills, could compete with otherauction members; finally, the price set by decree would becomemerely indicative, in effect giving the Bank of Italy the power to setthe auction price.

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The 1975 reform was a major step both towards central bankindependence and towards the revamp of the Italian financial system.The creation of a private market in Treasury securities provided amechanism for bond-financing of government deficits; at the sametime, it paved the way for the growing influence of non-bank actorson financial intermediation.

These steps were, however, not enough, from the central bank’sviewpoint. Indeed, in its view, “excessive” public expenditures ledto money growth and, under monetarist assumptions, to inflation.Government deficits averaged 12.5% of GDP in the 1970s, against5.8% in the 1960s; in 1981, they reached 11.8%, compared to anOECD average of 2.2% (Monti et al., 1983). Government spendingdid not only create inflationary pressures. It also drowned out privateinvestment: in 1978, public sector borrowing absorbed 70% of totaldomestic credit (Monti et al., 1983). Deficits were consistently criticisedby the Bank of Italy (voiced in its successive Annual Reports) and ledto a renewed claim for independence from its part. A few monthsbefore the divorce, Governor Ciampi pointed out that “thedimensions reached by public deficits set fiscal policy on a collisioncourse with monetary policy […]; the broad possibility, for theTreasury, to access the [central bank]’s financing increases […] the riskthat the control of monetary aggregates might lose its effectivenessin the short run83.” Similar views were expressed by the Monticommission, which was set up in 1981 by the Treasury to study thecredit and financial system.

However, Epstein and Schor convincingly demonstrate the weaknessof those arguments. First, after 1975 bond-financing substitutedmonetisation of the deficit – and central banks public debt holdingsdecreased. Secondly, private investment was not much crowded out– as a growing share of increased expenditure, after 1974, went toinvestment in firms, through subsidies and public financing (for asimilar argument, see Giannola and Imbriani, 1992). Finally, theburden created by debt servicing was balanced by inflation, which ledto negative real interest payments to bond-holders during the 1970s.This represented, as Epstein and Schor argue, hidden taxation onholders of government securities (Epstein and Schor 1989).

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83 Carlo Azeglio Ciampi, “Tra mercato e controlli: aspetti operativi della politica monetaria”,Intervention by the Governor of the central bank at the banks’ association, Centralinstitute of banks and bankers, Rome, 1981 – quoted in Monti and Onado (1989).

A more important factor leading to the divorce was related tofinancial – and in particular banking - intermediation. As mentionedabove, the imposition of portfolio constraints and ceilings on bankloans led to the subjection of banks to state financing needs.This, according to Epstein and Schor, was equivalent to financialdisintermediation – reflected in the sharp fall of bank loans to depositratios (Epstein and Schor 1989). This interpretation is questionable.First of all, quantitatively the share of bank deposits in households’financial portfolio was still higher in 1980 (at 45% of total assets)than its level of 1970 (36%)? its 1965 level (30%). Secondly, as seenabove, banks still fulfiled a critical intermediation function (at leastuntil the late 1970s – early 1980s), although reduced when comparedwith the previous decade: instead of transforming household savingsinto lending to firms, banks channelled the former to the Treasury.Rather than disintermediation, this trend could be termed “dependent”or “state-led” intermediation – a reinforcement of the Italian Treasurycircuit. In fact, during the 1970s the banking sector was solicited bythe central bank to compensate for the collapse of the bond market;during that decade banks became almost the sole collectors ofsavings in the country.

However, that interpretation was widespread among the Bank ofItaly, the Monti Commission and large commercial and savings banksby 1981. And it became more realistic after that, when deposits startedlosing their dominant position in household financial portfolios.Yet deposit disintermediation, owed more to the start-up growth of thebond market (unleashed by the 1975 decision mentioned above) thanto the strengthening of the Treasury circuit. Deposit disintermediationwas, in fact, the direct outcome of a consistent policy aimed atsustaining the growth of the bond and, later on, the stock market.Disintermediation was assumed to erode banks’ profitability. In 1980,the Bank of Italy noted in its annual report that “the circumstancesthat led to the widening of the interest rate spread might not recur.If they do not, the decline in intermediation will have adverse effectson banks’ profits” (Bank o Italy 1980: 97). However, during the 1970sbanks had refrained from raising interests paid on deposits, keepinga profitable interest margin.

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Perhaps more importantly, as Epstein and Schor point out, the declinein intermediation might be circumscribed to a handful of large,powerful banks, leaving aggregate profitability levels unchanged(Epstein and Schor 1989). As the 1980 Bank of Italy annual reportnoted, “the decline in intermediation affected most of all the threemajor commercial banks and the two largest savings banks” (Bank ofItaly 1980: 102). From the central bank’s point of view, bankingdisintermediation was a complex issue: on the one hand, it led to theweakening of its main constituency and eroded its power of controlover a sizeable part of the credit system; on the other hand, themarketisation of government deficits was seen as a powerfulincentive to curb excessive public spending, and therefore to freemonetary policy from it subjection to the Treasury’s will. In any case,both elements pleaded in favour of the divorce – and, in the mediumterm, the ending of the dismantlement of the Treasury circuit. It isimportant to note, however, that the Bank of Italy’s ambiguousattitude towards banking disintermediation has persisted until today.

With the 1981 divorce, the Bank of Italy was freed from the obligationto provide unlimited financing. Two elements, nonetheless, limitedthat independence. First, the Treasury’s ability to set floor prices onthe bills it issued, constrained the Bank of Italy’s interest-rate policyand allowed de facto the Treasury to continue re-financing its debt(Locke ). Secondly, the Treasury could still force monetary financingthrough authorised overdraft of its account at the central bank84.However, the divorce effectively put an end to automatic monetaryfinancing of government deficits. In addition, the divorce marked areturn to the use of interest rates as an adjustment tool, this time ina market context. In fact, the divorce was linked to a broader strategyaimed at increasing the market’s role in the functioning of the creditsystem. As the director of the central bank, Lamberto Dini, said in1980: “the full re-appropriation of monetary basis as an instrumentfor indirect credit control will allow the dismantlement of administrativeconstraints now imposed on the credit system”85.

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84 Overdraft was authorised up to 14 percent of each year’s government expenditures;additional overdraft may be granted by the Parliament (Epstein and Schor 1989).

85 L. Dini, “Politica monetaria, disavanzo pubblico e fenomeni di ‘crowding out’” in Bancaria,1980, n.12, p.1242.

The changes in monetary policy actually accelerated the crisis of thepublic overdraft economy – which was certainly one of themotivations behind monetary policy-makers’ determination to pursuean autonomous interest rate policy. While nominal public sectorborrowing needs were consistently high during the1980s (fluctuatingbetween 11% and 13.5%), their real value mechanically rose withdisinflation and rising real interest rates: from -1.6% of GDP in 1981,it reached -2.6% in 1982, -4.3% in 1983, -6.4% in 1984, -6.6% in1985, to a maximum of -8.5% of GDP in 1986 – while private firmsreal borrowing needs reached a maximum in 1985 at -3.5% ofGDP86, and nominal values started decreasing in 1981.

4.3.3 Changes in financial regulation

• Changes in banking regulation

In both countries, together with monetary and industrial policy, thefinancial regulatory regime underwent dramatic changes during the1980s. State-administered credit was definitely abandoned as apermanent feature of financial regulation87. Loan ceilings wereabolished, portfolio constrains were lifted and functioning financialmarkets were established with the support of the state.

In Italy, during the 1980s, Treasury bills and state bonds graduallycrowded out bank deposits in households’ financial portfolios: thelatter represented, in 1975, 50% of households’ total financial assets(other liquid assets accounted for a further 20%); that numberdecreased to 45% in 1980; 34% in 1985; 26% in 1990; 25% in1995; and less than 18% in 2000. In the meantime, Treasury bills (BOT)rose from 0% in 1975 to 9% in 1980 and 13% in 1985 and 12.5% in1990. They lost their attractiveness in the 1990s, with the competitionof stocks and shares. Treasury and public bonds rose in the late1980s: they represented 13% of households’ total financial assets in1975; 7% in 198088; 17% in 1985; 18% in 1990; 20% in 1995.

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86 Source: Bank of Italy, Annual Report, various years.87 As a top manager at the French central bank said in 1985, “l’encadrement du credit”

could retain its use solely as a temporary instrument.88 The 1975-1980 period marked a flexion in state bonds’ attractiveness for reasons

explained above, i.e. high inflation and negative interest rates; the same period saw, as aresponse by the state, a more frequent resort to Treasury bills (BOT).

In France, the 1982 nationalisations wave, mentioned above,represented the last offshoot of developmentalist industrial policies –especially in the field of credit and banking. However, two aspects ofthe nationalisation process and its outcome seem to point to theopposite consideration: namely, and quite paradoxically, the 1982nationalisation wave constituted the first step towards thedismantling of both state-administered credit and state-led industrialpolicies. First of all, the continuation of restrictive monetary policiesseverely constrained the extent to which the state could use its newlyacquired banks to lend cheap money. Secondly, as Lacoue-Labartheargues, there was no fully-fledged nationalisation of credit:

In 1986, the former Minister of the Economy, Pierre Bérégovoy wrotein the foreword of the “White Book” on the reform of financingof the economy (Livre blanc sur le financement de l’économie) that:“money must be mobile; then its cost is lowered, with the eliminationof rents. Therefore, it becomes possible to clarify the role of the stateby re-focusing its intervention on true priorities and by circumscribingits regulatory intervention to the general organisation and monitoringof capital markets”.

• State-supported rise of capital markets

In France, the state had to intervene repetitively to encourage the useof market investment instruments, such as mutual funds (in French,fonds communs de placement, or FCP) and investment funds (inFrench, société d’investissement à capital variable, or SICAV). FCPsand SICAVs were created in 195789 as a by-product of a reform aimedat fostering workers’ participation in firms’ benefits. They were notyet available until a 1963 decree90. It was not, however, until the late1970s that FCPs and SICAVs became widely diffused, thanks to afavourable fiscal regime put in place by the government underMinister Monory91.

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89 Law of June 26, 1957.90 Decree of September 20, 1963.91 Law of July 13, 1979; and decree of september 27, 1979.

4.4 Discussion

The dismantlement of state-administered credit lasted several years. It beganin the late 1970s with the definitive adoption of restrictive monetarypolicies in both countries and the increased reliance on financial marketinstruments to coordinate credit allocation, and lasted until the mid-1980s,with the lift of price and volume controls and the de-segmentation ofbanking. Such a change in the broad institutional environment of savingsbanks led to a profound transformation of the sets (or matrixes) ofconstraints and incentives facing savings banks and, therefore, shapedbanks’ behaviour.

The French and Italian state-administered credit systems created two setsof constraints and incentives: one general (common to all banks andbanking categories) and one specific to savings banks. The general matrixof constraints and incentives consisted of four elements. First, functionalspecialisation led banks to focus much more on liabilities than on assets;even if restrictions on medium and long-term lending were loosenedthroughout the years, they did not allow banks to expand their lendingbusiness in a significant way. Secondly, functional specialisation, statesupport (state funding, subsidies, guarantees) and accommodatingmonetary policies discouraged the development of risk-managementcapabilities. This is the meaning of moral hazard: banks had the certaintyof being refinanced or rescued by state institutions, and therefore didnot have to pay particular attention to the risk of their endeavours.Third, functional specialisation and market segmentation constrained anddiscouraged competitive behaviour. Both on a territorial and a sectorbasis, banks or groups of banks relied on captive clienteles and did not,with rare exceptions, face the competitive pressures inherent to markets.Fourth, price and volume controls and fixed rates dis-incentivised profit-maximisation strategies and de-emphasised risk-management.

In addition to this general set of constraints and incentives, French andItalian savings banks faced specific constraints and incentives. First, becauseof their institutionalised role as stabilisers of the banking system (throughtheir high number of depositors) and of specific incentives (fiscal privilegeson savings accounts), savings banks were even less focused on assets andmore on liabilities than other types of banks. State-centralised or controlledintermediation meant that savings banks did not have to care much aboutthe use of funds they were collecting. Secondly, the state and politicalcontrol (direct or indirect) over savings banks considerably restricted thelatter’s margin for managerial manoeuvre.

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This is especially true when comparing savings banks with other banks,even with those commercial banks in the orbit of the public sector (such asthe commercial banks nationalised in 1982 in France). Importantly, thesespecific constraints and incentives created by savings banks’ broadinstitutional environment were reinforced by savings banks’ own history,characterised by cautious asset management and not-for profit businessgoals (see previous chapter).

The dismantling of state-administered credit in both France and Italy ledto a complete upheaval of those matrixes of constraints and incentives.In the early 1980s, savings banks in both countries faced a completelytransformed set of constraints and incentives that irrevocably alteredtheir future expectations and – this is the argument developed in thenext chapter – had a profound impact on savings banks’ strategies.Three elements stand out for their importance. First, the abandonment ofaccommodating monetary policies and the lift of price and volumecontrols created incentives for banks to develop risk-managementcapabilities. The shift in monetary policy put an end to moral hazard;banks lost the certainty of being refinanced and rescued by the state forhaving engaged in risky activities. Banks became responsible for settingthe price and volume of their products and services, which could donothing but change their way of doing business. Secondly, the shift fromstructural to prudential regulation put greater emphasis on banks’solvability and patrimonial ratios. As a consequence, banks (and bankingregulators) started to pay much closer attention to their levels of equityand their exposure to risk on the one hand; and to the issue of ownershipand the sources of re-capitalisation on the other hand. Third, marketde-segmentation and functional de-specialisation led to a rapid increaseof competitive pressures affecting banks, and questioned the passivestrategies followed in the past, which had been predicated upon stablemarket shares and captive clientele.

Importantly, these changes in the general matrix of constraints and incentivesoccurred prior to changes in the specific constraints and incentives facingsavings banks. The next chapter will show how savings banks adjusted tothose changes in their macro and micro environment by provokingregulatory change and trying to shape its outcome in a way favourable totheir long-term strategies.

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5.1 Introduction

In the late 1970s – early 1980s, French and Italian savings banks were stillregulated by laws from the 1930s and 1940s – laws that had beenenacted with the specific purpose of avoiding a repetition of the crisis ofthe 1920s and 1930s.

The 1980s and 1990s, by contrast, are characterised by “paradigmaticshifts”92 in banking regulation in both countries –in that period theexisting regulatory paradigm (market segmentation, credit ceilings,importance of public banks) was replaced by a new one (based on marketde-segmentation, lift of administrative controls, introduction ofprudential regulation, privatisation of public banks) (see Moran, 1991 foran overview). In that sense the reforms of savings banks93 have to belinked with the quasi-simultaneous reforms of the banking sector as awhole: in France, the two important periods of reform of savings bankswere 198394 and 199995, while the laws of 198496, 199197 and 199698

changed the regulatory regime of the whole banking sector. In Italy, thekey reforms of the savings banks sub-sector occurred in 199099 and1998, while in 1993 and 1994 new laws were enacted concerning thebanking system as a whole.

5. THE REGULATORY‘NORMALISATION’OF SAVINGS BANKS

92 According to Peter Hall’s classic distinction between the three orders of policy change(Hall 1986).

93 Here savings banks are not taken as a simple proxy of the banking system as a whole, butas an analytical tool to understand the evolution of the two systems.

94 Loi n.83-557 du 1er Juillet 1983, “Loi portant réforme des caisses d’épargne et de prévoyance”.95 Loi n.99-352 du 25 Juin 1999, “Loi relative à l’épargne et à la sécurité financière”.96 Loi n.84-46 du 24 Janvier 1984, “Loi relative à l’activité et au contrôle des établissements

de crédit”.97 Loi n.91-716 du 26 Juillet 1991.98 Loi n.96-597 du 2 Juillet 1996, “Loi de modernisation des activités financières”.99 Legge Delega n.30 Luglio 1990, followed by the decree of November 1990.

More importantly, the shift in savings banks’ regulatory regimes occurredagainst the twin background of the dismantling of state-administeredcredit, analysed in chapter 4; and of savings banks’ growing demand forchange, mentioned in chapter 3. The present chapter will focus onregulatory reform to address the main research questions laid out inchapter 2100. First, this chapter will compare savings banks’ regulatoryreform process and outcomes in France and Italy. The research will seekto establish whether similar shifts in the macroeconomic environment,occurring in similar policy regimes (state-administered credit) lead tosimilar policy outcomes. Secondly, the chapter will assess whetherpotential differences in regulatory outcomes can be attributed toinstitutional differences. If regulatory changes simply translate or reflectchanges in macroeconomic policy, then cross-country differences inregulatory outcome must be attributed to institutional rigidities. If, bycontrast, regulatory changes incorporate actors’ strategies, then differentoutcomes might be linked to different strategies as well.

Findings have been regrouped under two headings. The first partanalyses the regulatory changes and their broader meaning for the twocountries’ banking system. Three main changes have been analysed:changes in savings banks’ legal status, changes in the structure of thesavings banks sector, and changes in the operational scope of savingsbanks. The second part analyses the causes of such changes. The thirdpart discusses the findings.

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100 This chapter will focus on changes in the legal regime of savings banks, paying thus lessattention to other types of regulatory changes – mainly, individual and general decisionstaken by regulatory authorities such as the central banks and the regulatory bodiesspecialised in banking regulation . Legal changes are emphasised for three reasons: (i) the1983 and 1999 legal reforms in France, and the 1990 and 1998 legal reforms in Italydid represent landmark changes in the regulatory environment of savings banks – inparticular with regard to their legal definition, their status and ownership, and the scopeof their operations; (ii) these reforms constituted, along with general banking reformswhich accompanied or preceded them, the first large-scale regulatory change at thelegislative level since the 30s and 40s; (iii) as legislative reforms, they gave rise to animportant public debate, which makes it easier for the observer to understand thedynamics of the reform and the stakes at play. Of course sub-legal regulatory changes willalso be addressed – since some of them had an importance of their own (such as the“Piano Sportelli” decision of the Italian Governmental Committee for Credit and Savings in1978, or the various decisions on the “status-type” of savings banks taken by the Frenchregulatory bodies during the 1970s), and interacted with legal reforms in ways that arerelevant to the present study. But for reasons of space they will not be covered exhaustively.

5.2 Changes in the regulatory regime

The changes brought about in the 1980s and the 1990s by law-makersto the regulatory regimes of savings banks touched on all aspects ofregulation. In both countries, however, three elements of change standout: the transformation of savings banks’ legal status, the re-organisationof the sector and the (further) de-segmentation of the banking market.

5.2.1 Statutory ‘normalisation’

The outset of the reform period – the early 1980s in France, the mid-1980sin Italy – was characterised by a profusion of legal categories of banks on theone hand, and the great number of statutory public banks, on the other.

In France, by the early 1980s there were many categories of banks (fromsavings banks to cooperatives, to the Crédit Agricole, which had a statusof its own, and to the banques d’affaires) legally recognised. In Italy twobroad categories (commercial banks and special credit institutions)included in fact more than two dozen sub-categories, which entaileddifferent governance and ownership structures. Commercial banksincluded: savings banks; public credit institutions (or Istituti di credito didiritto pubblico, which included several of the largest Italian banks: Bancodi Napoli, Banco di Sicilia, Banca Nazionale del Lavoro, Istituto San Paolo diTorino, Monte dei Paschi di Siena, Banco di Sardegna)101; national interestbanks (Banche di interesse nazionale, or BIN, including Banca commercialeitaliana, Banco di Roma, Credito italiano)102; the Banche Popolari103;the Casse rurali e artigiane104; the Monti di credito su pegno105; and thecommercial banks stricto sensu (private firms). Special credit institutionsincluded: the Istituto Mobiliare Italiano, or IMI; Mediobanca106;Interbanca and Efibanca; Centrobanca107; and the IRI as well, whichperformed some credit functions.

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101 These banks were public entities (Foundations), owned by the government and managedby directors appointed by the Treasury.

102 As seen in chapter 4, the BIN were owned by the Istituto per la Ricostruzione Industriale,or IRI, the giant public holding created in the 1930s, which managed state shareholdings.The BIN were above all used to finance the hundreds of firms in which IRI was present.

103 The Banche Popolari were cooperative banks with a peculiarity: although, as with othercooperatives, equity was unlimited, they had limited liability.

104 Cooperative banks.105 Credit institutions which used to specialise in pawn-broking and small scale lending

against mobile guarantees.106 Mediobanca is considered to have been Italy’s sole true merchant bank up until the 1990s.107 A kind of giro institution for the cooperative banks.

Among these banks the biggest (in terms of assets) were either public instatus or belonged to the public sector largo sensu (being controlleddirectly or indirectly by the State or para-statal institutions such as the IRI).Savings banks held a special position, in that they were independententities covered by public laws. But the biggest among them (Cassa diRisparmio delle Provincie Lombarde, Cassa di Risparmio di Venezia, Cassadi Risparmio di Torino) were controlled by political parties, especially theChristian Democrats (through the representatives of local governmentson their boards, and the director and vice-director appointed by theTreasury). In France the government had launched in 1982 the secondlargest nationalisation wave in the country’s history, after that of theimmediate post-war. Several dozens of firms went under state control,representing 11% of the country’s GDP108. Among them were 5 largebanks and credit institutions (see introduction).

The regulatory reforms of 1983 in France and 1990 in Italy were firstaimed at streamlining banking statuses and legal categories, which werea prerequisite for the restructuring of the whole sector (both in terms ofthe legal impediments to restructuring posed by the variety of legalcategories, and of the various ownership structures embodied in thosestatuses). They led to a “normalisation” of the statuses of savings banksand a progressive reduction of the number of legal categories of banks.

• France

In the French case, the first thing the 1983 law did was to re-formulatethe statutory identity of savings banks in order to bring it closer tocommercial banks’. For the first time, article 1 of the law defined theCaisses d’Épargne as ‘établissements de crédit’109. This concept wasof course the French translation of the ‘credit institutions’ introducedby the EC’ First Banking Directive of 1977.

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108 See Loriaux (1991).109 “Les caisses d'épargne et de prévoyance sont des établissements de crédit à but non

lucratif. Elles ont pour objet la promotion et la collecte de l'épargne ainsi que ledéveloppement de la prévoyance pour satisfaire notamment les besoins collectifs etfamiliaux. A cet effet, elles sont habilitées à recevoir des dépôts, à consentir des crédits età faire des opérations de banque au profit des personnes physiques, ainsi que desorganismes n'exerçant pas, à titre principal, une activité industrielle ou commerciale.Elles sont habilitées à consentir des prêts, notamment aux collectivités et établissementspublics, ainsi qu'aux organismes bénéficiant de leur garantie.” (Article 1, Loi 83-557)

Importantly, the 1984 banking law then extended the name to allbanks, and thus completed the ‘normalisation’ of legal categoriesinitiated in 1983110.

The mere definition of savings banks as credit institutions raised anumber of issues, however. First, did it mean that savings bankswould be submitted to standard credit regulations (especially in termsof credit ceilings then in vigor)? Secondly, were their bankingoperations to be submitted to the banking regulatory authority, theCommission de contrôle des banques like other credit institutions?Those questions were left unanswered in the design of the law111,which reflected the ambiguity of the government’s view about therole and function of savings banks within the French credit system.In particular, the issue of whether savings banks belonged to thepublic or private sphere was not solved – in fact it was not even raisedduring the debates over the law.

The issue was not solved until 1999, when a second major reformtransformed French savings banks into a cooperative network – thussubmitting their governance to the legal status of cooperatives112,while most aspects pertaining to banking activities fell undercommercial law113. The cooperative status seemed to stem directlyfrom their fulfiling national interest missions114. But some observersand actors of the banking regime disagreed. For instance, SenatorMarini voiced his preference for listing savings banks’ stocks, like theirItalian counterparts115; and Jacques Mayoux, a French banker, saidthat privatisation would have been a better solution, since it wouldhave allowed mergers with commercial banks and equity financing onthe market116.

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110 However, de Juvigny argued that the 1984 banking law achieved only “moderateuniversality” – since it did not apply to the CDC or the postal financial services, and sincecertain categories of banks (mainly the cooperative ones) did not fall under the regulatoryauthorities for access to ownership (de Juvigny, 1990).

111 See also Cluzel (1984), p.120, for similar remarks.112 which is the Loi 47-1775 du 10 septembre 1947.113 Loi 66-537 du 24 juillet 1966 sur les sociétés commerciales.114 Article 1 of the law read: “Le réseau des caisses d'épargne remplit des missions d'intérêt

général”115 See “Caisses d’Épargne: une réforme insuffisante”, in Option Finance, July 5th, 1999.116 See Option Finance, january 18, 1999.

• Italy

In the Italian case, the statutory issue was even more salient. The 1990law transformed the Casse di Risparmio in joint-stock companies, whoseactivities fell under the regulatory regime in vigor for commercialbanks (and integrated in the 1993 Testo unico). However, they were100% owned by a new entity set up by the law, the Fondazioni.These were public, non-profit entities owned by a variety of actors,among whom local and regional governments who had representativeson their board. Thus there was a certain ambiguity, which fed anintense academic and political debate on the public or private natureof the Fondazioni / Casse di risparmio entities. A closer look at theliterature, however, reveals that those discussions revolved almostexclusively around the Fondazioni, not the Casse di Risparmio.The issue was not whether the Casse di risparmio would remainwithin the (public) orbit of the Fondazioni, but rather when were theyto be privatised. This was a clear objective for policy-makers. As oneItalian interviewee put it,

Two operations were necessary: make banks become private inownership; and make banks become private in behaviour.117

And in assessing the impact of the 1990 law twelve years later,another actor of the reform said:

The process has worked, since banks have become subject tomarkets, to market rules.118

Besides, it is important to note that the 1990 law concerned savingsbanks as well as Istituti di credito pubblico, mentioned above – whichclearly gave a sign as to where the law-makers situated the savingsbanks: in the group previously within the public domain, but that wasto pass to the private one.

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117 The same interviewee added, however, that these two operations were to be assumed bytwo distinct authorities: on the one hand, the government (through the Law AmatoCarli); on the other hand, the central bank (through, in particular, the shift from activityregulation and regulation at entry with prudential regulation). (Interview, June 2002).

118 Interview, September 2002.

The Italian situation was thus both clearer and more obscure than theFrench one. It was clearer because savings banks had the status ofcommercial banks. It was more obscure in the sense that theirownership was still public. But this issue was intertwined with thepending re-organisation of the sector, which was pushed forward bysubsequent reforms.

5.2.2 The re-organisation of the sector

The statutory reform was important symbolically; it was also instrumentalin facilitating the re-organisation of the banking sector, the second coreelement of regulatory reform in both countries.

• Italy

In Italy, the separation of ownership and control (law Amato-Carli)and the transformation of ownership rights into shares that could besold (in the future) on the market was a clear first step in thatdirection. At first, the Fondazioni were to hold their 100% stake insavings banks. But this “neutrality” was the outcome of a politicalagreement passed in Parliament; originally the government’s idea wasto keep open the possibility for the Fondazioni to sell shareswhenever they wanted119. Law-makers could not, however, movetowards a real privatisation of savings banks120. As one of the keyactors of the reform said121, another idea that circulated before thereform was the attribution of all shareholdings of the savings banksto the Treasury. But this solution was constitutionally difficult, andpolitically impossible, as we will see in the next part.

The status-quo did not last long: a law passed in 1994 lifted the banon the sale of the savings banks’ shares owned by the Fondazioni,and a directive enacted a few months later by the Minister of theTreasury, Lamberto Dini (who had been one of the vice-governors ofthe Banca d’Italia in the previous years), from then on called the “Dinidirective”122, created fiscal incentives for divestiture.

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119 Hence the difference between the original design of law as presented in Parliament inOctober 1988, and the final text as passed by the Parliament in July 1990.

120 Interview with policy-makers, May 2002.121 Interview, May 2002.122 Direttiva n. Ottobre 18, 1994.

In particular, it exempted from capital gain taxation123 thoseFoundations that accepted to give up a controlling stake (50% ofshares) in Casse di Risparmio.

The 1998 Ciampi-Visco law then institutionalised these incentives butput a time limit on them: they would hold for another four years afterthe law was enacted, but would decrease over the next three years(article 4a). After seven years the specific fiscal regime would beended. Importantly, the 1998 law created fiscal sanctions as well: ifthe controlling stake was not given up within seven years, theFoundations would lose their non-commercial status (which entaileda favourable fiscal regime, reaffirmed in article 3a of the law) (art.4b).Thus the reforms of the 1990s showed consistency in pursuing therestructuring of the sector, but also showed a gradual shift fromneutrality and incentives to sanctions, which reflected the slowmoving of the Fondazioni in selling their shares in the savings banks(as we will see in the next chapter).

• France

In France, re-organising the sector was also an important item on thereform agenda. But it took a different direction: the French law-makerswanted to push for endogenous restructuring, meaning mergers andacquisitions among savings banks themselves rather than betweensavings and other banks. Thus the 1983 law did not clarify ownershipas the 1990 law in Italy did. Rather, it emphasised the re-organisationof the savings banks sector, with the strengthening of a “tête deréseau” (network head) embodied in the Centre National des Caissesd’Épargne et de Prévoyance (CENCEP – which later became the CaisseNationale des Caisses d’Épargne, or CNCE). The 1983 reform also createdregional re-financing centres, the Sociétés Régionales de Financement(or SOREFI). This marked the beginning of the rationalisation of thenetwork. A further step was taken with the decree of June 20,1985124, which organised the “financial de-centralisation” of savingsbanks125: indeed, about 200 billion FF coming from “banalised”financial products were transferred from the Caisse des dépôts tothe SOREFI created in 1983.

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123 The capital gains tax was introduced by the law n.102 of 1991 – one year after capitalliberalisation, and amounted at first to 25% of plusvalues.

124 Décret n. du 20 juin 1985.125 According to Antoine Moster (2000, p.48).

But the strongest encouragement for restructuring came with a lawof 1991 which dissolved the SOREFI and gave fiscal incentives to thosesavings banks who decided to merge. As will be shown in the nextchapter, the 1991 reform was a decisive step in the re-organisation ofthe sector. Within a few years, the number of savings banks shrunkfrom 450 to a little more than 40 (today they are 33).

Again, if the purpose of reform was similar in the two countries, thechanges actually took a different direction: in Italy, the Amato Carlilaw and its sequels were clearly aimed at transforming the majorsavings banks into the backbone of a re-organised banking system;in France, it was aimed at strengthening the sector itself.

5.2.3 Market de-segmentation and the path towardsoperational parity

The statutory normalisation of savings banks and the sectoral re-organisationwent hand in hand with a third major regulatory change: theenlargement of savings banks’ operational scope. This was, again, acommon element to both countries. The only difference was in thedegree of change, and this can be attributed to different startingsituations: in France savings banks were as of 1983 still very limited in thenumber of credit operations they could undertake, and the types ofclientele whose needs they were authorised to address. By contrast, thelimitations put on Italian savings banks’ operations (in particular the banon medium and long-term lending) were common to all “commercialbanks”, and there was no restriction attached to savings banks in termsof authorised business.

• France

In France, the 1983 reform authorised savings banks to pursue threebasic banking services identified by law-makers: receiving deposits,lending, and providing means of payment126. However the very firstarticle of the law restricted the scope of savings banks to collectingsavings, and specified that they were non-profit organisations.

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126 Articles 1, 2, 3 and 4 of Loi 84-46.

Interestingly, this limitation, far from vanishing in the following years,was instead reinforced by the legislators127. But a few years later, withthe June 17th, 1987 law128, the Caisses d’épargne were authorisedto lend to small and medium enterprises. At the beginning, a ceilingwas put on the amount savings banks could lend (equal to 30% oftotal assets) to private firms. The ceiling was set for a transitory periodof three years129 but was renewed in 1991130.

These limitations might be interpreted as a compromise betweensavings banks top managers and regulators; they guaranteed thatmost of the lending would go to public entities or to individualhouseholds, while giving time to savings banks to prepare for beingcompetitive in the new markets. In fact, the 1983 parliamentaryproceedings reveal that the crust of the debate revolved around thesetwo issues: namely, allowing savings banks to operate on severalmarkets, and to propose several new products; and at the same timeguaranteeing the permanence of lending to local governments withinthe Minjoz contingents. The proceedings clearly show this tensionbetween normalisation and particularism131. Diverging positions onthese two issues also constitute the main differences between thewordings of the text of the law as voted by the Parliament andthe wording of the law proposal132, introduced a year earlier.

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127 In 1991 the following paragraph was added to the initial wordings of Article 1: “[les caissesd’épargne] utilisent leurs ressources relevant de l'activité bancaire et commerciale duréseau au profit notamment du financement de l'économie locale et sociale en appui auxcollectivités territoriales.” (Art. 1&2, Loi 91-635 du 11 Juillet 1991).

128 Loi 87-416 du 17 Juin 1987.129 Art.50,Loi 87-416 du 17 Juin 1987.130 Art.2, Loi 91-635 du 11 Juillet 1991. It is interesting to note that the Parliamentary

majority which voted the text in 1987 was different from the one who approved the 1983reform and, further, that it had won the elections on a pro-business agenda.

131 In his report to the Assemblée Nationale, Mr. Taddei noted that the article 2 aimed atnormalising savings banks as well: “il s’agit de donner au réseau une pleine capacitéfinancière débouchant sur une banalisation relative et progressive des règles de tutelle etde contrôle pour une partie de la collecte de fonds et des emplois qui en résultent”(rapport Assemblée Nationale, n.1021, pp.22.)

132 Under the French Constitution, the law-making initiative belongs both to the Government(projets de loi) and to members of Parliament (propositions de loi). The practice, however,has shown a domination of laws initiated by the Government. Interestingly, in the presentcase the law originated in a proposal presented by Mr. Taddei, MP belonging to thegovernmental majority. It is likely, however, in this case as in many others, that thegovernment simply aimed at reinforcing its legitimacy within the Parliament and thus“let” an MP introduce a government-promoted initiative. This is the interpretation ofCluzel (1984) as well.

As per the enlargement of activities, the initial proposal set out tolimit deposits to individuals and non-profit entities; and lending totheir depositors and to local governments and entities guaranteed bythem. During the first discussion at the Senate Finance Committee,Senators expressed their concern towards what they saw as overlystrict limits on two counts: on the deposits side, they saw the risks ofexcluding important potential depositors – such as the entities incharge of social housing (Sociétés anonymes de HLM). These riskswere underlined in the report written by Senator Cluzel133, whoseconclusions are synthesised in Cluzel (1984). The Senate thus proposedto enlarge the group of potential depositors (replacing “non-profitentities” by “entities not mainly involved in industry and trade”),which the government accepted134.

Regarding the Minjoz contingent, the 1983 law opted for the statusquo. As Cluzel himself says, the last section of Article 1 (regardingthis very issue) was the embodiment of such a critical mission135.The discussion of the public mission fulfiled by savings banks extendedto the issue of definition as well: it explains why, for instance, duringthe first discussion of the law proposal in full session (séancepublique) of the Senate, two amendments proposed by Senatorsbelonging to different parties (one from the right-wing opposition,the other from the left-wing governmental coalition), attempted atincluding those dimensions in the very definition of the savings banksas in Article 1136.

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133 Rapport à la Commission des Finances du Sénat, n.342.134 Interestingly, after accepting the changes to the original wordings the Minister precised

that the formula proposed by the Senate would not include private firms, even thoughthe latter’s borrowings could be guaranteed by local governments since a law passed in1982 – another evidence that savings banks were to remain within the public realm.The warning to exclude private firms from savings banks’ clients was repeated severaltime by the government’s representative.

135 Article 1, “bien que non indispensable, permettait cependant de confirmer la vocationtraditionnelle et la mission première des caisses d’épargne dont les prêts sont destinésnotamment aux collectivités publiques et aux organismes bénéficiant de leur garantie.”(Cluzel 1984, p.119)

136 Amendment n.58 suggested to define savings banks as “établissement à but non lucratifreconnu d’utilité publique”; and amendment n.44 added to the original definition thewords “investis d’une mission de service public”. The juridical consequences of suchchanges were minor.

Thus two important notions coexisted in the 1983 law: first, savingsbanks were (finally) to be recognised operational parity with otherbanks, with less limitations than before regarding products or markets.Secondly, savings banks were still conceived as a peculiar kind ofcredit institutions, given their non-profit nature, their ‘historicalmission’, and their functional role within the credit system. In thefollowing years the regulatory authorities did put these principles intopractice: authorisation to offer checking accounts (1983), to proposecredit cards (1986) and to lift the ban to lend to firms (1991).

The 1999 law built on the 1983 reform, confirming the specificities ofsavings banks business scope, and further detailing the specificmissions assigned to them, in particular financing social housing andlocal economic development137. The specificity of the Livret A wasre-asserted as well. In addition, the first article specified that savingsbanks fulfil the general interest. The specific scope of the savingsbanks (referred to in the text of the 1999 law as a single network,rather than a group of individual banks as was the case in theprevious legislative texts) is enforced through the mandatory138

funding of local development projects (called in the law ‘projetsd’économie locale et sociale’, henceforth PELS), to which a part of thebenefits goes. This amount should not be less than a third of the totalbenefits after tax. Simultaneously, though, the ceilings previously puton lending to private firms had disappeared from the law.

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137 “Il contribue à la protection de l'épargne populaire, à la collecte des fonds destinés aufinancement du logement social, à l'amélioration du développement économique local etrégional, particulièrement dans le domaine de l'emploi et de la formation, et à la luttecontre l'exclusion bancaire et financière de tous les acteurs de la vie économique, socialeet environnementale grâce en particulier aux fonds collectés sur le livret A dont laspécificité est maintenue.” (art.1, Loi 99-352 du 25 Juin 1999).

138 “Les missions définies à l'article 1er de la présente loi ainsi que les projets d'économielocale et sociale doivent présenter à la fois un intérêt en termes de développement localou d'aménagement du territoire ou de protection de l'environnement et un intérêt entermes de développement social ou d'emploi. Chaque caisse d'épargne et de prévoyancetient compte des orientations définies par la Fédération nationale des caisses d'épargneet de prévoyance pour le choix des projets d'économie locale et sociale sur son ressortterritorial ou pour apporter sa contribution à des actions régionales ou nationalesentreprises par le réseau. Les projets d'économie locale et sociale financés par les caissesd'épargne et de prévoyance font l'objet d'une annexe détaillée au rapport annuel de laCaisse nationale des caisses d'épargne et de prévoyance.” (art.6, Loi 99-352)

• Italy

De-segmentation was less of a concern in the 1990 reform in Italy –but then savings banks were already on operational parity withcommercial banks, as mentioned above. The existing regulatorysegmentation, which distinguished short-term versus medium andlong-term lending, and lending to large firms versus lending tohouseholds and SMEs, had been loosened in regulatory practice(see previous chapter) and did not discriminate savings banks fromother banking institutions. The de-segmentation that followed(especially in 1993 with the Testo unico, which allowed all banks tolend both short and medium term) concerned all banks as well, anddid not distinguish legal categories. Article 10 of the 1993 TestoUnico was straightforward, in that regard: it defined banks as firms(“a bank has the character of a firm”), whose scope is to collectdeposits and lend money139.

5.3 The process of change: the role of ideas, interestsand institutions

In both countries, a single process of change can be identified; despiteshifts, turns, persisting ambiguities and contradictions, the 1999 and the1983 reforms in France and the 1990 and 1998 reforms in Italy show anunderlying, consistent idea of what savings banks should be. But theconcrete “policy outcomes” were variable and incremental, and theorigins of change were overlapping. In order to trace the causes ofregulatory change, it is therefore necessary to decompose the process ofchange and analyse its different layers separately140. To do so it is possibleto identify (i) the broader context that emphasised the need foradjustment; (ii) the debates surrounding the reform and (iii) the policyand institutional context which shaped the reform pattern.

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139 “La raccolta di risparmio tra il pubblico e l'esercizio del credito costituiscono l'attivitàbancaria. Essa ha carattere d'impresa.” ($1, art.10, Decr.Leg. September 1st, 1983, n.385)

140 A few scholars have recently put renewed emphasis on theorising process of change: seeBlyth, 2002 and Pierson, 2000.

The hypotheses explored here are the following (see also chapter 2):(i) faced with external pressures to adjust, savings banks’ top managementin both countries transformed this necessity into an opportunity forpushing their own agenda through regulatory reforms; (ii) the divergentpolicy outcomes arise less from the “rigidity” of political institutions thanto the peculiar socio-economic inheritance of savings banks that constrainedtheir managers’ modernisation designs.

5.3.1 The role of exogenous shocks and of persistingmarket failures

As argued in chapter 4, the macroeconomic shocks of the 1970s andthe failure of administered credit to mitigate their impact on the financialand real sectors dramatically altered the “matrix of constraints andincentives" faced by banks in both France and Italy (and, arguably, otherEuropean countries). At the outset of the 1980s, both economies werecharacterised by: (i) rising inflation and unemployment (stagflation);(ii) severe balance of payment problems; (iii) external constraint oneconomic policy – especially capital flows and speculative attacks onthe French Franc and the Italian Lira. As seen in the previous chapter,the macroeconomic policy framework was radically transformed duringthe 1970s. First, monetary policy shifted from an accommodating tooltargeting monetary growth to an autonomous, restrictive policy aimed atbringing inflation down through higher interest rates. Simultaneously,expansionary fiscal policies were progressively abandoned, given both theexternal constraint and rising public debt, which, in the context ofpositive (high) real interest rates, made public spending very costly.

In summary, strong and persistent exogenous shocks141 durably modifiedthe macroeconomic policies of France and Italy and, simultaneously, led firstto a strengthening, then to the gradual dismantling of state-administeredcredit. By 1982 in France, and 1982-84 in Italy (with the successive PianiSportelli), it became clear that credit market de-segmentation wouldcontinue. Together with positive real interest rates, the increased rolegiven to the stock-market in allocating credit, the diminution of inflation,and the diffusion of technological innovations led bankers to changetheir expectations concerning, in particular, future competition in thevarious segments of the banking market.

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141 Of course, as emphasised in chapter 4, exogenous shocks were partly the results of endogenouscontradictions in the post-war accumulation regime, as regulationists have observed.

Similar shifts in expectations were brought about by regulatory reform atthe European level. As seen in the previous sections, the First BankingDirective, in 1977, first laid out the alternative foundations for bankingregulations in Europe: shift from structural to prudential regulation,market de-segmentation, liberalisation of entry (especially for Europeanbanks desirous to operate in other countries than their country of origin),homogeneisation of legal categories. Those principles formed the pillar ofbanking regulatory reform throughout Europe in the 1980s.

Together with those changes in their macro and policy environment,French and Italian savings banks suffered from problems of their own,which increased the emphasis on the need to change. French savings bankswere small, mono-product institutions, plagued with labour-managementconflicts (1979 and 1980 saw a record number of strikes in the sector;and a well-publicised essay, in 1978, identified the “privileged” status ofsavings banks staff as one of the “scandals” of “corporatist France”)142.When it became clear that the State would not replenish savings banks’equity, savings banks’ under-capitalisation became problematic in theprospective of greater competition and prudential regulation143.

Italian savings banks suffered comparable problems: insufficient equitylevels, blurred ownership and governance, and a segmented market.The size of equity was indeed often used in public debates on Italianbanking, and the argument went well beyond the necessity to complywith international prudential regulation, in particular the ratios set up bythe Bank for International Settlements144. Size was seen as a prerequisiteto face greater competition. This was a point repeated by interviewees aswell. As one of them said, “it was a question of life or death”145.

The variety of banking categories was not perceived to be a problem per se.Interestingly, neither was, at first, the efficiency of savings banks. In manyinstances Governor Ciampi opposed the simplistic view that Italian bankswere less efficient than their European counterparts146. Efficiency didbecome a problem later on (after the Amato-Carli law was passed).

155

142 De Clozets, 1978.143 Prudential regulation building, as mentioned earlier, on patrimonial ratios to measure the

solidity of single banks and, therefore, their capacity to operate certain business activities.144 With the 1988 Basel agreement.145 Interview, November 2002.146 See in particular Ciampi (1982b), where the governor refers to a OECD study to relativise

claims on the inefficiency of Italian banks.

In fact, several observers note that the failure of the 1994 Dini directiveto encourage a sale of banking shares by the Fondazioni was due to thelow market value of savings banks as compared with their accountingvalue147. It was not a fiscal problem, but an economic one: the lowmarket value reflected the low profitability of CR148. But one intervieweeturned the argument on its head: the Fondazioni did not sell their sharesbecause the markets were low and there were no potential buyers…Whatever the interpretation, in this case, efficiency was seen as instrumentalfor the privatisation of banks, not as a problem per se.

This combination of pressures – exogenous shocks, shifts in macroeconomicpolicy, European regulatory reforms, and internal problems – formedthe backdrop of regulatory reform in both countries. In fact mostinterviewees, both in France and in Italy, underlined the “naturalness” ofthe reforms. That is, in their view the legal reforms brought a solutionto the “problems” of savings banks (low equity, blurred property rights)in line with savings banks’ “tradition”. This harmonious reconstruction ofpast events should be taken with caution. First, interviewees often showa tendency to offer re-collections that fit their actual positions/ideas.In this particular case, respondents at the head of savings banks or withinregulatory positions at the time of the reform might simply want to givethe impression that they did nothing wrong – in fact, did nothing butstick to the natural “course of history”. Secondly, we all have tendenciesto retain the outcome of the process as the logical or natural one –forgetting all the twists and turns that occurred all along the process.

More importantly, the nature of the specific problems faced by savingsbanks, as well as the peculiar context that made them salient do notexplain, by themselves, the outcome of the reform or the reform process.How do we understand, for instance, that new ownership took the form,in Italy, of privatisation and in France of the creation of a cooperativegroup? To get a more comprehensive understanding of the reformprocess and outcome, it is necessary, therefore, to pay attention to theformation of a policy consensus and to the political dynamics that led tothe 1983 law in France and the 1990 law in Italy.

156

147 This point was also made during the parliamentary debates around the Ciampi-Visco reform.148 See GU n.322, 1990

5.3.2 The resistible rise of a consensus about bankingand state intervention

Before addressing the causal role played by ideas in the process ofregulatory change, it is important to understand what those ideas wereat the core of the reform in both countries and where they came from.Of course, such important reforms contained or made explicit a full rangeof ideas of all sorts. We can distinguish two sets of ideas related to twomajor issues: the role of the state in the economy and the nature of thebanking firm. I am arguing here that the regulatory shifts of the 1980sand 1990s in the French and Italian savings banks sectors reflected aprevious transformation of these two core ideas within the policy circles.These core ideas are themselves surrounded by several policy ideas:privatisation, de-regulation on the “state” side, and statutory normalisation,market de-segmentation on the “bank” side. It is necessary to distinguishbetween these two strands of ideas (primary and secondary) because, ifthe latter were still hotly debated during the 1980s (witness the debatein Italy around the issue of the public or private nature of the Fondazioni),the former were already soundly established and rooted in the academicand regulatory circles.

As emphasised in the first part, the 1983 law in France was still ambiguousas to where the savings banks should fit in terms of ownership: public orprivate, the issue was still open during most of the 1980s. Indeed, thecritical issue spurring from the 1983 law and from the surroundingparliamentary debates was that of the adjustment of the Caisses to anevolving economic reality while not questioning the historical ‘mission’and, above all, the role played by the Caisses in providing credit to localgovernments. But this ambiguity did rely on a growing consensus onwhat savings banks should be allowed to do as banks. Several timesduring the debate the assertion was made that “banks were firms like allothers” despite the specific additional characteristics inherited by savingsbanks from their past. This was the sense of the intervention of theMinister for Finance (Jacques Delors) at the Senate in December 1982149.It was also re-iterated several times by the government representativeat the meetings of the Senate Finance Committee, as well as by theRapporteurs at the Senate and the National Assembly.

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149 See JO des Assemblées, n.2454.

These orientations were shared by senior staff at savings banks as well.Those ideas stood at the heart of the “Ancian Report”150, which waswritten by a working group set up jointly by the Union Nationale desCaisses d’Épargne de France (UNCEF) and the Caisse des Dépôts etConsignations. Interestingly, the report, while stressing the peculiaritiesand the crucial role of savings banks in “directing the country’s savingstowards priority objectives”151, also asked the permission for savingsbanks to operate fully as “family banks” – in essence, the members ofthe Ancian working group pledged for the lift of the ban on many of thedeposit and lending instruments available to commercial banks, and onthe means of payment as well. So both the Ancian working group andthe 1983 law-makers seemed to share the same normative view onbanks: namely, that they were doing a business inherently private, andthat they should compete with each other.

This should not come as a surprise, since the first part of the 1983 lawgot its inspiration mainly from the Ancian Report. This was confirmedby interviews with the main actors behind the policy change. In summary,all interviewees who were working in the savings banks in the earlyeighties confirmed that they saw as “inevitable” the shift towards fully-fledged banks operating within a competitive market. The same view washeld by policy-makers.

As for the ideas on the role of the State, evidence is more ambiguous.In 1981 a Socialist party-led majority won the Parliamentary elections,with an agenda centred on the “break” with capitalism. During the first100 days in power, the new majority indeed launched a number ofreforms that ended up in considerably extending the State’s reach on theeconomy (in particular through a wave of nationalisations). But two yearslater, after the famous U-turn operated by President Mitterrand, thepolicy direction radically changed. It is in this context that the 1983reform of savings banks took shape, reflecting the ambiguous direction.

In Italy, the idea of the bank as a firm was not popular among politicians, atleast until the mid-1980s. In 1982, the then central bank governor, CarloAzeglio Ciampi, argued publicly that Italian banks were not that inefficientcompared to other systems. In fact, he argued, quoting a comparisonby the OECD, while spreads in Italy might be large, the margin ofintermediation was lower in Italy than in the UK, but higher than Germany.

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150 UNCEF/CDC, Pour un redéploiement du réseau Caisse d’Épargne – Caisse des Dépôts etconsignations, December 1981.

151 Ibidem, p.2

In the late 1970s, all banks underwent a compression of their revenuesbecause of growing competition by public bonds and quantitative limitson credit expansion (“il massimale”).

The private-public debate stood at the core of three law proposalspresented to the Parliament by various political groups in the late 1970s.A first one, presented in February 1977 by several MPs belonging to thePartito Socialista Italiano152, aimed at giving local governments powerover savings banks direction and management. This was a clear attemptat rooting savings banks in the public realm, in a definitive fashion153.That proposal was “re-proposed” a year later, before the Senate, with thesame success (it was never debated)154. A second law proposal waspresented in the Parliament in 1981, this time from MPs belonging to theCommunist Party155. This proposal, too, aimed at creating strong organiclinks between savings banks and local governments, even though itmaintained most of the existing governance mechanisms (in contrast tothe previous proposal)156. A third proposal, contemporary to the first one,was presented by deputies belonging to the Christian Democrats Partyin 1977157. This proposal differed from the other two in that it concernedall “public” banks (that is, savings banks, BIN and Istituti di CreditoPubblico), and tackled another issue: that of the ‘politicisation’ of thosebanks – which was quite ironical given Christian-Democrats’ presence incredit institutions. The goal set out in the proposal was to de-politicisepublic banks through the strengthening of monitoring and supervisionmechanisms (with, for instance, the creation of an ‘elders’council’).

159

152 Proposta di legge Signorile, Colucci e altri presentata nella seduta del 24 febbraio 1977,recante Modifiche all’ordinamento delle Casse di Risparmio e dei Monti di credito supegno di 1a categoria, Camera dei Deputati, Legislatura VII, Atti Parlamentari, Documenti– Disegni di Legge – Relazioni n.1205.

153 According to Clarich (1984), this proposal bore the risk of putting an end to savingsbanks’ autonomy as well. In that sense, the proposal shows a strange filiation with thelaw proposal presented by Giulio Tremonti twenty five years later for the Fondazioni…

154 Disegno di legge Cipellini, Scevarolli e altri comunicato alla Presidenza il 22 novembre1979, recante Modifiche all’ordinamento delle Casse di Risparmio e dei Monti di creditosu pegno di 1a categoria, Senato della Repubblica, Legislatura VIII, Atti parlamentari,Disegni di Legge – Relazioni – Documenti, n.503.

155 Proposta di legge D’Alema, Alinovi e altri presentata nella seduta del 14 luglio 1981,recante Nuove norme concernenti l’ordinamento e le funzioni delle Casse di Risparmio edei Monti di Credito su Pegno di prima categoria, Camera dei Deputati, Legislatura VIII,Atti Parlamentari, Disegni di Legge – Relazioni – Documenti, n.2712.

156 Clarich (1984) emphasised the difficulty to reconcile the principle of linking savings banksand local government with the goal of giving a major operational flexibility to savingsbanks (Clarich, 1984, p.134).

157 Disegno di legge Grassini, Bartolomei e altri comunicato alla Presidenza il 4 ottobre 1977, sullaAmministrazione degli Istituti di Credito di Diritto Pubblico e nomine relative, Senato dellaRepubblica, Legislatura VII, Atti parlamentari, Disegni di legge – Relazioni – Documenti, n.91.

A common feature to all three proposals was the emphasis given togovernance mechanisms in reaching the reform’s objectives. Moreinterestingly, though, is the fact that none of those proposals foresaw theprivatisation of public banks – or even, at least, the possibility of openingup public banks to private interests and purposes. But the failure of theseproposals to gather consensus and eventually become law testifies thedifficulty to reform public banks in the other direction as well. In otherwords, politically, the situation was stalled, and the predominance of“public” conceptions of banks did not translate into legal reforms.

At least, however, those proposals succeeded in encouraging savingsbanks to elaborate a common position. The opening statement at thetwelfth national congress in Bologna in 1977 was a direct reply to thesocialist proposal: savings banks firmly opposed any organic linkagesbetween them and local governments. Instead, savings banks re-affirmedtheir claim to be put on operational parity with commercial banks158.The public horizon of savings banks remained, in their eyes, justified, butonly as a correction to the “excesses that a market economy can lead to,so as to ensure the balance between […] the security of deposits and thesupport to those subjects enduring inflation159.”

This clear position expressed by savings banks gave rise, accordingto Clarich, to the “second phase” of the debate about public banks, asthe same author calls it (Clarich, 1984), in which the central bank playedan important role. Indeed, the conception of banks as private firms tookroot at Banca d’Italia in the 1970s, under the last years of Guido Carli’sgovernorship. The yearly reports of the central bank give a good overviewof these changes in the institution’s thoughts about banks and thebanking market during that period. In the 1971 annual report, forinstance, Governor Carli insisted on the public nature of the bankingsystem160. In the 1973 and 1974 reports, the focus had shifted to theefficiency of the banking system as a whole. Later on, the governorshipof Carlo Azeglio Ciampi (the actual President of the Republic) wasmarked by the same emphasis on efficiency of the banking sector, whichimplicitly relied on the idea that banks were to operate as private firms.

160

158 According to Clarich (1984), this means that “The acceptance of the challenge of themarket and of competition justifies the call for a revision of the existing regime, where iteither favours or impedes the category.” (Clarich, 1984, p.137)

159 Final motion to the XIIth national congress, cited by Clarich (1984, p.137).160 “Considerazioni finali”, in Banca d’Italia (1971), Relazione annuale.

But this did not entail any plea for the reform of the system from the partof the Central Bank. The Governor made this point repeatedly over theyears: in 1980, for instance, he wrote that “public and private banks area given in our credit system, which chose the firm as a model for the exerciseof banking activities”161. Two years later, in a conference on savings banks,he made this eloquent remark: “in savings banks publicness is where it is”162.Again, in the 1982 annual report of Banca d’Italia, the Governor repeatedthe same notion163. The official position of the regulatory body was thusto re-assert that banks were above all banking firms, and should operateas firms; but this should not entail a break from the actual system.

Two White Books on public banks were released by the Central Bank in1981164 and 1988165, which synthesised this view and translated it intobroad policy ideas. The 1981 White Book began with an analysis of thebanking situation that emphasised its “private firm-like” aspects, in particularthe facts that on the operational side there were fewer and fewerdifferences between public and private banks, that there was no specificbanking activity that could be linked to the public nature of banks166, thatnon-banking purposes were doomed to disappear167. As a consequence, theBanca d’Italia clearly set the stage for the pursuit, from the part of publicbanks, of business goals similar to those of private, commercial banks168.Furthermore, the 1981 White Book suggested that the most appropriateform of organisation for banks was the joint-stock company169. The diagnosisoffered by the central bank was, therefore, unambiguous; this was not thecase of the prognosis, in which most of the previous discussion was left aside.

161

161 “Considerazioni finali”, in Banca d’Italia (1980), Relazione annuale.162 “Non si ha da far distinzione tra enti pubblici e enti privati ma piuttosto tra aspetti

pubblici e aspetti privati, relativamente al medesimo ente. Nelle CR la pubblicità c’è dovec’è: essa non s’addice alla loro attività di impresa che per sua natura neutra edassoggettata al diritto privato.” (Ciampi, 1982b, p.33)

163 “La redditività e l’efficienza sono comunque criteri fondamentali validi anche per questiintermediari, in quanto connaturati all’attività commerciale intrapresa, pur nell’ambito diuno scopo non identificato in via immediata nel lucro” (Ciampi, 1982b, p.31).

164 Banca d’Italia (1981), Ordinamenti degli enti pubblici creditizi; Analisi e prospettive,Roma: Banca d’Italia.

165 Banca d’Italia (1988), 166 “non potendosi individuare un nesso di strumentalità delle operazioni bancarie con speficiche

e contingenti finalità pubbliche perseguite dall’ente.” (Ibid., p.7) And, later on, “l’attivitàbancaria di un ente pubblico è del tutto identica a quella di una banca privata” (Ibid., p.7).

167 “Le finalità extra bancarie sono oggi venute meno o perché direttamente perseguite dalloStato quali funzioni sociali o perché assorbite dalla tutela del risparmio, che è affidataall’ordinamento bancario nel suo insieme” (Ibid., p.6).

168 “L’organizzazione degli enti pubblici creditizi deve consentire e anzi favorire lo svilupparsidella logica della redditività nell’agire degli organi e nei rapporti tra i medesemi.” (Ibid.,p.7).

169 “Il modello organizzativo più appropriato alle attività imprenditoriali è, nel nostro ordinamento,quello della società di capitali, e la stessa identità d’azione della banca pubblica e dellabanca privata rende opportuno riferire la struttura a un medesimo modello.” (Ibid., p.8)

The authors of the 1981 White Book focused, instead, on the problemof the low levels of equity among public banks and how to solve them.As Revell (1994b) rightly points out, additional capital can come fromonly two sources: retained earnings added to reserves and fresh capitalinjections raised on capital markets (or by owners). The authors of theWhite Book proposed, for those banks which had not been incorporated(and thus for savings banks), to create, alongside the banks’ equity(fondo di dotazione), an additional fund formed with the subscription ofspecial shares issued by the banks (azioni di risparmio), which would notbear any claim on the banks’ management. Even more obscure is the partdedicated to changes in banks’ governance mechanisms, which wereconceived to give more room to new stakeholders. After reviewingalternative solutions (among them a strict separation between ownershipand management, which was to come back with the 1990 law), theauthors recommended170 to keep the ‘firms’ as they were, with minorityshares eventually given to financial institutions. That configurationwould, according to the authors, ensure banks’ corporate developmentwithout running the risks of being too exposed to market forces171.

As we can see, the central bank did not come up with a clear roadmap,despite a seemingly unambiguous diagnosis and the recognition thatpublic banks were in all aspects similar to commercial banks. The 1981White Book was, nevertheless, important in that it was to be the officialposition of Bankitalia for the successive years (until the 1988 WhiteBook). It was important also because it faithfully reflected the views heldby the Banca d’Italia’s top executives. In fact, it was written by theGovernor’s closest collaborators. Why this ‘timidity’ (or lack ofimagination) in the prognosis? One interviewee, who was at Bancad’Italia at that time, said that the White Book, and the subsequentinaction of Banca d’Italia towards the reform of public banks, simplyreflected the Governor’s political shrewdness; in other words, it fit thestrategy then pursued by the Governor, who did not want to appear totake sides in a political contest.

162

170 This option was presented as the one best preserving the local characteristic of publicbanks, or “la caratteristica e i limiti di organismi legati forse troppo rigidamente all’ambitoterritoriale originario.” (ibid., p.12).

171 Dall’instaurarsi di questi rapporti potrebbero derivare più ampie possibilità didiversificazione degli impieghi e dei rischi, contribuendo anche per questa via alla soliditàcomplessiva del sistema.” (p.12).

The 1988 White Book was very different from its predecessor. But it wasmade public at the time when discussions over the reform, betweensavings banks and the Minister of Treasury (Giuliano Amato), werealready under way. Analysing the motives behind Banca d’Italia’s cautiousbehaviour is beyond the scope of this chapter. Suffice to say here that thetwo White Books both revealed the fact that top central bank officialswere convinced of the “private business” nature of banking at least asearly as 1981; and that, at the same time, they would not be among theforces of change to put those ideas into practice.

Later on, the reception of the 1990 law was quite positive, as shown bythe introductory remarks by several directors of savings banks at the 65thworld savings day. This reaction marked a clear change from the past.Until the late 1980s, privatisation was not only out of question, it was a“non problem”, as Cariplo’s president (and president of the ACRI) thendeclared (Ferrari, 1985). We can also use here a counterfactual: the merefact that the savings banks did not oppose the 1990 reform through legalmeans is indicative. Indeed, by contrast, the Fondazioni did not hesitateto resort to the administrative courts in 1994, against the Dini directive,and more recently, in 2002, against the reform designed by MinisterTremonti. The “welcome” given to the Amato Law in 1990 was alsoemphasised by Clarich (1998).

By the time the reform process started, in both countries there was abroad consensus about the future of savings banks on the one hand, andthe role of the state as a regulator on the other hand. But ideas do nothave the power to impose by themselves. Why did the ideas pushedforward by regulators and savings banks’ top management in France andItaly become law? To understand this last aspect of regulatory change,one should consider the political dynamics at play in both countries at thetime of the reform.

5.3.3 Seizing the political window of opportunity

Regulatory change took place, in the two countries, at a time of profoundand rapid political change. As mentioned above, the context of the 1983reform in France was very peculiar. The Socialist government went topower in 1981 on a left-wing platform, characterised by ambitious plansto reform the economy.

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The first year of the Mitterrand presidency was characterised by a waveof nationalisations – especially nationalisations of banks - unprecedentedsince the immediate post-war period172; reforms of the labour market;and two devaluations. However, the policy alternative was quicklydefeated by the exchange rate crisis and the failure of the ‘reliance’ in aninternational context of economic stagnation. Reforms were put to a haltby those within the elite bureaucracy and the Socialist party whoconvinced Mitterrand that the financial situation was not allowed tocontinue along the path chosen in 1981. Both the 1981 alternance andits reversal in 1982-83 provided a window of opportunity used by someof savings banks’ top executives. In fact, the Ancian working group wasset up in June 1981, just a few months after the election. Both the timingand the explicit mandate of the working group were clearly aimed atinfluencing the new government, at a time when expectations for reformwere high.

In Italy, by contrast, until the early 1990s there was no real change in thepolitical balance of power that opposed, since the postwar period, theChristian Democrats (in power) and the Communist Party (in theopposition). Bettino Craxi’s Socialist government, in 1985-86, did seem torepresent a political alternative, but its existence relied on tacit support bythe Christian Democrats – and the experience did not last long. Its mosttangible effect, however, was to bring to power a team of reformists fromthe North. Only the collapse of the Christian Democrats, triggered byfiscal crisis and the “clean hands” anti-corruption trials of 1992-1993put an end to the previous political regime and opened the way to regimechange. Again, change was brought about through an alliance betweenkey bureaucrats, policy-makers and savings banks officials. Minister Amatoset up in 1988 an expert committee composed mainly of academics whohad been involved in drafting the central bank’s second white book andlinked to the savings banks world.

Here the comparison is enlightening. It tells us that in both casesthe regulatory reform occurred at a time when a broad alternativemacroeconomic policy had been tried and had come to a halt.Both political alternance and its shortcomings constituted the windowof opportunity through which the reform could succeed.

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172 loi no 82-155 du 11 février 1982 de nationalisation.

5.4 Discussion

5.4.1 Convergence and divergence in the regulatory reformof the savings banks sector in France and Italy

As set out in the introduction to this chapter, when discussing recent trendsin national capitalisms most scholars agree on a descriptive hypothesis:that is, there is a certain level of regulatory convergence between nationalregulatory regimes. The evidence presented here does provide supportfor this hypothesis, with two important caveats however. First, the datashow that if convergence is undoubtedly occurring, divergence is occurringas well and simultaneously. Put differently, convergence is not the onlyforce at play in the regulatory evolution experienced by France and Italyover the past twenty years. It is interesting to note how the public-privateequilibrium in savings banks was solved in radically different manners,but at the level of the banking system these two opposite solutions in factfit within a very similar, if not identical trend.

The other two hypotheses presented in the introduction to this chapterdeal with the causes of convergence and divergence. Several scholarsclaim that while convergence is the outcome of mostly external pressures,namely globalisation and europeanisation, divergence, on the opposite,is the product of the resistence of national institutions to such pressures.Whether convergence wins over divergence, or vice-versa, depends onthe relative strength of such institutions – and the sustainability of thesituation. In any case the two are elements of the same ‘dialecticalmovement’: external pressures versus national mobilisation of resources.

The findings presented here do not support that view. They do not denythe role of either globalisation or europeanisation pressures. Rather, thoseplayed at most as the “trigger” of change, and at least as a “catalyst” forchange, giving an institutional justification to the deep reformsundertaken by governments in both countries. This is exactly the reverseof the thesis that ideas are pure justification of political reactions toexogenous change. Again, I am not claiming here that ideas – especiallyacademic ones - have it all. Far from it. As Lee said, “As a workinghypothesis, one might suppose that some modicum of conceptual gloss(or, alternatively, some veneer of empirical verisimilitude) made an ideamore attractive to policy-makers than it would otherwise have been”(Lee, 1989, p.144).

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Moreover, regulatory change was neither the direct translation of businessgroups’ demands for re-regulation (as claimed, among others, by Soskice1999), nor the automatic reflection of international pressures, nor thesole expression of insulated elites’ reformist projects. Regulation shouldnot be understood as a functional part of the system; neither should it beviewed as a pure autonomous force.

Mostly, reform resulted from the intertwining of political change, changein economic conditions, and the maturing of specific ideas regarding thenature of banking firms and the role of the state in the economy. This mixof factors bears some resemblance to the Spanish financial reformsanalysed by Sofia Perez. According to that author the success of financialreform in Spain depended on the presence of at least three factors: (i) theway identities, networks and conflict among state elites are configuredover time; (ii) the extent to which economic change interacted withdomestic political conditions to alter the influence of different groups ofpolicy-makers; (iii) the nature of the relationship between the financialsector and non-financial firms. In Spain, regulatory reforms were domesticallyrooted: “political struggles within the state served as the impetus forregulatory change, changing economic conditions as a facilitating factor, andaccommodation with the banking sector as a constant” (Perez, 1997: 43).

A second hypothesis mentioned in the previous chapter is that convergenceprimarily resides in a change of path, while divergence results from pathdependence. But, again, the two cases under study point to a differentconclusion. Against path-dependence stands the fact that savings banksin France did not originate in the cooperative movement of the late XIXthcentury, and never had a similar governance structure to that created inthe 1999 law. In fact, many interviewees within the French savings banks(both at the national and local level) pointed to the novelty of such astructure, and to the necessity for them to “learn” how to make it work.Some interviewees also pointed to the Crédit Agricole to show thecontrast between the two establishments – the Crédit Agricole beingborn out of the cooperative governance structure.

Similarly, the creation of Fondazioni in Italy was also a “break” from the“path”, in the sense that for the first time the banking function and the socio-economic redistributive function were clearly separated. Although theFondazioni were referred to by their creators (and by the savings banksthemselves) as a “natural” development, they represented a clear departurefrom the century-long historical path followed by savings banks in thatthey asserted the necessity to separate these two functions.

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5.4.2 Firms-led adjustment?

The evidence presented above shows how savings banks in bothcountries have been at the origin of regulatory reform and have tried toshape the policy outcome, both through setting the agenda and seizingthe window of opportunity offered to them by the changing politicalenvironment. Those findings are in line with other works on adjustmentprocesses in France and Italy during the 1980s. Hancké (2002) shows how,after the failure of government-led industrial reforms in the early 1980s,French large firms took the initiative, building on the changing labour andfinancial environment secured by the state. In that way, large firms couldshape their own adjustment pattern. Similarly, Bianchi et al. (1989), dealingwith privatisations in Italy, argue that in that country the privatisationprocess was not driven by political or government programs, but by publicenterprises and agencies in order to reorganise and regain autonomy.Companies to be privatised were selected by the state holding managementat the IRI, ENI, EFIM – a prerogative recognised by the Parliament.

Those processes were initiated with changes in top management atthe IRI and ENI in 1982, the new managers being less disposed than inthe past to undertake the variety of “public goals” (rescue of ailing firms,investments in strategic resources, employment protection, developmentof the Southern regions) that had been assigned to the state holdingsand led to a multi-purpose industrial policy. These cases underline thesecond characteristic of this firm-driven adjustment process: the key roleplayed by top management in the process. In particular, in the case ofFrance and Italy, top managers’ pursuit of managerial autonomy (fromstate and political directions) drove the process of regulatory change.Top managers, who were a minority in savings banks staff in bothcountries, built on both the exogenous shocks and the political windowof opportunity to impose their views on all other stakeholders: regulators,policy-makers, savings banks employees.

Once the reform was passed, savings banks’ top management couldgo ahead with their adjustment strategy, and proceed to build strongbanking groups able to compete in a de-segmented banking market.

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169

SAVINGS BANKS’ CORPORATERESTRUCTURING ANDSECTOR ORGANISATION

6.1 Introduction

As seen in chapter 5, the policy reforms of the early 1980s in France andearly 1990s in Italy aimed, in part, at re-organising the savings bankssector in both countries, so as to respond more adequately to a rapidlychanging environment. Chapter 5 showed how similar concerns, insimilar situations, led to diverse adjustment paths, from a policy point ofview. It showed, moreover, that such diversity has more to do withpeculiar dynamics and long-run historical legacies than to political orinstitutional path-dependence. This chapter will build on the previous oneby looking at the post-reform restructuring path followed by the savingsbanks sector in the two countries. Then, again, the question addressedby this chapter is twofold: first, is there a diversity; secondly, can oneattribute these differences to the distinct paths taken by policy reformevoked in the previous chapter? In other words, does the outcome of therestructuring process, fifteen years or so after the reforms, mirror theoutcome of policy reforms? Or are there other factors at play?

This chapter focuses on two related aspects of savings banks transformationduring the 1980s and 1990s: the re-structuring of savings banks through(mainly) mergers and acquisitions and the transformation of savingsbanks’ sector organisation. These two elements could be labelled,respectively, as the “external boundaries” and the “internal density” ofsavings banks sectors.

6. THE CHANGING BOUNDARIESOF COORDINATION:

6.2 Shifts in savings banks’ corporate boundaries

6.2.1 Mergers and acquisitions in the savings banks sector

Both French and Italian savings banks have seen their numbers drop inthe eighties and nineties. In France, there were 451 Caisses d’épargne in1980, a number reduced to 33 by June 2003. In Italy, a same trendtowards a drop in numbers can be observed, albeit considerably lesspronounced: there were 90 Casse di risparmio in 1980, 65 in 2002173.Although they belong to different scales, which we will analyse later on,changes do follow the same decreasing trend. This trend is continuousover the years; it concerns, moreover, and perhaps more importantly, allcategories of banks. The total number of French credit institutions fellfrom 1975 in 1980 to 879 in 2003; the total number of banks strictosenso174 from 1025 to 479. Similarly, the total number of Italian banks fellfrom 1250 in 1980 to 841 in 2000. All sectors were affected: commercialbanks, cooperatives and savings banks. This is a strong indication thatsame dynamics were at play in all segments of banking.

Moreover, such a drop in numbers (the IEF 1999 report calls it “naturalattrition”) occurred in other European countries as well: the number ofSpanish savings banks fell from 81 in 1984 to 51 in 1996; in Austria, thenumber decreased from 131 to 74 over the same period; and in Norway,there were 133 savings banks in 1996 against 227 in 1984175.

The decreasing number of banks in both countries reveals an intense processof change in ‘corporate boundaries’ through mergers and acquisitions.And this is, again, true for all types of banks176. In France, althoughsimilar data is not available, almost 95% of the drop in numbers ofsavings banks can be attributed to mergers and acquisitions177.

170

173 Those are the numbers of legal entities, and do not reflect the fact that a) many Italiansavings banks belong to banking groups and b) all French savings banks are parts of asingle group. Those aspects will be addressed below.

174 Credit institutions include banks and other types of financial intermediaries: investmentfirms, specialised credit institutions (leasing or factoring firms), and so on.

175 All numbers cited in that paragraph are extracted from the IEF 1999 report.176 Although it has slowed in the past few years, this trend has not stopped. For instance,

the French Banques populaires group recently announced further mergers among itsmember banks in Alsace, thus bringing the number of Banques populaires to 20 by theend of 2003 (down from 42 in 1970). See “Banques Populaires: le Haut-Rhin va fusionneravec Strasbourg”, in Les Échos, February 2003.

177 According to Lacoue-Labarthe, 2001.

This restructuring wave was not the work of, say, an aggressive group ofinvestors desirous of building financial groups. First, mergers were moreimportant than acquisitions178. Secondly, most banking acquisitions thatoccurred during that period were “friendly” acquisitions179. Thus, onecan say that this restructuring wave was the expression of a shared view,at least among banks executives180.

Given the evolution common to all kinds of banks, it is, therefore,possible to accept one hypothesis widely held in the current literature onbanking181: that M&As were motivated first and foremost by the feltnecessity to increase individual banks size in front of the seeminglyirresistible de-segmentation of the banking markets. Other motives arethe cession of certain activities by groups willing to specialise in someactivities; the strengthening of their presence in “métiers de base”(traditional activities) through acquisitions; internal restructuring to simplify/adapt internal structures to the evolution of the market/clientele.

As the then future president of the savings banks group, Charles Milhaud,said in 1989:

“We are going to witness, all around the world, the emergence oflarge groups with specialised branches. Indeed it is not possible for abank providing, for instance, cashier services, to be competitive, interms of the financial offer, with a bank that does not provide suchservice and does not bear network costs.182”

Milhaud added, two years later:

“Such restructuring aims at providing the network’s firms – this termof “firm” is important – with a sufficient size, especially in terms ofown funds. This would allow them to ensure the full management oftheir balance sheet and adjust to the market’s new conditions.183”

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178 A merger is an agreement between two legally autonomous economic units that decide tobecome one; acquisitions, by contrast, denominate the absorption of one firm by another one.

179 Hostile acquisitions, or takeovers, often occur on a market where a firm’s shares can bebought and sold easily. Acquisitions of non-publicly listed firms (which was the case forthe majority of Italian banks in the early 1990s) cannot proceed without the decision byequity share holders to actually sell those shares.

180 This is an important restriction, as will be shown below.181 This is also conformed by recent moves by Banques Populaires, officially motivated by the

“need to get out of isolation”. See the previously cited article.182 Milhaud interviewed by Professions du Sud-Est, September 1989.183 Charles Milhaud interviewed in Le Méridional, February 27th, 1991.

As noted by the Institute of European Finance in its 1993 report, “thebulk of M&A activity in banking to date has been domestic and defensive”(Institute of European Finance, 1993, p.9). In fact, this motivationemerges from interviews with savings banks actors as well. All intervieweeshaving played a direct role in the M&A wave of the 1980s – 1990s(12 interviewees in the two countries) emphasised the “irresistible”character of such moves. As one of the top officials of the Cassa diRisparmio di Roma at that time said:

During that period the liberalisation of bank windows was looming,and I realised one thing: the CR Roma would have become the objectof attacks from other banks willing to settle in Rome. Since we couldnot protect ourselves, we had to expand. I had the idea to make abank that would have become strong in the Lazio region. The mergerwith the Banco dello Santo Spirito allowed the CR Roma to strengthenits market shares in Italy184.

But the numbers reported above do not tell the whole story about therestructuring process at work in the two countries. First of all, mergersand acquisitions are but one particular way to restructure business. Otherrestructuring options (less easy to document) were undertaken by manybanks in both France and Italy, two of which can be emphasised: strategicpartnerships or alliances and banking groups. In the present cases,mergers and acquisitions were just part of a wider aggregation processthat took place within the banking system as a whole. Secondly, not allbanks participated into this restructuring or aggregation process: manylocal banks, especially in Italy, remained at the end of the 1990s botheconomically and legally independent.

This is not the case of savings banks. In both countries, all savings banksdid participate in the aggregation process at play in the banking industry.In other words, all savings banks shifted their corporate boundaries,either in a radical and definitive way (through mergers and acquisitions)or in a softer, looser way (partnerships and alliances). All savings banks,therefore, participated in the emergence of banking groups.

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184 Interview, 30.05.03.

6.2.2 The constitution of vertically integrated banking groups

• France

All France’s (remaining) savings banks are now part of a singlebanking group. This group is the outcome of a double aggregationprocess consisting of, on the one hand, mergers between and amonglocal savings banks – resulting in the existence of 33 regional savingsbanks, legally autonomous entities; and, on the other hand, thetightening of operational and organisational bonds among these33 regional savings banks. The group includes, besides regionalsavings banks themselves, several subsidiaries and partly ownedspecialised financial firms. Figure 6.4 shows the shareholdings of theGroupe Caisse d’Épargne, as of early 2004185.

The aggregation that gave rise to the Groupe Caisse d’Épargne is notdissimilar to the restructuring process followed by other groups, suchas the Crédit Agricole, the Crédit Mutuel, and the Banques Populairesgroup. All these groups are, similarly, cooperative banking groups,which consist of a limited number of regional banks (between 20 and40) and a group of national, specialised subsidiaries. Such “federal”groups differ from the vertically integrated banking groups that haverisen around former public banks that were privatised in the late1980s –early 1990s – BNP-Paribas, Société Générale. But all thesebanking groups share the characteristic of being a group – and thishas been a strong trend across most segments of the banking systemduring the 1980s and 1990s.

• Italy

The Italian case is slightly different. There, too, has there been a cleartendency towards the constitution of large banking groups. But variousgroups, of varying nature, coexist and compete. Within the savings banksector itself, one can distinguish three different aggregation patterns,which ended up producing three different kinds of banking groups.

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185 This web of shareholdings is of course doomed to change over time. For instance, inSeptember 2003 the CDC and CNCE announced that they had reached an agreementon a re-shuffling of ownership and control of former CDC subsidiaries, mainly CDC – Ixis.

The first pattern characterises the constitution of national bankinggroups, building on the alliance between a large savings bank andone of Italy’s former large public banks. This pattern corresponds withthe emergence of Italy’s four most important banking groups:IntesaBCI, San Paolo IMI, Unicredito and Capitalia. To these four onemight add two large banks: Monte Paschi di Siena (the oldest Italianbank, which has been legally associated with the savings bankscategory since the late XIXth century) and Banca Nazionale del Lavoro(a former public bank, where the Treasury has kept a small stake).All of these groups were created through a strikingly similar aggregationprocess, in which we can identify four distinct phases: a first phase inwhich a leading savings bank absorbs a smaller one; a second phasein which the resulting groups create specialised subsidiaries; a thirdphase in which the whole group associates itself with another majorformer public bank; and a fourth phase in which this alliancetransforms itself into a new integrated banking group.

This pattern, which one could call the “national universal bank”pattern, appears clearly in the case of the formation of the BancaIntesa group, Italy’s leading banking group (in terms of assets). BancaIntesa’s short history starts with the Cassa di Risparmio delle ProvincieLombarde (Cariplo), historically the strongest and largest of Italy’ssavings banks. In the 1990s, after the Amato law, Cariplo firstacquired shares in a variety of local (Northeastern) Casse di risparmio,namely the CR della Provincia di Viterbo, the CR di Parma e Piacenza,the CR di Ascoli e Piceno, the CR di Biella e Vercelli, the CR di Citta’ diCastello, the CR di Foligno, the CR di Rieti and the CR di Spoleto.A following step was the merger, in 1998, of Cariplo with the BancoAmbrosiano Veneto (Ambroveneto), a commercial bank, to formthe Banca Intesa Group. In September 1999, the group acquiredBanca Commerciale Italiana (Comit), one of the main public bankspreviously owned by the state-owned holding IRI. In December 2000,the group incorporated Cariplo, Ambroveneto and Mediocreditolombardo – and one year later it incorporated Comit, becoming“Banca Intesa BCI”, renamed “Banca Intesa SpA” in 2002.

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Another clear example of that pattern is the constitution of theCapitalia Group. The latter is the outcome of an alliance between aformer Cassa di Risparmio (CR di Roma) and a large former publicbank. The aggregation process started, again, in the late 1980s –early 1990s. In 1989-1991, the Cassa di Risparmio di Roma, whichhad first absorbed the Monte di Pietà di Roma in 1985, acquired theBanco di Santo Spirito (a commercial bank). In 1991 the CR Romamerged with the Banco di Roma to form the Banca di Roma group(officially created in August 1992). In 1997 the Banca di Roma groupacquired shares from the Treasury in Mediocredito centrale (Credit),the other large long-term bank owned by IRI alongside with Comit,to form the Capitalia Group. In the same year, Mediocredito centraleacquired shares of the Banco di Sicilia, Sicily’s large former publicbank. Two years later, the Banco di Sicilia was entirely absorbed bythe new entity. The last move was the acquisition of shares into theBipop-Carire group, itself the outcome of a merger between theBanca Popolare di Brescia (Bipop) and the Cassa di Risparmio diReggio-Emilia (Carire). The Capitalia Group was officially formed inJanuary 2002 with the integration of Banca di Roma, Bipop-Carire,Mediocredito Centrale and Banco di Sicilia. Both the Intesa andCapitalia Groups are vertically integrated but maintain the identity ofthe three main components.

A second aggregation pattern characterises the formation of regionalbanking groups with a strong territorial basis and often alliances withthe Banche popolari, a form of cooperative bank – which one couldcall, therefore, the “regional group” pattern. The territorial elementis fundamental within this pattern: the aim of such aggregation is tostrengthen savings banks’ retail market positions through specialisedjoint-ventures – while keeping the local clientele networks andorganisational flexibility. This pattern is common to several groupingsamong cooperative banks – mainly, small Banche popolari and theBanche di credito cooperativo. A good example of such a pattern isthe Carige Group, which formed around the Banca Cassa di Risparmio diGenova SpA (Carige). The group was created in 1992 and included,besides Carige, Credito Fondiario della Liguria and MediocreditoLigure (both specialised in medium and long-term lending); ColumbusLeasing SpA, Columbus Factoring SpA and Columbus Domestic SpA(all were specialised subsidiaries offering para-banking services, createdby the CR Genova in the late 1980s – early 1990s).

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At first a multifunction group, in 1993 the Carige Group became auniversal bank, with the merger between Banca Carige SpA on theone hand and the above mentioned entities on the other. In 1997-98,the Group grew with the acquisition of controlling stakes in the CR diSavona and the Banca del Monte di Lucca.

Other examples of such intra-sector, regional groupings include theGruppo Bancario Banca delle Marche (resulting from the mergerbetween the CR di Jesi, the CR di Pesaro and the CR di Macerata in1994, and the acquisition of a controlling stake into the CR di Loretoin 1998) and the Gruppo Bancario Cassa di Risparmio di Firenze(which includes, at its head, the CR di Firenze, and the CR diCivitavecchia, the CR di Pistoia e Pescia, the CR di Mirandola and theCR di Orvieto).

A third pattern characterises those (small) savings banks that haveremained independent, or formed a group on their own. These banks,or mono-banking groups are characterised by circumscribed territorialrooting and almost exclusive reliance on the retail market.

Out of 76 remaining savings banks186 in 2002, 16 followed theindependent or small group pattern; 30 were owned, controlled by orheaded a regional group; and 30 belonged to or were controlled bynational universal banking groups.

6.2.3 Factors of divergence: the variety of aggregation patterns

The above two sections clearly show a similar tendency at play both withinand across the Italian and French banking sector: a tendency characterisedby shifts in corporate boundaries (mainly, but not only, through mergers andacquisitions) and the constitution of large banking groups. However, theyalso show strong elements of differentiation in both cases, again bothwithin and across the two banking systems.

There are, first of all, a variety of aggregation patterns within countries.This is clearer in Italy than in France. In the latter, federal cooperative groupshave risen to compete with national universal banks, and it is not clearwhether these groups will move, or not, towards forming universal banks.

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186 That is, remaining legal entities.

In the case of the French savings banks group, the growing centralisationthat has come with autonomy from the CDC certainly points towardsthat direction. That is a view shared by all interviewees, whether theythink it is necessary, inevitable, or regrettable (or all three together).For instance, the price and product policies have been so centralised thatit has become impossible for single savings banks to choose another way.As an interviewee from a local Caisse said,

There are caisses who do not sell some products from the catalogue;but the opposite does not happen. To create a specific product isnearly impossible, for at least two reasons: (i) IT groupings are verydifficult; (ii) you need the agreement from the Caisse nationale187.

And according to another interviewee (a top official at the FNCE):

Personally, I think that after a while the Caisses d’Épargne will losetheir autonomy and become simple bank windows for the financialproducts designed and developed by the group’s specialisedsubsidiaries. All that for economies of scale188.

The same difficulty exists in the Italian case, albeit less evident. As analysedabove, savings banks have followed roughly three different aggregationpatterns (more precisely, two aggregation patterns and one non-aggregation pattern). But is it possible to draw a conclusion at this pointin time? In other words, have aggregation patterns stabilised, or, on thecontrary, do they continue changing? In the latter case, it is possible toimagine that some regional banking groups that have emerged from thecross-provincial alliance between savings banks and Banche Popolari willfurther merge into or become controlled by the four or five majoruniversal banking groups.

This is already the case for several such regional groups, which constitutedpreliminary steps in the formation of integrated national banking groups:the Cardine Group, which was created through strategic alliances andcross-shareholdings between savings banks from Padova, Bologna, Venezia,Udine and Gorizia ended up within SanPaolo IMI.

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187 Interview, 27.06.02.188 Interview, 24.04.02.

The southern Carime group, which emerged out of a 1998 merger betweenthe Cassa di Risparmio Salernitana, the Cassa di Risparmio di Calabria eLucania, and Cassa di Risparmio di Puglia was similarly absorbed bySanPaolo IMI. Another example is Rolo Banca 1473, formed in 1996 bythe alliance between the Credito Romagnolo and Carimonte, itself theoutcome of a merger between the CR di Modena and the Banca del Montedi Bologna and Ravenna. Rolo Banca was acquired and incorporatedwithin the Unicredito Group in 2002. There is no way to be sure that theGruppo Banca delle Marche, or the Gruppo Bancario Unibanca, whichare the outspurts of small savings banks, will not ultimately take the samepath (a similar argument is made in Messori et al. 2003).

The uncertainty about the durability of this pattern variety can be partlybalanced by looking at other segments of the banking system. Regionalgroupings represent a sizeable feature of the whole system – around 95banking groups are identified by the ABI, among which two thirds areregional retail groupings. The regionalisation trend is especially strongamong Banche Popolari, which have in many cases formed alliances withlocal or regional savings banks. Finally, the Italian banking system is stillcharacterised by a high number of small cooperative banks, many ofwhom have formed local alliances.

A second interesting aspect of change – and a second element ofdifferentiation - is the sector dynamics of banking aggregation patterns.In other words, shifts in firm boundaries have occurred mostly withinbank categories: commercial banks with commercial banks, savings bankswith other savings banks… Such intra-sector dynamics were stronger inFrance than in Italy where, as we just saw, the biggest savings bankschoose to form groups by forging alliances with non-savings banks189.As a central bank official said,

Speaking of savings banks in Italy does not make sense any more.Because the Casse di risparmio are a very heterogeneous type of banks.Some of them are still very rooted, linked to the territory190.

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189 Of course, it can be argued that the partners chosen by savings banks for these largedeals were former public banks – and since savings banks were considered as quasi-publicbanks, there is a ‘sectoral’ flavour to the aggregation patterns that brought these bankstogether.

190 Interview, 19.02.02.

In the Italian case, differentiation occurred within the broad category ofsavings banks. The 1999 IEF report rightly points out that “at present it ishard to identify a single strategy for the Italian savings banks sector”,adding that “to some extent, strategies seem to be related strictly to size,which is very heterogeneous”. (IEF 1999, p.125.) The latter is a crucial issue:territory, or “localism” (that is, the extent to which banks or banking groupsare rooted in a particular territory) is clearly a discriminatory variablebetween Italy and France. Several studies document the specific patternof aggregation followed by most small and medium-sized Italian savingsbanks, which reveals a strong ‘sector character’ (Locatelli, 1998) consistingin a deep rooting (and continued investment) into the territory of origin.

In France, M&As occurred strictly within the category. They happened,furthermore, in an orderly territorial way: at the departmental, cross-departmental, and then regional level191, suggesting a very orderedre-structuring process (no cross-regional or cross-sector merger). In fact,sector institutions played a key role in encouraging mergers and shapingthe emergence of integrated regional banks. In late 1989, the CENCEPcommissioned a report from a consulting firm about the network’s futurerestructuring needs and ‘optimum’ size. The report’s conclusions werepresented in May 1990, and the restructuring scheme was adopted bythe CENCEP General Assembly in June 1990, where the director of Caissedes dépôts, Robert Lion, announced, obviously in agreement with theCENCEP, the plan to re-group the 187 existing savings banks into 50 unitsthat should be “strong, autonomous and accountable”192. This decision hadbeen long expected at the CENCEP, but any proposal to further re-organisethe sector had previously met with strong reluctance from the unions,and was a bone of contention between the Caisse des dépôts and theCENCEP. Indeed, the former was keen on keeping a hand on financiallinks between savings banks and SOREFI. One month later, RaymondDouyère gave his own report to the Government. In July 1991, the newreform was passed, which institutionalised the re-organisation of thenetwork. In 1991-92, following both CENCEP’s decision and the 1991reform, savings banks underwent the most radical wave of mergers in theirhistory: in a few months, the number of savings banks fell from 187 to34 – a further reduction compared to the 1990 consulting firm report.

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191 It should be noted, however, that the regional boundaries of the actual 33 savings banksdo not exactly match regions’ administrative boundaries.

192 On that crucial date for the future organisation of the sector, see Le Monde, June 30,1990 (“Les caisses d’épargne accélèrent leur restructuration”); and Moster (2000), p.52.

Interestingly, this process was largely driven by the group’s top executives:the chronology of events clearly points to the legislator playing a follower’srole in the 1991 transformation. In a special issue of La Lettre del’Association pour l’Histoire des Caisses d’Épargne (n.5, December 2001),one can even read “The size of changes undertaken by savings banks ledthe legislator to modify the 1983 law to harmonise the legislation withthe new organisation”.

6.3 Sector coordination

At the outset of the 1980s, French and Italian savings banks belonged tolegally recognised and economically specific categories within thebroader banking system. Both the legal and organisational characteristicsof the “savings banks category” underwent tremendous changes in thesubsequent decades, in seemingly different directions for the two countries.These changes in sector boundaries mirror and complement, in manyways, the changes in savings banks’ corporate boundaries just described.

6.3.1 The logic of vertical integration and the diverging fatesof the sectoral banks

• France

In France, the centripetal dynamic that characterises savings banks’aggregation patterns over the years goes hand in hand with anincreased centralisation of financial flows within the group, throughthe emergence of a “sector central bank”.

At the outset of the 1980s, savings banks were part of a financial circuitessentially directed by the Caisse des Dépôts et Consignations (CDC).Figure 6.5 represents that circuit. The CDC managed administeredsavings resources collected by the savings banks, and gave back partof those resources to the banks for the use of financing localgovernments’ housing investment needs (the famous ‘Minjozcontingents’, which will be further explored in chapter 8)193.

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193 From 1950 to 1971, savings banks were only authorised to present (support) loanrequests to be funded by the CDC on their share of the Minjoz contingent; in 1971 theywere authorised to directly fund those loans from the Minjoz funds provided by the CDC.

Such a circuit deprived savings banks of autonomy in the managementof their financial resources and in the choices to be made in the use ofthose resources; denied their nature of intermediary; and maintainedthe unbalance between their large presence in the collect side andtheir marginal role in lending. A first change had been brought to thesystem in the late 1960s with the creation of the GroupementsRégionaux d’Épargne Prévoyance (regional savings groups, or GREP).The GREP’s mission was to manage part of the new resources allowedto savings banks (among which the Livrets d’Épargne Logement andthe bons d’épargne logement) and redistribute them to the Caisses soas to be used in loans to local governments. The GREP, jointly ownedby the banks and the CDC, were a first step in delegating to the“savings banks world”194 part of the financial management untilthen entirely centralised at the CDC. However, the creation of theGREP did not fundamentally alter the structure of the circuit – and, inparticular, savings banks’ subordination to the CDC and absentfinancial autonomy.

The 1983 law substantially modified this structure, by organising areal financial network among savings banks195. First, it replaced theGREP with Sociétés Régionales de Financement (regional financing firms,or SOREFI), entrusted with substantially the same role. However theSOREFI, in contrast to the GREP, had a direct responsibility on theresource side; in addition, their role was extended to all resourcescollected by savings banks, except the Livret A (and part of the CODEVI);and the SOREFI could directly use some of the resources to financeloans, limited by law to institutions specialised in industrial investment,backed by public entities. In sum, SOREFI were true regional banksoperating like the Giro banks for the German savings banks.

A second, major change driven by the 1983 reform was the creationof a “network head”, the Centre National des Caisses d’Épargne etde Prévoyance (Savings banks national centre, or CENCEP). Finally,two funds were created by the 1983 law, which laid the base forgroup-level risk management: the Fonds de solidarité et demodernisation (solidarity and modernisation fund) and the Fondscommun de réserve et de garantie (common reserve and insurancefund). Both were managed by the CENCEP.

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194 Since the GREP were distinct from the savings banks, but at the same time linked to them.195 Duet sees in the 1983 law an unambiguous step towards the “re-conquest of [savings

banks]’ independence” (Duet 2001: 72).

Following Duet, one can interpret the 1983 law as creating twoparallel, but distinct, financial or intermediation circuits: a first one,public, based on the Livret A, regulated and headed by the CDC;a second one, private, based on all other resources, from then onmanaged within the network (by the SOREFI). The twin intermediationcircuits created by the 1983 law are represented in Figure 6.6.

The 1991 law brought further substantial modifications to thisarchitecture. First, it abolished the SOREFI, and simultaneouslytransferred balance sheet management to savings banks themselves.Within one year after the law was passed, SOREFI’s assets andliabilities were transferred to the newly formed regional savingsbanks, while their own funds were transferred to the CDC.Simultaneously, the law abolished the Minjoz contingent, allowingsavings banks to finance their loans to local governments from‘banalised’ resources (i.e. non administered savings resources), furtherdistinguishing the public intermediation circuit (Livret A resourceswere to be entirely managed and used by the CDC) and the privateone, described above. These were crucial changes, since they gavesavings banks full autonomy in the management of their balancesheet.

In addition, the law created two national financial institutions,fulfiling the functions of a central cashier: the Société centrale detrésorerie (central treasury institute), which held regional banks’current accounts; centralised excess of liquidity; and ensured inter-banking payments between the network and other credit institutions(including the central bank and the CDC); and the Société centraled’émission et de crédit (central credit and lending institute),predominantly owned by the CE, which managed emissions for thewhole network, ensured regional banks’ refinancing and organisednational lending pools. This structuring was supposed to evolvetowards the creation of a fully-fledged central cashier196. And in fact,in 1995, the two institutes were merged into a Caisse Centrale desCaisses d’Épargne et de Prévoyance (savings banks central cashier,CCCEP). To take, again, the German system as a comparison, the CCCEPwas conceived as a Girozentralbank.

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196 According to the CENCEP in La Caisse d’Épargne: une mutation réussie, Paris: October 1991.

The latest step in French savings banks’ road towards autonomy wasthe 1999 reform, which merged the CENCEP and the CCCEPtogether, into the Caisse Nationale des Caisses d’Épargne (savingsbanks national cashier, or CNCE) – the ‘associational’ components ofthe CENCEP being spun off to create the Fédération Nationale desCaisses d’Épargne (savings banks national federation, or FNCE), whichwill be analysed in the next section. In addition to centralisingfinancial flows within the network, the CNCE also inherited all thespecialised subsidiaries that, from 1988, were controlled by the CNCEthrough the holding Écureuil Participations (see Figure 6.4).

Strengthened coordination and reinforced autonomy were the twinoutcomes of this process. As one of the French interviewees stated:

The reform allowed us to maintain the group’s cohesion, in contrastto what happened in Italy, with one single group, and one singlebank operating on a single territory197.

However, coordination was subsumed into centralisation. The rise ofthe savings banks national cashier parallels, indeed, the radical shiftof savings banks’ corporate boundaries during the 1980s and early1990s, gave rise to a ‘federal’ banking group, where products weredesigned at the central level (through specialised subsidiaries), not atthe regional one (see previous section). An additional relevant tendencyrelated to the growing ‘merger’ between IT systems and the growinginterconnection, promoted by the CNCE. There were 14 regional ITcentres in 1990, down to 3 different platforms in 2003.

Similarly, one should note the pooling of communication resourcesthrough the birth of the “Précoce” network in 1987 (Précoce stoodfor “Premier Réseau de Communications des Caisses d’épargne”).

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197 Interview, 24/04/02

• Italy

At this level of analysis, the Italian case displays fundamental differencesto the French one. Starting situations were altogether different: firstof all, at the outset of the period under study, Italian savings bankswere fully-fledged banks, which had kept full autonomy over theirbalance sheets since their creation. Secondly, since 1919 Italiansavings banks’ intermediation built on the guarantees and servicesprovided by the Istituto di Credito delle Casse di Risparmio Italiane(Italian savings banks credit institute, or ICCRI).

Along the years, ICCRI increased its role from a risk-management toolto a fully-fledged credit institution at the service of savings banks,providing mainly treasury services, merchant bank services (for bonds)and ‘circular checks’, a typical network externality first experiencedwithin the savings banks network – allowing customers to cash inchecks at savings banks other than their own. The role played by theICCRI was very similar, in that sense, to the one played by Girobankenin Germany. In the 1950s, a Fondo di Solidarietà e Sviluppo (solidarityand development fund) was created, together with Fondi di garanziafederali (federal guarantee funds) at the regional level. Beyondcentralised financial services, such funds, together with the ICCRI,ensured the possibility of sector-wide investments – such as thosein IT, whose costs were too high for the smallest savings banks198.In 1979, the ICCRI launched STACRI, an ambitious IT program thatincorporated the payment system and systematised the circulationand sharing of data and information among savings banks.

A crucial change occurred in 1986 when all payments systems, includingSTACRI, were unified into an electronic Rete nazionale interbancaria(inter-bank national network). In addition, the ICCRI became, alongwith a few other specialised institutions, one of the operators of thenetwork. This change was an important step towards the constitutionof a unified banking market in Italy (what economists would call ‘alevel playing field’), and formally marked the end of the ICCRI as apurely ‘savings bank’ actor. The second major change was broughtabout in 1993, with the transformation of the ICCRI into a joint-stockcompany, whose shares were then held by several major Foundations.The ICCRI was therefore privatised along savings banks – although itsownership still remained within the former savings banks sector.

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198 As emphasised in Acciaro et al. (1985).

In November 1999, the Banca Popolare di Lodi, one of Italy’s largestcooperative groups, acquired a majority stake in the ICCRI –followeda few months later by a wave of acquisitions of savings banks.In January 2000, the ICCRI acquired the control of the CR di Imola;In 2000-2001, the BPL completed the merger between the ICCRI andthe Casse di Tirreno SpA, head of the homonymous holding group,which in turn controlled the Cassa di Risparmio di Lucca, the Cassa diRisparmio di Pisa and the Cassa di Risparmio di Livorno. In addition,between 1999 and 2001 BPL made acquisitions or alliances withmerchant banks and institutions specialised in credit services, thusbuilding up on the ICCRI’s historical assets.

Thus, in contrast to what happened in the Banche Popolari sector(where the Istituto Centrale delle Banche Popolari fulfils missions tothe exclusive benefit of banks belonging to the category), the Italianequivalent of CNCE soon disappeared as a sector central bank,mirroring the heterogeneous destiny of savings banks themselves.

6.3.2 The diminishing power of sector associations

The existence of strong sector associations has long characterised savingsbanks in Germany, Spain, and the Netherlands. In those countries suchorganisations play a key role in representing savings banks’ interests,steering exchanges between category members, and maintaining thecohesion of the whole sector. They generally are responsible for all issuespertaining to contacts with regulatory authorities, common strategies,and lobbying. Their organisation mirrors that of the political institutionswith whom they are dealing (Deeg, 1999). France and Italy show, fromthis point of view, two contrasting histories.

• France

French savings banks did not create a formal sector organisation untilthe late 1960s. They did, however, participate in an institutionalisedforum, called Conférence générale des Caisses d’Épargne (generalconference of savings banks), which consisted in regular, nationalmeetings of all savings banks. The general conference was replicatedat the regional level through regional conferences.

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The general conference fulfiled representation and proposition functions:in 1947, for instance, it was within its framework that the proposalleading to the Minjoz law was discussed and then presented to thegovernment (see Duet 2001: 59). However, the General conferencedid not evolve into an organisation until 1969, much later, therefore,than the Italian savings banks. The reasons for this un-organisationprobably lies in (a) the fragmentation of savings banks and theirembeddedness in local political and economic networks, and (b) their‘functional dependence’ from the Caisse des Dépôts.

In 1969, French savings banks set up the Union nationale des caissesd’épargne de France (French savings banks national union, or UNCEF),which was the first formal organisation (with its own staff and a legalstatus) to represent savings banks’ interests. UNCEF, with the 1983law, disappeared and its activities were transferred to the CENCEP –which was, however, more than an association representing savingsbanks. As seen above, the CENCEP was conceived as the head of thesavings banks network.

A true savings banks association did re-emerge two decades later, atthe term of a process that saw the birth of an integrated banking group(see sections above). The Fédération Nationale des Caisses d’Épargne(national savings banks federation, or FNCE) was formally institutedby the June 25, 1999 law (articles 1, 6 and 15), and was created onSeptember 29th, 1999. It has a “law 1901 status” – that is, it hadthe legal status of an association – but its name, “Fédération”, revealshigher ambitions: its core mission was indeed, to federate the 34 Caissesd’Épargne. In particular, the law gave four missions to the FNCE:

- to coordinate the relations between the Caisses d’Épargne andtheir owners, the sociétaires, and organise training for the latter,especially their representatives elected at the Sociétés localesd’épargne (SLE, see next chapter) and the Conseils d’orientationet de surveillance (COS, see next chapter);

- to participate in the definition of the Group’s “strategicorientations”;

- to set national goals for the “general interest missions” definedby Art.1 of the 1999 law, and especially the projets d’économielocale et sociale (PELS, see chapter 6);

- to represent interests common to savings banks and their owners,especially vis-a-vis regulatory authorities.

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The Fédération represents both savings banks and their owners.Indeed, it is owned entirely by the 34 Caisses d’Épargne (in contrastto the Caisse nationale, partly owned by the Caisse des dépôts), and itsgeneral assembly, the purposeful organ of the Fédération, is composedof the 34 savings banks represented each by three individuals:the President and one member of the COS, and the President of theDirectoire. The General Assembly, which meets every year, appointsthe 18 members-board of the Fédération, which is composed of12 Presidents of COS and 6 Presidents of Directoire. The chairman ofthe board is a COS President.

This evolution, and in particular its ultimate twist in 1999, indicatesthe reinforcing of the group’s bank at the expense of the association.This is not clear in the formal institutional mechanisms, by which theFNCE seems to have gained in power as compared to CENCEP – inparticular, its roles of coordination with and training owners seem togive it a strong leverage over the Group’s governance. This is not soin reality, as the next chapter will show. Finally, and perhaps moreimportantly, there is a strong perception by savings banks staff (bothat the central and local level) that they are part of a banking groupmore so than a cooperative organisation. This element aroserepeatedly in the interviews.

To sum up, the gradual increase of sector centralisation throughoutthe 1980s and 1990s, culminating in the current organisation,paradoxically did not play in favour of strengthening the particularidentity of savings banks, but to an assertion of the savings banks asa “normal” banking group intended to compete with other bankinggroups – and not only the Crédit Agricole199. This trend is reflected inthe new organisation of the Group, but above all in the real balanceof power between the two national institutions, the CNCE and theFNCE. However, and this is an important point, there is no reason tosay that the current balance cannot change.

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199 In a revealing speech delivered at the FNCE in March 2000 and aimed at giving someindications to the FNCE on how to proceed to develop the “cooperative status”, anoutside guest said “focusing on statuses, elections, is running the risk of emphasising toomuch issues of power and representation. [The Federation should] draw the attention out ofthe General Assembly and on to more open, useful and comfortable issues for managersand employees at the Caisses d’Épargne.” Speech reproduced in the first “Compendium”(Textes choisis et commentés par la Fédération Nationale des Caisses d’Épargne) publishedby the FNCE in 2001 (10,000 issues disseminated within the network).

Institutional features do not force one way or another. In fact, if the1999 reform, which formally opened new ways to re-assert thesavings banks’ particularities through the cooperative status and thecreation of the Fédération, was bended by reality in another direction,future developments might well bend it backwards. This is all that isat stake with ownership (see next chapter).

• Italy

The Italian situation differs from the French one in two aspects: first,the Italian savings banks’ sector association has historically been morepowerful than its French counterpart; secondly, in the early 1980ssavings banks belonged both to the category’s association and to thecommercial banks’ association.

The Italian savings banks’ sector association has been, historically,more powerful than its various French counterparts. It was foundedin 1911, at a period when the Casse di Risparmio were undergoingstrong competitive pressures from other groups of banks – when, thatis, creating a unified body was felt necessary to lobby the governmentfor protection (De Rosa, 2003: pp.130-9). Twenty years before, savingsbanks had met in a first national congress to organise themselves inthe wake of a forthcoming law on the subject. The Associazionefra le Casse di Risparmio Italiane (Italian savings banks association,or ACRI) operated continuously ever since 1911, except during thefascist period, when it was replaced by a “Fascist federation ofsavings banks”200. In the postwar period, the ACRI asserted itself as apowerful banking lobby, linked with top officials at Banca d’Italia201.

Associational links between savings banks were very strong until themid-1980s, through the ACRI, but also through national congressesorganised every three years, and thematic meetings organised bysingle savings banks almost every year, without mentioningworkshops and the annual celebration of the “world’s savings day”,which is still today organised by the ACRI and in which top officialsfrom both the Central Bank and the government participate (ingeneral, the governor and the Minister of the Treasury).

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200 From 1938 to 1944. On that period, see De Rosa (2003), pp.380-9.201 The central bank governor, from then on, became the official godfather of the ‘world

savings day’ celebrated every year at ACRI. In addition, starting with governor Menichella,top officials at Banca d’Italia started to frequent regularly the savings banks annualcongresses and other conferences organised by ACRI.

As an observer noted in the early 1980s, the strong associationallinkages between savings banks were all the more remarkable in thatthey formed a very heterogeneous category, both in legal (see chapter3) and dimensional terms (Pin, 1984). A former president of the ACRI(and CEO of Cariplo) called the association a “sociality leitmotiv”(Ferrari, 1985). The same emphasised how the links and exchangesbetween savings banks top officials operated “as if we were a single,large firm” (Ferrari, 1985, p.1038).

In addition to these associational linkages, moreover, most savingsbanks belonged to a regional or cross-regional Federation. But in themid-1980s, doubts regarding Federations’ role rose, culminating in thedisappearance of that particular level of association (Ferrari, 1985).

The ACRI did not, however, have the monopoly of savings banksassociational linkages. Since the postwar period, the ACRI was“subordinated” to the Italian banks association, ABI, for all matterspertaining to inter-bank operations and self-regulation. Indeed, asmentioned above, the Casse di Risparmio were simultaneously membersof the ACRI and of ABI. A fact that, according to one observer,“should not be surprising […] since savings banks are true and propercommercial banks” (Pin, 1984).

During the 1980s and 1990s, savings banks’ ACRI membership lostrelevance, to the benefit of ABI. First, in 1985, the ACRI allowednational labour contracts to be negotiated directly at an ABI level.This was an important change since savings banks employees benefitedfrom a particular status which included many advantages in terms ofworking hours, salary and union activities. It is also interesting tonote that the ACRI’s decline started with losing its prerogatives oncollective labour negotiation, before the Amato Law. The latter didindeed bring a major blow to the ACRI, since, by transforming thesavings banks into joint-stock companies, it allowed them to becomefull members of ABI. In fact, this allowed a broad convergence inbanking labour regulation, through the negotiations around the 1994collective contract between ABI and the unions. Finally, since January2000, the function of tutela (guarantee) of the Casse di Risparmiowas transferred to ABI. In the words of a top official at the ACRI,the Association is now “supporting” ABI in his new function.

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But ‘losing’ savings banks did not put an end to the ACRI’s existence,since it ‘gained’ new members in the person of Foundations, the newex-owners of savings banks (see next chapter). Since the 1990 AmatoLaw, the ACRI has represented the Foundations. The legislator furtherinstitutionalised the ACRI’s role towards Foundations, in particularwith a 1991 law202 on voluntary activities (which recognises the roleFoundations play in financing voluntary associations) and a 1999decree203, which confirms the ACRI as the official interlocutor ofregulatory authorities for all matters pertaining to Foundations’organisation and functioning.

6.4 Discussion

6.4.1 Shifts in boundaries and shifts in coordination modes:variation within and across countries

What both the French and Italian cases show is a shift from sector togroup coordination. This is clearer in Italy, where, as we have seen, thecategory of savings banks as such ceased to exist in the early 1990s – andwhere the category’s association shifted its focus from savings banks toFoundations. The simultaneous emergence of large banking groups(a shift in savings banks’ corporate boundaries) completed this shift insector boundaries. In France, the evolution has been similar despite theapparence. The category has been strengthened so much as to becomea group – and lose the coordination characteristics of a sector category.External boundaries (both of banks and sectors) are reinforced by shiftsin ‘associational density’, or group cohesion.

Again, this double shift (shift in sector boundaries and in sector cohesion)signals a change in the mode of coordination. This change, moreover,has been common to all categories of banks: savings banks, but also,cooperative banks (and Banche Popolari in Italy), and commercial banks.

However, both the processes of change and its outcomes vary across andwithin countries. As seen above, the strengthening of a ‘central cashier’within the French savings banks network, and the spin-off ofassociational functions from the head of the network (itself merged withthe central cashier) have had strong centripetal effects.

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202 Art.15 Law 266/91203 Art.10 Legislative Decree n.153/99

In Italy, in contrast, the network’s central credit institution, ICCRI, wasprivatised, while the savings banks’ association turned its focus awayfrom savings banks to Foundations. In effect, the category exploded intoseveral sub-groups, each following a different path of aggregation.

Changes have also produced variety within each country. This is clear inthe Italian case, where savings banks have followed several divergentaggregation patterns, while the sector ceased to exist. As seen above, atleast three subgroups of savings banks can be identified: a first one includessavings banks who have been absorbed, or who are now controlled, bylarge banking groups; a second group consists of savings banks who havere-grouped in regional alliances, either within the category or withbanche popolari; and a third one is made up of those savings banks thathave remained independent or formed a group on their own.

As Figure 6.8 shows, group centralisation has increased in both countries,while sector cohesion has increased in France and decreased in Italy.

Again, however, part of the divergence can be explained by the differingsystemic relational properties of the units of observation (savings banks).In other words, the evolution analysed above reveals that French andItalian savings banks fundamentally differ in one critical property: theirrelation to the system. Therefore, one needs to take a systemic view toverify the validity of the comparison: have other Italian banks fulfiled arole that is functionally equivalent to the French savings banks? It doesnot seem so. Cooperative banks, be they Popolari or simple cooperatives,have not aggregated into a national federal banking group. These twocategories are also, as the Italian savings banks sector, characterised bystrong internal differences.

A final “test” of the validity of the analysis results exposed misgivings onwhether the Italian case lags the French one. In other words, the trendsshown by the Italian case might well be temporary and, in the long run,converge on the French model (full integration of all banks into national,federal banking groups). Again, however, this objection does not resistsa counter-objection: the actual patterns of aggregation already exhibitedby Italian banks differ from those followed by French banks in fundamentalways, the first one being the territorial variable. The regional level inaggregation processes in Italy has played a much more importantrole than in France, where the mergers of small local savings banks intolarge regional savings banks have been accompanied by strengthenedgroup centralisation.

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6.4.2 The historical- institutional roots of sector coordination

The second issue to be addressed here is the role institutions played in thechanges analysed above. Since we are dealing here with the rules of thecoordination game, the only prior or superior institutions are regulatoryones. Two kinds of institutions may be identified: static, boundary-definitioninstitutions on the one hand; and dynamic, boundary-redefinition institutionson the other. The first category consists of all regulations pertaining tothe definition of firm’s environmental boundaries. In particular, they arethose regulations defining sectors, categories, and the ways in whichthey differ (corresponding to the ‘top-down’ sector characteristics inHollingsworth, 1994); and the extension of the banking market.The second category refers to all rules that induce (or constrain) firms,in the present case banks, to redefine boundaries on their own.Characteristic of this category are fiscal incentives for mergers andacquisitions, for instance.

‘Boundary definition’ institutions have undergone tremendous changesin both countries. As shown in chapter 3, the very legal definition of thesavings banks category (or sector) has changed. In the French case, froma sui generis category, the savings banks sector was assimilated to acooperative banking group in 1999; in Italy, the category effectivelyceased to exist with the legally mandatory transformation of savingsbanks into joint-stock companies in 1990. Moreover, the first article ofthe 1990 law was dedicated to mergers. Indeed, it explicitly provided thatpublic credit entities “can merge with other credit institutions of anynature, even in the case in which they would become joint-stockcompanies”. At a broader level, in both countries legal boundaries werere-drawn for all sectors in the 1980s and the 1990s, leading to the officialrecognition of two main categories: cooperative and commercial banks.

‘Boundary re-definition’ institutions also underwent profound changesduring the period under study, in both countries. In Italy, thoseinstitutions took two forms: on the one hand, legal and regulatoryincentives for mergers and aggregation. These incentives, according toZazzaro (2003), played a key role in pushing for aggregation during the1990s. It is especially striking to see the acceleration of mergers andacquisitions after 1994, i.e. after the government took more decisivemeasures to encourage especially share sell-offs from savings banksowners, one key element in the process (see next chapter). On the otherhand, the steering role played by the central bank might be seen as a key‘re-definitional’ institution.

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As said in chapter 3, the 1990 antitrust law confirmed Banca d’Italia’spower to authorise mergers and acquisitions among banks. This processmight be paralleled with what happened in the previous large-scaleaggregation process in the banking sector, i.e. in the 1930s. In 1927204,the government forced small savings banks to merge, and the gatheringof remaining savings banks in local Federations. As reported in the ACRI’sfirst report on banking foundations, the Minister of the Economy theninvoked the need to avoid “a remarkable waste of energy” and to facilitatemonitoring by the government, “through a smaller number of Casse dirisparmio with a broader range and less subject to local issues”205.That move brought to a rapid fall in the number of savings banks: from200 in 1926 to 91 in 1938, and 81 in 1939206.

So regulatory institutions did change, as well as coordination. But didinstitutional change cause change in coordination? Here we have to buildon the findings reported in the previous chapter, especially on theproactive role savings banks actors played in defining the substance ofregulatory reforms. The emergence of powerful banking groups, and thepositioning of savings banks within the group structure, reflects not achoice by savings banks actors of a strategy fitting the new (given)environment, but a choice by several key groups of actors to transformthose very ‘institutions’. A multi-layered consensus (in Italy, between theFondazioni and the political power, between top managers at savingsbanks and at the Fondazioni, among political forces, between regulatoryactors) permitted the realisation of this radical institutional shift in theItalian and French banking sector.

To sum up, in France, the 1980s and 1990s saw the strengthening of abanking network, increasingly centralised around the Caisse nationaledes caisses d’épargne207, itself slowly acquiring more autonomy from theCaisse des Dépôts. In Italy, the national level was never strong and wasabandoned after it became clear that the former savings banks wouldbecome the backbone of the new banking system of the 1990s. But atthe same time, one can see a very clear pattern of “endogenous”aggregation between and among savings banks before aggregation withother categories of banks.

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204 Decreto legislativo of February 10th, 1927, n.269.205 Cited in ACRI (1996), p.11.206 That subsequent decrease in the number of savings was due to another legislative move

that disposed mandatory fusion of some savings banks with Monti di credito su pegno(Law of December 14th, 1939, n.1922).

207 As said in Chapter 3, the CNCE was created with the 1999 law, but it retained some ofthe missions previously exerted (in a looser way) by the CENCEP.

In other words, the emergence of major banking groups in Italy was anorderly (although fragmented) process governed by the individual savingsbanks themselves. In a sense, then, this contrasting evolution followsinstitutional patterns well established in both countries. But if the peculiarcharacteristics of the process of change, and even some of its substantialcharacteristics, can be explained by institutional path-dependence, suchexplanation falls short of understanding change itself (its “triggers”, itsdirections).

If de-segmentation means the end of a form of compartmentalisationorganised by the State, it does not mean the end of all forms ofcompartmentalisation. In both cases actors have re-organised in verydistinct ways, leading to new forms of differentiation. Those forms ofdifferentiation correspond to a minimal compartmentalisation (territorialand sectoral in Italy, sectoral in France) and are, therefore, subject to change,in the absence of further demands for stronger compartmentalisation.

194

Figure 6.4: Ownership and shareholdings of the Groupe Caisse d’Épargne in 2004

195

Clients100%

Sociétés locales d’épargne

La Poste

50.1%

Sopassure

CNP Eulia

Écureuil Vie

ÉcureuilAssurances IARD

Saccef

Sogeccef

Crédit Logement

36%

40% 53%

35%

37%

65%

49.9%

Real estate

Socfim

Crédit Foncierde France

Caissesd’Épargne

Caissedes dépôts

A3C

Cicobail

Bail Écureuil

Écureuil gestion

Caisse nationaledes Caissesd’Épargne

ÉcureuilParticipations

Gestitres

Banca Carige

San Paolo IMI

CDC Ixis

CDC Ixis Capital Markets

CDC Ixis Asset Managem

ent

Insurance Specialisedfinancial subsidies

Investment bankand financial

market activities

100%

49.9% 49.9% 50.1%

47%

Figure 6.5: Intermediation circuit in the French savings bankssector before the 1983 law

Figure 6.6: Intermediation circuit in the French savings bankssector in the mid-1980s

196

Collect

Collect

Livret ALEP

All otherproducts: Livret B,

Éopargne-logement…

Caissed’Épargne

Caissed’Épargne

Prêts Minjoz

Lending

Lending tohouseholds and

associations

Lending toinstitutions

specialised inindustrial

investment

Prêts d’intérêtrégional

GREP

CDC

Livret ALEP

CODEVI



Caissed’Épargne

Caissed’Épargne

Prêts Minjoz

Lending


associations



investment


SOREFI

CDC

Figure 6.7: Intermediation circuit in the French savings bankssector after the 1991 law

Figure 6.8: Evolution of group centralisation and savings bankssector cohesion in France and Italy, 1980-2000

Low sectoral cohesion High sectoral cohesion

Low group centralisation

France

High group centralisation Italy

197

Collect

Livret ALEP

CODEVI



Caissed’Épargne

Lending


associations



investment


CDC

CCCE

199

7.1 Introduction

Besides facilitating savings banks’ corporate restructuring, the regulatoryreforms in France and Italy allowed the streamlining of ownership and control– that is, corporate governance. Savings banks’ control had representeda key stake in the reform process – a process, as emphasised in chapter5, driven by savings banks’ top management. Understanding changes insavings banks’ corporate governance requires, therefore, an analysis ofthe changing balances of power between top management and otheractors (political actors, employees, clients).

Chapter 6 has shown how the regulatory reforms of the early 1980s inFrance and 1990s in Italy paved the way for a “piloted” restructuring ofsavings banks by their top management. Changes in ownership and controlhave accompanied those shifts in sector and firm boundaries: the formerboth facilitated and were reinforced by the latter. In other words, on the onehand savings banks’ corporate restructuring depended on the clarificationof ownership and control (characterised by implicit privatisation in Italy,explicit autonomisation in France); on the other the redistribution ofcorporate control to the benefit of managers (as will be showed in thischapter) was strengthened and legitimised by corporate restructuring.

This chapter, therefore, addresses the same questions dealt with in theprevious chapter, which mirrors the research puzzle presented in the firstpart of the study. On the one hand, the chapter seeks to understand thepatterns of change followed in each country, with the goal of assessingthe convergent/divergent forces at play across France and Italy. On theother hand, the chapter aims at identifying the factors of change andpersistence in both countries. Corporate governance, as mentioned inchapter 2, is often identified in the comparativist literature, as one of theinstitutional pillars of contemporary capitalism.

7. CHANGES IN SAVINGSBANKS’ CORPORATEGOVERNANCE

In other words, ownership and control are seen as institutions that influencesingular (and aggregate patterns of) behaviour. Here, by contrast, corporategovernance is taken as the dependent variable. The ultimate aim of thischapter, therefore, is to assess whether and to what extent are changesin savings banks’ ownership and control attributable to changes in theinstitutional “matrixes of constraints and incentives” identified in chapter 4.

7.2 Ownership patterns

7.2.1 The starting point: whose savings banks?

Until the 1980s, neither French or Italian savings banks had clear owners.In both cases, savings banks were sui generis entities, whose location withrespect to private or public law was ambiguous (see chapter 3), whosemanagers were co-opted within a pool of local power holders (notables).Savings banks’ equity, whether it had foundational or associationalorigins (in the Italian case), did not give rise to property rights over thebank or the bank’s revenues, and their benefits were redistributed throughgrants to local associations, or to finance social or artistic endeavours208.

As an interviewee (top official at the FNCE) said:

[In 1981] Savings banks’ ownership was confused: did they belong tothe State? To the nation? That’s what Beregovoy [the Socialist Ministerof Finance] said then. But what does that mean? Who is «the nation»209?

This ambiguity did not, however, place them in equidistance from privateand public sectors. Savings banks were strongly associated with publicintermediation circuits, where public entities – especially the Minister ofthe Treasury, in both cases – played a key role in the banks’ corporategovernance. In France, as shown in figure 4.5 (see chapter 4), savingsbanks were not really autonomous entities, and were an element of theso-called ‘Treasury circuit’ (Zerah, 1993) in financial intermediation: decisionsabout lending and collect were made by the Caisse des Dépôts etConsignations, itself organically linked to the Treasury department at theMinistry of the Economy.

200

208 Such funds were tellingly called in France the “Fortune personnelle” (personal wealth) ofsavings banks.

209 Interview, 24.04.02.

In Italy, the two key members (Director and vice-Director) of the savingsbanks’ executive board were appointed by the Comitato Interministerialeper il Credito e il Risparmio (intergovernmental committee for credit andsavings, or CICR), which was dominated by the Treasury as well.

Such unclear ownership lines were problematic, or more precisely becameproblematic for several reasons. First, they became problematic for savingsbanks themselves, faced with recurrent needs to increase equity (orrecapitalise). Who should do that, and under what form? Since therewere no equity owners, there was nobody to turn to when the issue ofrecapitalisation arose. As chapter 5 has shown, the need for recapitalisation(a precondition for systematic banking restructuring) was among thedriving forces in savings banks reform process during the 1980s.

A second problem associated with blurred ownership was the ‘undueadvantage’ it was perceived to give savings banks over other banks – byexonerating them from remunerating owners. This undue advantagebecame even more problematic after 1985 in Italy, and the introductionof prudential regulation. Unclear ownership meant, for savings banks,having more resources at disposal for complying with prudential regulation(equity-related ratios, reserves)210.

A third problem was the issue of power. In the context of a gradualloosening of the state’s grip on the banking system, and on savings banksin particular (see chapter 5), who would take a hold of savings banks, andtherein control savings banks’ economic resources and political assets?In Italy, the power of the Ministry of the Treasury over executive directors’appointments had a great political significance. The Casse di Risparmiowere, indeed, a pillar of the Christian-Democrats’ Northern and Southernpower base, and of the Communists in Toscana and Emilia-Romagna.There is no study on the relationships between the Casse di Risparmioand political power – just brief mentions in monographs or broaderessays211. However, the existing evidence seems to show that Italiansavings banks were much more of a national and regional political stakethan their French counterparts – the Caisses did represent a politicalpower place, but at the very local level.

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210 The undue advantage given to savings banks by their public status also concerns thefavourable ratings given to them by rating agencies (since they are backed by publicentities, which cannot go bankrupt). Such was the argument used in recent years inGermany by commercial banks to criticise the “state aids” to Landesbanken.

211 See, in particular, De Rosa (2003) for a historical perspective.

In addition, since until the 1980s French savings banks did not pursue anactive strategy on the asset side, savings banks in France were much lessseen as an economic power holder than in Italy, where the Casse dirisparmio could effectively allocate resources to “friendly” firms or clients.This is a key difference that explains much of the subsequent variationsin ownership changes.

7.2.2 The Italian case: a successful privatisation?

In the Italian case, two clear periods of change can be identified. The firstperiod, which runs until the 1990 reform, is characterised by attempts atinternal change, that is, change within the sector itself. The failure of thelatter led to legislators’ intervention in 1990. Following that externalchange, however, is a decade of tension between political authorities and“new” owners of savings banks desirous to keep a hold on them.

In the 1980s, several savings banks implemented statutory changes that werehowever quickly rebutted by the courts for encroaching upon constitutionalmatters (See Cassese, 1983 and Merusi, 1984). Those statutory changeswere primarily aimed at allowing savings banks to raise new equity andchange their governance mechanisms. Given the limits posed to suchchanges by the courts and the existing regulatory regime, savings banksstarting pleading in favour of changes in the legislation. This was clearlyexpressed at several official meetings. At their 13th annual congress inApril 1982 in Sicily, for instance, the Casse di Risparmio asked for a legalreform to change the rules governing the access to capital markets, thenrestricted, and the possibility to change their governance structures –introducing the separation between management, control and direction,on the model of the joint-stock company (Società per Azioni) (ACRI, 1995).

As mentioned in Chapter 5, this view was shared within the central bank,which made it explicit first in a 1981 White Book; and in a second WhiteBook published in 1988, where it proposed that public banks betransformed into joint-stock companies, a status more appropriate forgetting access to capital markets.

202

The second period of change started with the 1990 Amato-Carli reform,which can be read as an attempt to solve the three issues mentioned above.More precisely, the 1990 reform constituted an attempt to: i) allow savingsbanks to access to new shareholders for recapitalisation, and ultimatelycorporate restructuring; ii) level the playing field and iii) make sure thatthe transition from the public sphere to the private one would occursmoothly, and would ensure the gradual constitution of new owners andstable power groups. The Amato-Carli reform, as showed in chapter 5,created new legal entities, the Fondazioni, to whom the equity of savingsbanks (and of public law banks who belong to the same broad category212)was to be fully transferred. New owners were thus created ex nihilo.

During the 1990s, both the control of savings banks by Foundations, andthe control of Foundations themselves stood at a centre of a hotly debatedcontroversy. This controversy originated in the ambiguity created by the1990 reform. In fact, the latter disposed that the Foundations shouldkeep controlling shares in the savings banks from which they had beencreated. In addition, the 1990 law disposed that the management ofshareholdings in Casse di Risparmio would constitute the raison d’être ofthe newly created Foundations.

The application decree of that same year blurred the picture by disposing,in contrast to the law it was supposed to transcribe, that managingshares held in savings banks were merely instrumental in producingrevenues; and that the mission of Foundations was to pursue publicinterest and “social utility” goals, through actions in the field of welfare,scientific research, education, health and art. Foundations, therefore,would not (should not) become holding firms.

These contradictions stood at the heart of the subsequent debates, whichlasted until 2003, and mainly revolved around three issues. The first one was:what should Foundations do with the shares they owned in savings banks?The second and the third issues were, respectively, what was the legalnature of Foundations and who should control them? These three issueswere closely linked to each other, and represented a crucial stake for theItalian political economy as a whole. If Foundations were to retain controllingshares in savings banks, and were to be simultaneously recognised as publicentities, controlled by other public entities, then a sizeable share of theItalian financial system would still belong to a broadly defined public sector.

203

212 Monte Paschi di Siena, Banco di Napoli, Istituto San Paolo di Torino, Banco di Sicilia, Bancodi Sardegna.

If instead, Foundations were to be recognised as private entities withprivate owners, but kept holding majority shares in savings banks, thiswould imply a shift from public sector to a sui generis political economy,in which non-firms and non-governmental entities governed part of thefinancial system; if, thirdly, Foundations were to lose their control insavings banks, privatisation would become complete.

Policy-makers first moved to solve the first issue, that of Foundations’control of savings banks. They introduced fiscal incentives for sharedismissals. A 1993 law exempted the sale of shares by Foundations fromtax on plus-values213. Then, a law passed in July of 1994214 eliminatedthe obligation over Foundations to keep control of Casse di Risparmio inwhich they held shares215; on the contrary, it obliged Foundations torelinquish control of the banks. Building on that law, a November 1994directive (known as the “Dini directive”, from the name of the thenMinister of the Treasury)216 specified the criteria and modalities of sharedismissals from Foundations.

What is interesting is that the Dini directive did not address the issue ofcontrol upfront. Rather, its official aim was to encourage the Foundationsto gradually diversify their risks. In fact, the two ‘parameters’ set up bythe directive were: (a) that at least 50% of the resources (assets) used bythe Foundations for the pursuit of their ‘institutional goals’ (finalitàinstituzionale) come from other sources than their shareholdings intothe CR; and (b) that no more than 50% of Foundations’ capital beinvested into shares of the CR. In a sense, then, the directive echoed, onthe regulatory side, the prevalent portfolio management character of themanagement of CR shares by Foundations, which was continuouslyclaimed by the latter in subsequent years. In addition, the Directive set adeadline (1999) for such control dismissal to take place.

Did the Dini directive impose an unwanted constraint on reluctant actors?This is what emerges out of several actors’ accounts and perceptions ofthe period. Many CRs resorted to the court to object to the directive’sdispositions. But, according to a central bank official, this was justfoot-dragging on the part of the Casse di Risparmio; what they wantedwas to earn more time.

204

213 Art.4, Law 489 November 26th, 1993.214 Law n.474 of July 30th, 1994.215 More precisely, article 7 bis of the cited law abrogated articles 13, 14, 15, 19, 20 and 21 of

the Legislative decree n.356/1990 that contained references to the public control obligation.216 Directive of the Minister of the Treasury of November 18, 1994.

This interpretation seems quite reasonable, in light of the lame performancesof the stock-market in those years, which prevented from foreseeing themaximisation of gains on the sale of CR controlling stakes. By contrast,the ACRI, in its first report on Foundations, claims that a trend towardscontrol dismissal could be observed before the Dini directive (ACRI, 1995).Subsequent years, however, proved it wrong. The 1990s were characterisedby a constant struggle between policy-makers and Foundations aroundthe issue of the control of savings banks.

Data gathered from savings banks individual documents and from ACRIannual reports on Fondazioni show a clear decline of ownership shares ofFondazioni in the CR. The median share started diminishing in 1994, andhas diminished every single year since then. It is now (late 2004) around14%. Of course, this general trend reflects different individual paths.In fact, one could classify Fondazioni in several groups, according to theimportance of their ownership share and, more importantly, to therhythm of dismissal. These data are reported in Figure 7.1.

205

100

90

80

70

60

50

40

30

20

10

0

1990

� Controlling stake

� Non-controlling stake

� No stake

Figure 7.1: Foundations’ stakes in Italian savings banks(nr. of Foundations)

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

The 1998 Ciampi law, when it was first introduced to the Parliament, wasgreeted with positive reaction from the world of savings banks.According to savings banks officials217, the law “finally recognised theirprivate nature”. Such recognition was reinforced by the fact that the law,in the Foundations’ view, set up incentives, not obligations, for the saleof shares on the part of the Foundations. Foundations were right to seea shift in attitude from policy-makers – but the Ciampi law was passed ina context much more favourable to the sales of shares on the market.

The trend towards share dismissal accelerated in the late 1990s, andslowed down in 2001, due to the European Commission‘s decision tosuspend the concession of fiscal incentives set in the law, arguing thatthese amounted to State aid, which runs counter to the principle ofcompetition. Those Fondazioni that were intent on selling further sharesthus (as of end 2004) suspended their dismissals, the time for the EC toclose its inquiry. This event illustrates the importance of externalincentives for ownership changes at the margin.

Overall, the Casse di risparmio had achieved, by the end of the 1990s,clearer ownership lines and ownership status. Why, however, did sharedismissal seem such a painful process? Again, this issue raises conflictinginterpretations. Government officials and policy-makers claimed that theFoundations were just reluctant to cede control over savings banks.Savings banks and Foundations officials disagreed. The 1997 ACRI annualreport went on to say that “The action of Foundations in [the field ofshare dismissals] will be determined above all by market assessment andeconomic considerations.” (ACRI, 1997). All savings banks intervieweesconfirmed this view.

As one of them, a former savings banks official, said:

It’s not that Foundations do not want to get out [of banks’equity].It’s just a matter of selling [their shares] at a good price. Sometimes it’sdifficult to sell well the shareholding portfolio, it’s not easy218.

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217 See the conclusion of their 1997 annual congress, in ACRI (1997b).218 Interview, 30.05.03.

In fact, that interviewee added, Foundations’ shareholdings within savingsbanks are “more a problem for the Foundations than for the banks”219.Another interviewee, president of a major Foundation, shared this view:

Regarding shareholdings in the bank, they are just financialshareholdings; I have always thought this way. I have never defendedshareholdings. In fact, had I been able to get rid of them, I wouldhave invested in real estate220.

Another President said

About [the obligation to sell shares imposed by the government in1998], I have nothing against it, if we can sell the shares for profit,and find alternative investment opportunities221.

However, the decrease in Foundations’ ownership did not solve the issueof effective control of savings banks. In other words, have Fondazioniseen their control decline along with ownership shares?

This question is difficult to answer, for at least two reasons: first,the dataset used above focused on Fondazioni’s stakes in their own banks– and not in other CR, excluding cross-shareholdings from the picture;second, control does not diametrically correspond to ownership. One hasto look, therefore, at other measures of Fondazioni’s control, besidesmajoritary ownership. Indeed, indirect ownership, cross-shareholdings,and low ownership concentration (meaning that however little theirshareholdings are, Foundations still count among ex-savings banks’largest owners) all point to a persistent power of Foundations, both atthe large banking groups and in medium-sized savings banks groups.

The Control of savings banks by the Foundations was as hotly debated asthe control of the Foundations. The latter was intensely discussed duringthe 1990s (and early 2000s), in relation to the legal nature of Foundations.Were they public or private entities? That debate had obvious practicalimplications: were Foundations to be recognised as public entities,control by local government would have been justified – and savingsbanks would fall again in the public realm.

207

219 Interview, 30.05.03.220 Interview, 06.05.03.221 Interview, 14.02.03.

The private nature of Foundations was of course pleaded forcefully bythe ACRI, and backed by several scholars such as Merusi (1993) andGalgano222. As the ACRI argued, the very concept of “Foundation”indicates the “civil society provenance of their patrimony” (ACRI, 1997).

Both, therefore, ownership and owners’ control were solved by the early2000s. To completely assess the effective control of savings banks byFoundations, however, one has to turn to control mechanisms, which willbe addressed in the following sections.

7.2.3 The French case: the choice of the cooperative model

In France changes started earlier but have not (yet?) brought a completebreak with savings banks’ past. While the 1983 law did not addressthe issue of ownership upfront, the 1999 did, by giving savings banksa cooperative status – and thereby creating new owners under the formof cooperative membership (‘sociétariat’). Creating owners could notbe achieved until savings banks could rely on their own capital.Therefore, the 1980s and 1990s were used by gradually constitutingequity or own funds, through the accumulation of revenues and commonfunds at the network level (“fonds de solidarité et de modernisation”,“fonds commun de réserve et de garantie” – see chapter 6), whichrepresented 49 billion francs in December 1990.

Apparently, therefore, the ownership problem in French savings bankshas been definitely solved since the 1999 law. In practice, however,the issue of effective control remains open, as we will see in the followingsections. French savings banks still do not have controlling owners.Internal documents, as well as interviews, showed that savings banksenior staff (both at the national and the local level) show no interest ingiving the sociétaires real control; and staff at the Fondation nationaledespair at finding owners interested in exerting their rights.

208

222 As noted in ACRI first annual report on Foundations, if the legislator gave Foundations apublic nominal recognition, the latter authors claim that given the private origin of theirequity, the mostly private locus of their creation, and the end of mandatory controldisposed by the 1994 law, Foundations are private entities. (ACRI, 1995, p.17.)

7.3 Control and monitoring mechanisms

The second pillar of corporate governance, besides ownership and controlpatterns, is constituted by the mechanisms of governance within firmsand groups. In other words, changes in ownership and formal control donot automatically translate into changes in the effective exercise of powerwithin savings banks. The following two sections explore such mechanisms.

7.3.1 The French case: the resistible rise of managerial control

The actual governance mechanisms in French savings banks are describedin Figure 7.3. As seen above, the 1983 law did not solve either theownership nor the control issue. Representation of stakeholders wasensured through the establishment in 1983 of “Conseils consultatifs”.But those vague bodies, with no clear juridical basis and corporatelegitimacy, did not really function, as a top official admitted in 1991223.

The true reform of control occurred in 1999. Under the 1999 cooperativestatus, each client of the Caisses d’Épargne can acquire up to 1000 eurosin shares. Whatever the amount paid and the number of shares held, allsubscribers are entrusted with an equal degree of ownership. Each ownerexerts his/her ownership rights through two levels of governance: a firstlevel, within a Société Locale d’épargne (SLE), which is a cooperativeinstitution. There are several SLEs for each Caisse d’Épargne: each SLEcovers a chunk of the territory on which the savings bank operates.Clients-owners belong to the SLE of their residency. Their shares entitlethem to voting rights, on the (cooperative) basis of “one man, one vote”.SLE members meet at least once a year, at a general assembly where theyelect the board.

The board, in turn, is entrusted with representing SLE members’ will throughthe Comité d’Orientation et de Surveillance (COS), whose members areelected by the SLE boards. The COS works like a monitoring board, sinceit appoints the three to five members of savings banks’ Directoire, whichis the body that effectively runs the bank.

209

223 Lucien Peretti in La Revue des Caisses d’épargne, February 1991, p.17.

The effective exercise of their ownership rights by sociétaires met withserious difficulties early on. These difficulties were of two types. First, boththe CNCE and the FNCE do not seem to have been wholehearted in theirefforts first to “recruit” sociétaires and then to consider them as the realowners of savings banks. As mentioned above, the Fédération wasentrusted with the mission to coordinate relations between savings banksand their owners. Its first task was to create the new owners, by sellingequity to the public, and setting up, in parallel, the governance mechanismsthrough which ownership would exert its rights. The acquisition of sharesstarted on January 1st, 2000 and ended on December 31st, 2003.In practice, this means that savings banks employees (“agents”) startedto propose to their clients the acquisition of shares in SLE. After a yearand a half, the number of clients-owners reached two million. As ofMarch 2003, there were 2.7 million clients-owners. The original objectivewas to reach 4 million shareholders by the end of 2003.

But that objective was brought down to 3 million in 2003, one millionless than initially planned. Indeed, each sociétaire has subscribed morethan expected: on average, from 600 to 750 euros of shares. And, in1999, the State was set for the Caisses d’Épargne objective of selling2.42 to 2.87 billion euros in shares by 2003, the amount raised beingaffected to the Fonds de réserve des retraites (the State’s emergencypension fund). This was, in a sense, the “price of freedom”224 – the“transfer of ownership” authorised by the State.

As a consequence, the drive to attract new sociétaires responded first andforemost to a financial necessity: that of not “over-paying” the State inthe operation225. Had the Group maintained the initial target of 4 millionstakeholders, it could have ended up raising much more than the 3 billioneuros originally targeted, and thus lost further money to the State.This operation, in sum, bears testimony to the low importance given bythe Group to the effective number of their owners.

210

224 See “La Fédération des Caisses d'Epargne veut peser sur le projet stratégique pour2004-2007”, in Les Échos, February 27, 2003

225 From interviews with savings banks managers and regulators.

Besides, it does not seem that either the CNCE or the FNCE expected togenerate new owners through access to the sociétariat. A documentdisseminated by the FNCE in December 2001 is very revealing for thatmatter: it shows the potential returns that the Group could get frompromoting sociétariat:

- a better fidélisation of a growing group of sociétaires, who will becomemore prone to acquire new products and services from their Caisse;

- the emergence of a new “communication force”, since satisfiedsociétaires will “sell” the Caisse d’Épargne in their familial and socialenvironment;

- the availability of a strong potential to be mobilised when needed;- the availability of a reserve of subscription to draw from [in the case

of future capital needs]226.

As one can see, the drive to attract, “recruit” and satisfy sociétaires is notjust a matter of finding owners. It is also (above all?) aimed at keepingand multiplying faithful customers. This objective is, of course, only half-heartly acknowledged at the FNCE –it is much more explicit at the CNCE.But this is one side of the coin. The other is that sociétaires themselvesdo not seem eager to exert ownership rights, as successive surveysconducted by the FNCE have shown. Of course, there is no certainty thatthose surveys are not biased : the Fédération might well see what it wantsto see. However, one could oppose a counter-factual to this potentialbias: in its power conflict with the CNCE, the Fédération has a vestedinterest in developing its power basis within savings banks – namely, thesociétaires themselves, whose interests it is supposed to represent.

In 1999, 2000, 2001, 2002, a series of quantitative surveys were thusconducted by the Fédération in order better discern the sociétairesprofiles, their expectations and the degree of their desired involvement inthe life of Caisses. The quantitative surveys were completed withqualitative studies of samples of sociétaires. This effort was systematisedwith the creation of an “Observatoire du sociétariat” within the FNCE.One of the consistent findings of such studies is that the most importantmotivations behind becoming a shareholder are (1) to earn dividends and(2) to benefit from special offers and banking services.

211

226 Fédération Nationale des Caisses d’Épargne, Un projet coopératif pour enrichir le projetstratégique des Caisses d’épargne – Promouvoir l’identité remarquable du Groupe Caissed’Épargne, November 2001.

In a recent study, the FNCE found that only 19% of respondents identifiedthe participation in the bank’s life as a reason behind acquiring shares227.Of course, it might be too early to judge whether this situation willstabilise in time. Nevertheless, the FNCE is now focusing its efforts on thatsmall part of “motivated owners”. But the current situation does not favourthe exercise of strong monitoring and control on the part of clients-owners.

A final, and critical obstacle to the effective exercise of ownership rights bythe new owners is the role played the CNCE in the corporate governanceof savings banks. As mentioned above (and shown on figure 7.3),the CNCE intervenes at a key moment of the governance chain: it givesits “agreement” on the Directoire (executive board) members appointedby the COS. The law is ambiguous as to what “agreement” means, andwhat is the precise extent of CNCE’s power over COSs’ nominees. In practice,however, all interviewees (be they at the CNCE, at the FNCE, or at thelocal savings banks) recognised the predominance of the CNCE in thechoice of Directoire members.

In addition, the segmentation of SLE (there are 448 SLE for 34 CE) leadsto a greater diffusion of ownership, which, in the legal-economic literatureon corporate governance, is seen as the breeding ground for managerialcontrol. As a local savings bank staff member candidly said:

The creation of 48 SLE in Picardie (a national record) enables us to becloser to our clients; but it also gives less weight to SLE …228

In sum, both the FNCE or the CNCE are ambiguous as to what theyexpect from sociétaires; in addition, key veto points are retained by CNCEin the governance process; and the FNCE – that is, the organ supposedto represent owners - has much less power than CNCE (see chapter 6).A first element that indicates the real balance of power is the sheer sizeof the two institutions, in terms of staff: the FNCE includes around30 people, while the CNCE is staffed with more than 500 employees.

212

227 FNCE (2002), “Enquête quantitative auprès des sociétaires”, internal document, (donethrough 1224 phone interviews with sociétaires in December 2001 – January 2002).One should not rely on those numbers, since different numbers have been given byinterviews or in the newspapers. What remains constant is the trend and the relatively lowproportion of owners willing to engage actively in the savings bank’s life.

228 Interview, 22.07.02.

A second element is the fact that the FNCE participation into thedefinition of Group’s “strategic orientations”, set by the law, is marginal,and does not encroach upon the business goals that stand at the core ofsavings banks’ strategy (see next chapter). These are clear obstacles toany kind of substantial monitoring and control from owners.

There is a ‘cultural’ path dependent explanation to such a situation, which isgiven at the FNCE : the CE have no “culture” of cooperation (by contrast,for instance, with the Crédit Agricole). So the current outcome couldreflect path-dependence, and the difficulty to change paths. But thatdoes not explain change in paths, neither does it account for the fact thatthere is an internal conflict and the effective exercise of ownership is notdoomed in advance.

7.3.2 The Italian case

As emphasised above, since the transformation of Italian savings banksinto joint-stock companies, after the Amato-Carli law, the problem ofownership became a problem of control – that is, what degree of controlcould and should the Foundations exercise upon savings banks’management and strategies. Since the governance mechanisms put inplace by the successive reforms were, in contrast to the French case, in linewith “normal” governance practice in private, joint-stock companies, theattention should shift to the control of senior management by Foundations.

Before the Amato-Carli law, top officials at savings banks were politicalappointees. The appointment system was called ‘terne’ (threes): at themoment of the renewal of the mandate of savings banks’ chief executive,the central bank proposed three names to the Treasury. The appointmentwas then decided at CICR meetings, in which the central bank governorhad no say. It is notorious that once in the 1980s the Governor of thecentral bank was expelled from the meeting room for having expressedhis views about the appointees.

Of course, this system became obsolete with the transformation of savingsbanks into joint-stock companies, and with the institution of formalgovernance mechanisms. A 1993 referendum abrogated the dispositionsof a 1938 law that gave the Minister of the Treasury the power to appointthe President and Vice-President of those Casse di Risparmio withinstitutional origins.

213

In addition, the 1993 Testo Unico put an end to the Ministerial appointmentof the President and Vice-President of the Banche del Monte, a categoryassimilated to that of savings banks. Therefore, while before the renewalof the boards in 1994-95, almost 19% of board members had beenappointed by the Minster of the Treasury, by 1995 they were only 0.4%229.This shift benefited the ACRI, which almost doubled its appointees withinthe boards (from 8.4% to 15.5%), and cooptation by the board, whichreached 9% of total members by late 1995. Meanwhile, members ofthe board appointed by local governments (cities, provinces and regions)still constituted in the late 1990s a sizeable part of the board: 43%;And Chambers of commerce appointed 19% of members. As for Cassedi Risparmio with associational origins, more than two third[s] of theirboard members were coopted by the Assembly of stakeholders.

The appointment power then passed to savings banks’ legitimate owners,the Foundations. In addition to being able to appoint their men to savingsboard’s top management, Foundations were for a while able to have theirown board members serve on banks’ boards. This was a logical continuationof the previous regime: in the immediate aftermath of the 1990 reform,it was conceivably difficult for Foundations to renew all executivepositions either on their board or on savings banks’ board.

A 1993 ministerial decree230 further severed the links between Foundationsand Casse di risparmio by disposing the incompatibility betweenmandates at the Foundations and the savings bank. In other words, topofficials and directors of the Foundations who were also top officials atthe controlled savings bank were forced to choose between one of theirmandates231. This was a widespread practice in “institutional” Foundations:in November 1995, more than 11% of members of the Foundations’administrative boards were also board members at the controlled savingsbank – half of which were either the President or Vice-President of theCassa di risparmio232. Statutory changes were completed in 1997; and inthe 1995-97 period, 54% of board members were renewed. However, hereagain, the process of change was slow. In 1998, 24 Foundation boardmembers (out of a total of 880) still held mandates within the controlledsavings bank233.

214

229 According to data provided by ACRI (1995).230 Decree of the Minister of the Treasury of November 26th, 1993, transposing a decision

taken by the governmental committee on credit and savings (CICR) of August 1993.231 Originally, in the 1990 reform, as the ACRI reports, compatibility between the two mandates

was considered useful to facilitate transition from the old to the new regime (ACRI, 1995).232 Data from ACRI, 1995.233 According to ACRI, 1999.

They had to choose. As a top official at one of the savings banks said,

In all the Casse di risparmio, there was a powerful man. When theyhad to choose between the bank and the Foundation, after the spin-off, almost all of them chose the bank, because banks, more thanFoundations, were seen as a power centre234.

Did this mean, however, control of the bank by its owner? It is not veryclear. As one of the interviewees said,

We cannot generalise. Where there was a strong character, and thatcharacter chose the bank, then it was the manager who controlledthe shareholder. Where the opposite was true, it was the shareholderwho controlled the manager235.

7.4 Discussion

As seen in the previous chapter, the re-distribution of power that occurredwithin the savings banks sector in both France and Italy participatedin a broader restructuring process within the banking sector as a whole.What can we conclude so far?

7.4.1 Ownership and the issue of power distribution

As shown above, the problem of ownership was solved in different waysin France and Italy (see tables 7.1 and 7.2). In France, the transformationof savings banks into a cooperative group and the gradual separation ofsavings banks from the Treasury circuit led to the creation of new equityand new owners – the sociétaires, within the specific configuration of thecooperative sector (one vote per individual owner). In Italy, savings banks’ownership was also created ex novo, under the form of the Foundations,but that intermediary step served to gradually align the new ownershipwith commercial banks’ owners, through the functioning of the marketfor corporate control.

215

234 Interview, 30.05.03.235 Interview, 30.05.03.

Table 7.1: Ownership patterns in France and Italy, 1980

France France Italy Italy Savings banks Other banks Savings banks Other banks

Legal status Sui generis Public; Sui generis: Public;private “quasi-public” private

Owners Unclear State; private Unclear State; private

Ownership Concentrated Concentratedcharacteristics

Effective control Managers; State; Political Political;Caisse private owners private owners

des dépôts

Table 7.2: Ownership patterns in France and Italy, 2002

France France Italy Italy Savings banks Other banks Savings banks Other banks

Legal status Cooperative Cooperatives Joint-stock Cooperative firm and joint-stock companies and joint-stock

companies companies

Owners Stakeholders Stakeholders Shareholders Shareholders and shareholders and stakeholder

Ownership Diffused Diffused; Strategic owners Strategic owners;characteristics strategic shares diffused

Effective control Managerial Managerial Managerial Managerial

This difference in outcomes owes much to the difference, underlined atthe outset of this chapter, in savings banks’ relation to power and powerholders. In France, historically, savings banks executive boards werecomposed of local power holders: businessmen, politicians, in a word,notables. Savings banks were a local actor, and were locally important topoliticians. They were, furthermore, autonomous in their governance,with coopted boards. In Italy, instead, through the appointment of keyboard members by the Minister of the Treasury, savings banks were anational political stake. Since the postwar period, most governmentappointees were Christian Democrats236 – and, in some specific cases,Communists, following an institutionalised bi-partisan spoils system.

216

236 According to Figliolia, 1981.

Reasons behind the changes in corporate ownership and control aroundthe Foundations are closely linked to Foundations’ potential and real rolewithin Italian capitalism. Interviews and parliamentary archives show thatseveral policy-makers hoped to make Foundations become institutionalinvestors, very much like mutual funds in the United States. In reality,more than institutional investors, Foundations have taken the other‘path’ offered to them; they have become grant-making institutionssimilar to, or trying to resemble, US Foundations. This horizon was ofcourse present at the inception, in the 1990 law – but there werewidespread fears that Foundations would long loom as powerbrokersover Italian financial capitalism, which did not happen – mostly thanks tothe rise of management control in banks and Foundations themselves. Infact, the diffused character of sociétariat in France and the breakdown ofthe savings banks sector in Italy ended up, in both cases, producing weakowners, while managers strengthened their grip on power.

7.4.2 A convergent trend towards management control

Indeed, savings banks in both countries have undergone a tremendouspower shift in favour of managers. This trend is linked to the changesstudied in the previous chapter: the wave of mergers and the emergenceof big banking groups required specific technical and professional skills atthe executive level, and shifted emphasis from ownership to guidanceand management of savings banks through this period of rapid corporatechange. Professionalisation and growing skill requirements for managers’position reinforced this evolution. In addition, the increased differentiationbetween ownership, control and management have left, in a probablymore durable way than corporate restructuring, considerable leeway tomanagers and have weakened owners’ effective power of control.

Such evolution is consistent with the leading role played by savingsbanks’ top management in the twin processes of regulatory reform (seechapter 5) and corporate restructuring (see chapter 6). In the face of of aradically altered environment (higher interest rates, higher competition,freer markets, regulatory changes) top managers at savings banks choseto modernise their banks, and this modernisation effort included theidentification of clear owners and the institutionalisation of owners’control – without, however, relinquishing power within savings banks.

217

219

8.1 Introduction

As noted in the previous chapters, the past two decades have beencharacterised by far-reaching changes in banking, both in terms of whatbanks are doing and how they are doing it. Savings banks have taken partin this transformation. Indeed, since the 1970s French and Italian savingsbanks have gradually extended the operational (and territorial) scope oftheir business. In two decades, savings banks in both countries havebecome quasi-universal banking groups, offering a complete range ofproducts and services present on most segments of the banking market(retail, investment banking, corporate finance…). These changes wereespecially remarkable in France, where savings banks transformedthemselves from being, mostly, quasi-public institutions collecting savingsfor non-profit purposes, to banks focused on profitability and revenues.

Understanding these changes, how they relate to changes in the bankingsector as a whole, and how they compare from one country to the next,is critical in assessing the validity of the neo-institutional theories of capitalistdiversity presented in Chapter 2. As observed then, corporate behaviouris usually seen as residual, or as the ultimate dependent variable in a longcausality chain – in that framework, corporate behaviour depends on, oris shaped by, existing institutions. This chapter will not discuss that claim.Rather, the following pages will investigate the various patterns of bankingstrategies and their evolution, and to what extent the changes in bankingstrategies can be directly attributed to broader institutional change.

In particular, as in chapters 6 and 7, this chapter addresses the two researchquestions formulated in chapter 2; namely, (i) do patterns of changeshow convergence / divergence between the two cases? And (ii) arethose differences (similarities) in outcomes directly attributable to the roleplayed by institutions in mitigating the impact of external pressures ondomestic actors / processes of adjustment?

8. CHANGES IN SAVINGSBANKS CORPORATESTRATEGIES

The first section presents and analyses changes in the strategy of savingsbanks, mostly relying on balance sheet and annual report data237.The second section puts things in perspective: how do these changes farewith the evolution of the banking sector as a whole? Finally, the thirdsection discusses factors of change, in relation to the changes explored inthe previous chapters: regulation (chapter 5), corporate restructuring(chapter 6), corporate governance (chapter 7).

8.2 From specialised intermediaries to quasi-universalbanks?

8.2.1 The changing intermediation function of savings banks

Over the past two decades, savings banks in both Italy and France haveradically transformed their business behaviour and strategies – reflectedin shifts in their balance sheet structure. On the assets side, there hasbeen a shift towards non-bank lending activities. In Italy, as Figure 8.1shows, non-bank lending238 has continuously increased from the 1980sonward, from 28% of total assets in 1984 to 62% in 2000. In themeantime, bank lending has remained constant; the amount of cash andaccounts held at the Central Bank have sharply decreased; and theproportion of assets held in securities has fallen down, too (from 28% oftotal assets in 1984 to 16% in 2000).

French savings banks have followed a similar trend. Figure 8.2. showsa continuous increase of non-bank lending, from 16.4% of total assets in1984 to 31.5% in 2000. Overall, however, that proportion is still muchlower than in the Italian savings banks sector. This difference can beexplained by (i) the lower proportion of non-bank lending at the beginningof the period; and (ii), more importantly, the fact that a significant crust ofsavings banks’ “administered savings” resources (the famous “Livret A”)is still managed by the Caisse des Dépôts et Consignations (CDC) – whichfalls into ‘bank lending’ within savings banks’ balance sheet.

220

237 Balance sheet figures for Italy have been calculated from data provided by the ABI. It isimportant to note that these data are disaggregate (by single savings bank) and thefigures used to build the graphics are a median value. I did not use the average value forthe simple reason that some savings banks being much larger than others, it would haveintroduced a bias in the calculations. As for France, the calculations were made usingannual report (aggregate) data by the Caisse Nationale des Caisses d’Épargne. Appendix A.shows the re-ordering of the balance sheet data I had to make.

238 That is, lending to non-financial firms and to households.

This point will be analysed in detail in the next section. What this means,however, is that assets held in “other credit institutions” (of which theCDC) still represents a sizeable proportion of total assets (41% in 2000),despite a continuous fall since 1984 (76%), which parallels the rise innon-bank lending. To note as well: the proportion of assets held insecurities has increased, from almost nothing in 1984 to 15% in 2000.

221

100

80

60

40

20

0

1984

� Other assets

� Lending to clients

� Lending to banks

� Stocks

� Securities

� Cash and central bank account

Figure 8.1: Composition of Italian savings banks' assets,1984-2000 (in % of total)

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Changes in the composition of liabilities have been important, too. In Italy,as Figure 8.3. shows, the contribution of non-bank deposits to total liabilities(e.g. to savings banks’ resources) has fallen sharply over the period, especiallyduring the late 1990s: from 73% of total liabilities in 1984 to 48% in 2000.At the same time, liabilities made of bank deposits and securities rose fast,especially after 1988. That year, securities rose from 1 to 5% of totalliabilities, to reach 8% in 1989, 11% in 1990. In 2000, securities represented23% of total liabilities. The evolution is similar for commercial banks.The evidence is straightforward: savings and commercial banks’ liabilitycomposition have converged. The two categories of banks display thesame tendencies with respect to the diminished importance of currentaccount deposits, the drop in savings accounts, the boom in depositcertificates, the increased reliance on bonds and “pronti conto termine”,a remunerated long-term account. The data shows, moreover, that wheresavings banks were lagging far behind commercial banks (for example inthe market for deposit certificates), they have caught up and now displaya very similar balance sheet structure.

222

100

80

60

40

20

0

1984

� Other assets

� Non-bank loans

� Assets in other credit institutions

� Securities

Figure 8.2: Composition of assets in French savings banks,1984-2000 (in % of total)

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

In France, as Figure 8.4. shows, the contribution of non-bank deposits tototal liabilities has declined in the same proportion as in Italy: from 90%in 1984 to 59% in 2000. The proportion of bank deposits shows a morecontrasted evolution, and seems to have returned in 2000 to the 1984level. The proportion of secure debt has increased, from 0% in 1984 to20% in 2000. The level of capital and reserves has decreased, and thenumber of “other liabilities” (mainly provisions or products of off-balancesheet operations) has increased as well.

In contrast to their Italian counterparts, French savings banks do not havea long history on the lending market. Starting from zero corporate lendingin 1987 (the year savings banks were authorised to lend to firms), thistype of asset was however bound to rise. Which it did: it now representsbetween 11 and 15% of total savings banks lending.

223

100

80

60

40

20

0

1984

� Other

� Equity

� Reserves

� Liabilities in bonds

� Non-bank deposits

� Bank deposits

Figure 8.3: Composition of Italian savings banks' liabilities,1984-2000 (in % of total)

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

French savings banks (especially through the alliance with the CDC,which brought its merchant bank along) have also increased investmentservices; and similar to Italy, the share of administered savings accountshas dropped.

What do all these numbers mean? At a broad level, these shifts in banks’balance-sheet structures are a clear signal of a profound transformationin the “intermediation function” fulfiled by savings banks in both countries.Financial intermediaries, in the classical vision first conceptualised byGurley and Shaw (1960), transform short-term liquid funds into long-term lending.

224

100

80

60

40

20

0

1984

� Other liabilities

� Capital & reserves

� Securities

� Bank deposits

� Non-bank deposits

Figure 8.4: Composition of liabilities in French savings banks ,1984-2000 (in % of total)

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

In Italy, savings banks were already fulfiling a classical intermediation functionbefore the 1980s: the Casse di Risparmio were, in effect, channelling fundsfrom households to firms and public bonds. In other words, they weretransforming short-term money into long-term capital. Within time, theysoon became more reliant on financial markets, while increasing theirlending to non-bank clients – mainly households. The intermediation circuitwas, therefore, not simply reversed (from “households to firms/State” to“firms to households”), but made more complex, signaling a criticaltransformation of financial intermediation as a whole (see chapter 4).

In France, change was even sudden. In the 1970s, savings banks were thecollecting part of a broader intermediation circuit, headed by the CDC(see Figure 4.5 in chapter 4): the former were merely collecting savings,and transferred the funds to the CDC, which transformed those fundsinto long-term lending to firms and local governments. Now, in contrast,savings banks both collect savings and directly lend to firms and households;and, like their Italian counterparts, the intermediation function they fulfilhas become more complex.

Viewed from a narrower angle, changes in the balance-sheet structurereflect, albeit imperfectly239, a clear trend towards the diversification ofassets and liabilities on the part of savings banks – and the turn towardsnew clienteles and markets. This broad trend will be analysed in furtherdetail in the next two sub-sections.

8.2.2 The diversification of savings banks products and services

• Italy

Changes in balance sheet structures reflect changes in theoperational scope of savings banks. In Italy, the Casse di risparmio, asmentioned in the Introduction, were clearly more ‘bank-like’ thantheir French counterparts by the late 1970s: they offered a muchbroader range of products and services, and autonomously decidedon their investments and the use of their resources.

225

239 Balance-sheet data are a limited source of evidence since they do not include a growingpart of bank business (called, for that reason, “off-balance sheet activities”): mainly, allthose services provided to clients (savings management, liquidity management, advisoryservices….).

However, the Casse di Risparmio did stand in a particular segment ofthe financial system, in the midway between credit firms (short-termoperations) and ‘special credit institutions’, which operated in thelong-term. Within the context of market segmentation, savings banksheld a rather large and diversified position, financing public institutionsinvestment, consumer credit, real estate and rural credit (creditoagrario). Their lending revealed a preference for extra-industrial sectors(see Figliolia, 1981, Capriglione, 1977). There was, however, no legalconstraint specific to savings banks regarding products and services:savings banks were part of a segmented credit system characterisedby the separation of long and short term finance. In other words,taking the Hollingsworth formula again, there was no strong top-down imposition of boundaries as to products and services.

The full homologation of savings banks with commercial banks was notachieved until the Testo Unico of 1993240, which abrogated the specificlegal regime of savings banks (as well as those of Banche popolari andthe Casse rurali), and put an end to credit segmentation (short versuslong term). But the real turning point was reached in the 1980s.During that period, Italian savings banks started offering “accettazionibancarie”, pool medium-term finance, export finance. Services weredeveloped as well, such as leasing or factoring241. Both services andspecialised financial products were often offered through specialisedsubsidiaries. Again, however, these innovations were not specific tosavings banks, and concerned all types of banks. According to Gualandriand Landri (1994), diversification was the result of convergencebetween the aims of policy-makers and those of commercial bankers.

• France

In France, the process of de-specialisation reflected in the balancesheet data presented above started in the mid-1960s, but proceededvery gradually. In the late 1970s, as a respondent put it, the CE werenothing (yet) but a “small collector of moneyboxes”.

226

240 Testo Unico in materia bancaria e creditizia, Legislative decree n.385, September 1st, 1993.241 Leasing allows credit institutions to finance entirely the acquisition of real estate by a firm.

The real estate good is owned by the bank, who collects a rent from the contractor. Uponthe expiration of the contract, the client has the possibility to buy the good, for a pricedetermined at the beginning, minus the rents paid until then. Leasing became verypopular during the real estate bubble in the late 1980s, when rents sky-rocketed, thusallowing credit institutions to improve their profitability. But the real estate bubble, onceit exploded, was also at the origins of serious financial troubles faced by French creditinstitutions in the early 1990s.

In other words, savings banks then were mainly a mono-productcollecting institution. As argued in Chapter 5, the 1983 reformrepresented a turning point, the reform considerably extending thescope of activities savings banks could pursue. But some substantivechanges had already taken place in the previous decade. In fact, themid-1960s represent, in Duet’s threefold periodisation of the historyof French savings banks, the “entry into diversification” (Duet, 2001).

Diversification took root on both sides of the balance sheet. On thecollect (liabilities) side, the CE started distributing the Livret ÉpargneLogement (housing savings bankbook, or LEL) in 1965. In 1969, thebons d’épargne logement (housing savings coupons) were launched;and in 1970, savings banks started offering Plans d’Épargne logement(housing savings plan, or PEL). These products were all savingsaccount products; but they differed from the Livret A by being moreflexible (they were not ‘administered savings’, as was the Livret A,whose interest was determined by the government). Besides thosesavings account products, savings banks diversified liabilities byproposing investment instruments to their clients, mainly SICAV(Société d’Investissement en Capital Variable), which are managedinvestment funds. Savings banks’ first SICAV in stocks was launchedin 1967; the first SICAV in bonds in 1969.

On the lending (assets) side, the 1950 Minjoz law allowed for partof the resources collected by savings banks under the form ofadministered savings to be used for financing local governments’investments in housing (see chapter 5). But until the late 1960s, savingsbanks’ role was circumscribed to the transmission of proposals to theCDC, which then decided whom to lend to, and which managed lendingprocedures. Besides, savings banks were not allowed to develop lendingto individual clients until 1969 and the creation of the Prêts Épargnelogement (housing saving loans). Two years later, in 1971, savingsbanks were authorised to offer personal loans and housing loans.

Changes accelerated in the late 1970s and early 1980s. In 1978, savingsbanks were allowed to open checking accounts for their clients. This wasa major break-through for savings banks, who until then were notallowed to offer any collect product other than savings accounts.

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In addition, in the following years new administered savings instrumentswere created, such as the Livret d’Épargne Populaire (popular savingsbankbook, henceforth LEP), in June 1982; and the Compte d’épargnepour le développement industriel (savings account for industrialdevelopment, or CODEVI) in October 1983. These products were“banalised”, i.e. they could be distributed by all kinds of banks.But savings banks soon took a lead in the distribution of such products,building on their experience with administered savings accounts.

Further product innovation took place in the 1980s: a first short termSICAV was launched in 1982; two new Fonds Communs de Placement(investment funds) were created in 1985 (Epareurop and Eparpacific);and two pension insurance instruments were launched in 1985 and1987 (Plan d’Épargne Retraite). Among the most dynamic savingsbanks, the Caisse d’Épargne Bouches du Rhône proposed, in 1985,11 investment products, all specific to the savings bank sector(Éparcourt, Eparpacific, Epardyn…). In 1991, the savings banks networkoffered 19 SICAV, 9 FCP, and collected 107 billion francs throughthose channels, or a 13% market share. In June 1984, a first savingsbanks bond was put on the market. In 1985, savings banks joined aninterbanking coordinating entity that launched a nation-wide creditcard (the Carte Bleue). The Plan d’Épargne Populaire (popular savingsbanks), a new savings product, was launched in January 1990. It wasa success and created a very competitive market, but CE quickly got20% of market shares. Finally, the 1980s also saw the creation of newlending instruments; in addition to housing lending, savings bankswere authorised in 1985 and 1987 to lend to individuals and families.Mostly, however, these lending products were complementary tothe various savings products savings banks were already offering(Prêts complémentaires livrets, prêts complémentaires plans…).

To sum up, while Italian savings banks never really differed from othercategories of banks in terms of products and services, French savingsbanks did, until the 1980s and 1990s, when they underwent a progressivehomologation of banking products and services across sectors, asshown above. During that period, French savings banks caught up oncommercial banks.

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8.2.3 Exploring new markets, targeting new clienteles

This catching up process in the French case, and the enduring similaritybetween Italian savings and commercial banks, was not limited toproducts and services; it also concerned clienteles and markets. Table 8.1shows the composition of Italian savings banks’ assets and liabilities, bytypes of clients. Again, the ‘clientele mix’ of savings and commercialbanks have converged: savings banks have increased their lending tohouseholds, which were already sizable in the mid-1980s; commercialbanks, meanwhile, have almost closed the gap. Similarly, both savingsand commercial banks have decreased their lending to the governmentand to private firms.

Table 8.1: Composition of liabilities and assets of Italian banks,by market

1980 1986 1995 1996Savings All Savings All Savings All Savings All banks banks banks banks banks banks banks banks

Lending 100 100 100 100 100 100 100 100

Households 17.79 2.78 18.42 3.62 37.67 35.31 38.74 35.96

Government 11.56 9.51 6.72 7.99 6.81 5.09 6.64 5.00

Non-financial 68.40 85.24 69.63 81.63 46.84 49.69 45.28 48.33firms

Other 1.49 0.00 1.44 0.00 7.97 9.25 8.37 9.87

Liabilities 100 100 100 100 100 100 100 100

Households 72.35 71.62 80.59 75.07 62.59 61.98 63.94 62.54

Government 10.34 7.69 4.19 3.83 2.87 2.72 2.96 2.85

Non-financial 15.20 19.43 13.73 19.27 7.47 9.45 7.32 9.16firms

Other 2.11 1.26 1.49 1.83 27.07 25.85 25.78 25.45

Source: Schena (1998).

On the liabilities’ side, the evolution is smoother, but sill shows similartrends at play for the two categories of banks: a gradual decrease of thereliance on households savings, on government and firms, balanced byan increase in other forms of liabilities (such as stocks and bonds).

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In France, savings banks show a similar trend towards exploring newmarkets – but in a much more limited way. French savings banks arehistorically specialised in the market for individual credit and collect (seechapter 3). They are also well positioned in the NGO market and the localgovernment market, again due to their historical role in financing localgovernments’ investment in social housing. However, the Caisses d’épargneare quasi-absent of corporate markets. Due to the lack of data on thatissue, one can only rely on estimates provided by savings banks actorsthemselves. According to one of these estimates (given by a CE managerworking in that domain), the situation is very heterogeneous within thegroup: one third of CE are well rooted in the SME market, one third ismaking significant efforts to increase their activities in that sector and thelast third is totally absent of the market (see table 8.2.).

Table 8.2. Banking market shares in France

Deposits Lending1986 1993 1999 1986 1993 1999

Commercial banks 49.9 46.6 38.9 50.7 50.3 44.3

Cooperative banks 45.3 52.3 59.6 24.7 27.2 37.1

Of which: savings banks 17.4 18.7 19.8 3.9 4.8 7.6

Others 4.8 1.1 1.5 24.6 22.5 18.6

Sources: Commission bancaire (2000), lacoue-labarthe (2001)

But the SME market is an explicit target for the savings banks group, asstated in recent commercial strategy papers released by the CNCE – alongwith the so-called “professional” market, that is the market of loans toprofessionals (medical doctors, lawyers…)242. The position on thosespecific markets depends greatly on the specific history of local Caisses– which accounts for the heterogeneity mentioned above. For instance,the CE of Picardie’s larger than average market shares in small firmlending are due to the acquisition of a leasing firm in 1995.

Market, clientele and product strategies have of course evolved together.The need to move into new markets, or to remain competitive in traditionalmarkets, stimulated savings banks in both countries to innovate andmultiply the number of products offered, while services tailored to theclients grew in importance.

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242 The market for professionals corresponds to lending below 1.5 million euros; the marketfor small and medium size enterprises (SMEs) corresponds to lending between 1.5 and15 million euros. Lending above that amount belongs to the corporate market.

For instance, one of the innovations of the early 1990s in the French savingsbanks group, the “Compte Satellis”, a treasury management service,was developed in 1991, at a time when the newly re-dimensioned groupsought to enter corporate markets. As a top savings bank official saidin the late 1980s: “The opening of the squirrel [the savings banks groups’nickname] to the business firm’s universe corresponds to a strategythat needs to be pursued up to the end so that not to lose touch withcompetition”243.

8.2.4 From core businesses to large groups

The corporate strategies pursued by savings banks in the 1980s and1990s relate to the shift in corporate boundaries analysed in chapter 6.Corporate restructuring, mergers, and acquisitions were a means to pursuethe strategy of diversification just analysed, so as to become a universal bankor a multi-functional group. Conversely, diversification and competition inall markets were necessary to ensure the sustainability of external growth(M&As) strategies. French savings banks’ acquisition of the Crédit Foncierde France in 2003, belongs to that logic – as has been the continuouseffort to build partnerships and set up specialised subsidiaries.

As an interviewee from the CNCE said,

In order to build all those national structures, we have to makepartnerships, create profit centres. All these subsidiaries will be listed.To be able to maximise, a large banking group must be present on alltypes of activities (métiers). All of those structures must be unitedwithin the group244.

This strategy was, as we saw in chapter 6, systematically pursued bythe French savings banks ‘network head’ after 1988. Subsidiaries builtafter 1988 by the CENCEP, with the CDC or specialised institutions,covered: off-balance-sheet activities, such as OPCVM Écureuil-Gestion(created in 1989), life insurance (Écureuil-Vie), damage insurance(MURACEF), leasing (Bail Écureuil, Mur Écureuil, Cicobail), capital-risk(Épargne Développement), project financing (Ingecep, created in 1990).

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243 A top official at a SOREFI, cited in Le Méridional, June 9th, 1989.244 Interview, 24/04/02.

8.3 Convergence and Resilience

8.3.1 Cyclical change or convergence?

Most of the changes presented above are common to all category ofbanks. In other words, the move towards universal banks is not specificto savings banks in either country. Banks tend increasingly to act in thesame way: offer similar products to similar clients in the same markets,following comparable commercial targets. There is a clear trend towardsoperational isomorphism. This is true even for those credit institutionsthat were least considered as “banks”. This is the case, for instance, ofthe French Post office, which during the 1990s gradually asserted itsbanking identity. In 1994, for example, it gained (from the State245) theright to practice overdrafts; in 1998, it gained the right to pull back postalcurrent accounts’ encours (Comptes courants postaux, ou CCP) worth25 billion euros from the Treasury to one of its subsidiary (Efiposte).

The evidence displayed above therefore provides strong support both toconvergence theories and to the ‘systemic congruence’ view also adoptedby VOC scholars. However, this is not the end of the story. A more carefullook at the data shows that strong divergence forces are at play beneaththis broad converging trend.

8.3.2 The persistence of market niches: products…

The convergence story ignores, first of all, the persistence of marketniches, which lead to divergent business strategies. What savings bankslost in statutory and legal peculiarities, they gained in building on theircompetitive advantages in specific niches. This is the argument made byDe Boissieu, among others (De Boissieu, 2000).

• France

French savings banks are aggressively moving towards the corporatelending market. However they are still a small player in that market –and they know their real strength is household lending. All intervieweesin the French savings banks group acknowledged this: “At the endof the day, that’s were our natural market is” said one of them246.

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245 Since 1990, every four years the Postal office negotiates with the State, under a so-calledcontrat de plan (Planning contract), its strategy and its public service obligations.

246 Interview, March 2002.

The savings bank group, furthermore, remains among the main lendersto local governments, and the main providers of credit to publichousing programs. In addition, the Livret A still represents a sizeablepart of savings banks revenue.

What about other non-bank resources? The first section showed thatFrench savings banks greatly diversified their offer of credit and services,but also of collect instruments, i.e. savings and deposits accounts.Looking more closely at French savings banks’ balance sheet structure,however, one quickly notices that a large chunk of non-bank liabilitiesconsists of “special regime” savings accounts: Livret A247, of course,but also Pel, Lep, Pep, Codevi… Those collecting instrumentsrepresented 87% of non-bank lending in 2000, against 13% forcredit and current accounts248.

The case of the LEP is interesting. Created in 1982, the Livretd’Épargne Populaire (LEP, or popular savings bankbook) was originallydestined for low income households – individuals exempted fromincome tax, or paying a tax below a certain level. Conditions of accesswere broadened by a 1997 ministerial decision, setting a ceiling of660 euros. Return for LEPs was originally set at the Livret A rate level,with a supplement to compensate the real negative return on LivretA, which persisted until the mid 1980s. Once real return on Livret A,however, returned to “normal”, the advantage given to LEP ratewas maintained249.

Therefore, one can conclude that French savings banks did chooseto diversify and diminish their reliance on the Livret A, which waspreventing them from becoming fully-fledged banks; but at the sametime, diversification took very familiar forms. In other words, Frenchsavings banks ventured into new activities by relying on “old” ortraditional business practices and behaviour.

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247 That part of Livret A not destined to the CDC.248 Source: Groupe Caisse d’Épargne, Rapport Annuel 2000.249 As emphasised by in Nasse and Noyer, 2003 (annex 2).

• Italy

In Italy, too, product diversification and homologation with commercialbanks are neither complete nor irreversible. In 1981, in the Italiansavings banks journal, an observer noted that the de-specialisationwave that started in the 1970s would be reversed, and that “the timehas come to put in place a new specialisation, which would justify,within the frame of a pluralistic banking system, the existence of[bank] categories” (Ruozi, 1981, p.438).

The same observer added that while savings banks had to a large extentassimilated the operational characteristics of commercial banks, theymaintained a “proper physionomy”, both on the assets and theliabilities side. The high proportion of liabilities made up of clients’deposits (versus other bank loans, for instance) was evidence of thepersistent rooting of savings banks in local markets. Ruozi furtherdescribed a “complementary intermediation” to that done bycommercial banks, corresponding to the “functional specialisation”of the Italian banking system. But divergence did not originatein persistence or path dependency. Ruozi equally showed thatthe shift from loans to bonds, which characterised Italian savingsbanks’ assets in the 1970s, reversed the postwar trend, which hadseen a shift from bonds to loans (Ruozi, 1977).

The same comment could be made today. A longer-term perspectivewould show that the convergence of liabilities does not change thefact that savings banks have long been characterised by a heavyreliance on deposits from households. This was true in 1981 (seeFigliolia, 1981), and still holds today. Conversely, the current shift tolending reverses a previous trend which itself reversed a previous one.

There is, then, a specificity in savings banks’ product strategies.Such a strategy is not opposed to that followed by commercial banks.As Figliolia noted in 1981, there is “no dualism or alternative, butcomplementarity and development of commercial activities in strictlinkage with other activities” (Figliolia, 1981).

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8.3.3 … And markets and territories

• France

As emphasised above, French savings banks are still heavily dependentupon their retail markets for their income. In particular, the Caissesd’épargne remain a major provider of special savings accounts tohouseholds. In addition, French savings banks hold niche positionsin the lending market for local governments and for associations(non-governmental organisations). Savings banks’ large marketshares in these two specific lending markets owe to their historicallegacy, and in particular their experience of lending under the Minjozlaw250 framework. The Minjoz law, as mentioned in chapter 5, wasthe result of heavy lobbying by savings banks through key politicians(of whom Minjoz himself), aimed at enlarging their operationalscope. The Minjoz law created another, very specific intermediationcircuit within the ‘Treasury circuit’ analysed in chapter 4.

Under this framework, savings banks could ‘sponsor’ borrowers (localgovernments) by presenting them to the CDC for lending. Out of that‘sponsoring’ the Caisses earned a fixed commission. In 1971, the CEgained the right to manage lending contingents directly – assumingrisks and earning interests251. Those funds were, at first, mainly aimedat financing investments into collective infrastructures – transportation,public housing…

In the early 1980s de-centralisation reforms passed by the Socialistgovernments increased local governments’ financing needs and fedthe Minjoz intermediation circuit. After 1986, the majority of “Minjozcontingent” funds were destined for social housing. By the end of1990, the government decided to put an end to those de-centralisedMinjoz contingents; thereafter, Minjoz loans would be made solely bythe Caisse des Dépôts. However, the Caisses d’Épargne continuedproviding funds to local governments (out of ‘normal’ resources)for financing investments into social housing252. During the 1990s,the Caisses d’épargne strengthened their position in the localgovernment market by offering new financial products and services,such as project finance (through Ingecep, a product created in 1990),treasury management…

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250 Law of June 24th, 1950.251 CENCEP, Pour mieux connaître la Caisse d’Épargne, November 1984.252 CENCEP, La Caisse d’Épargne: une mutation réussie, Paris: October 1991.

As for associations, savings banks were authorised in the early 1980sto finance the investments of those associations who benefitedfrom local governments’ guarantee (under the Minjoz framework).Here again, their strong retail position at the local level, along withtheir local networks, helped tie strong links with associations.

• Italy

The Italian savings banks’ territorial rooting has long constituted thecore of their identity. At their 1981 meeting in La Spezia, savings banksofficials underlined the usefulness of savings banks as a category, andthe necessity to distinguish oneself from other banks not in terms ofbanking products, but in terms of banking segments (Lisanti, 1981).Recent works have shown how savings banks’ business remainsclosely linked to local economic systems. Farabullini and Gobbi haveshown, for instance, that savings banks remained, throughout the1990s, the main providers of bank lending to small and medium firmsbelonging to industrial districts alongside Banche popolari, and aheadboth of commercial banks and cooperative banks (Farabullini &Gobbi, 1997). In sum, savings banks have kept their leading rolewithin Italy’s “localistic” banking system (Locatelli, 1998b).

Furthermore, Bongini and Locatelli argue that “in contrast to otherbanks, savings banks have chosen, following the liberalisation ofbank branching, to intensify their presence in their regions of origin,which constitutes a specificity even with respect to Banche popolari,characterised by the density of local rooting” (Bongini and Locatelli,1998: p.216).

8.3.4 The role of non-profit objectives in savings banks’business strategy

As mentioned in the introduction and chapter 3, savings banks’ corporateidentity is linked in part to the importance of non-profit activities financedby their revenues. However, the transformation of savings banks in thetwo countries had a profound impact on those non-profit activities – andtheir fate diverged in the two cases.

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• Italy

The role of non-profit objectives in savings banks’ business strategy ismarginal since the unambiguous divorce between banking businessand general interest activities that took place in the early 1990s.The Legislative Decree 356/1990 specified the sectors of intervention.A 1991 law253 made mandatory for the Foundations to dedicate partof their annual revenues254 to constitute special funds at the regionallevel and at the disposal of voluntary associations. Non-profit objectives,therefore, were entirely transferred to the newly born Foundations.

• France

Like their Italian counterparts, French savings banks have long beencommitted to redistributing part of their revenue to the local economy,mainly through grants or zero-interest loans. In France, this traditionis associated with the diffusion of public baths and “workers’ gardens”(jardins ouvriers) in the late XIXth and early XXth century. This practicewas essentially the prerogative of the local Caisses. Until 1994 therehad never been any successful attempt to centralise, or at leastcoordinate such activities. In 1994 a Foundation was created: called“Fondation Caisses d’Épargne: Agir Contre l’Exclusion” (Savings banksfoundation against social exclusion), it was set up to rationalise theuses of the fortune personnelle of the single Caisses. It defined threeaxes for intervention: fight against illiteracy, fight against the exclusionof the elderly, and fight against the exclusion of the unemployed.

The 1999 reform represented a major turning point for French savingsbanks’ non-profit activities. The law, indeed, obliged savings banks todirect part of their revenue to non-profit activities – the so-called“projets d’économie locale et sociale” (social and local economyprojects, or PELS). The PELS correspond to the savings banks’ “generalinterest missions” (missions d’intérêt général, or MIG), recognisedby law. The FNCE, whose mission was to coordinate non-profitactivities at the national level, defined in 1999 three main axes forintervention, drawing on savings banks’ variable past experience:“local development” (including loans and subsidies for firm creation),“social cohesion” (subsidies to associations fighting illiteracy, forinstance), and “quality of life” (housing, environment…).

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253 Law n.266, August 11th, 1991, article 15.254 Specifically, one fifteenth of their revenues, net.

What makes French savings banks original, especially compared totheir Italian counterparts, is that non-profit activities are pursuedalong for-profit ones. The linkage is even stronger since, as a topFNCE official said,

In Italy, Fondations get their revenue from their assets, whereas inFrance, if the CE does not make profits, there won’t be any MIG255.

And according to another respondent,

The French situation is very peculiar: it’s the law that gives MIG to theCE. We are not sad about that. This situation is linked to historyand to the culture of CE. It’s an incentive to make profits256.

This second quote, however, underlines the ambiguity of PELS. Yes, thereis an incentive to pursue non-profit activities that is nestled within thevery core mechanism of profit-making. But doesn’t it mean that,reciprocally, PELS could be conceived as a somewhat other form ofprofit making?

In fact, looking at the substance of some PELS themselves, for instancethose within the “local development” axis, one quickly notices thatthey are more like capital-risk. This is duly acknowledged (within theGroup) by the Fédération257. Asked about the linkages betweenredistributive goals and corporate interest, one interviewee responded:

We try not to link the two: it is not because we support anassociation that we will force it to open an account with us.We are very careful not to mix the two: first because we wouldcompete with ourselves, secondly because it’s very complex258.

Added to the ambiguity regarding the nature of PELS, and theexpectations nourished by the Caisses about them, is the ambiguityabout the status of PELS within the day-to-day business activities ofsavings banks. There is no coherent practice across Caisses d’Épargne:MIG are sometimes the direct responsibility of a Directoire member;sometimes they are managed by junior staff.

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255 Interview, 24/04/02.256 Interview, 24/04/02.257 For instance in the appendix to the internal document Orientations des projets d’économie

locale et sociale des Caisses d’Épargne258 Interview, 27.06.02.

In Picardie, for instance, responsibility for the PELS belongs to theDirection for Communication (headed by a junior manager). Besidesthe issue of location of MIG within the organisation, there is the issueof the sheer means attributed to their management. At the Fédération,all respondents acknowledged this was an issue. In Paris, for instance,only five agencies have someone specialised in MIG. As a respondentbelonging to a regulatory authority told me in an euphemistic way,

One can question oneself about the means savings banks givethemselves to manage those PELS259.

Overall, therefore, the exact “meaning” of PELS within the new Groupis a moving target. But in the French case, in contrast to the Italian one,non-profit missions and activities have actually been reinforced by thelaw, rather than weakened or dissociated from profit objectives.

8.3.5 The persistence of differences among savings banks

Besides the arguments made above (about market niches), convergenttrends that can be observed at an aggregate level also lose salience whenlooking at disaggregated data. This is especially true for Italy. Figures 8.5and 8.6 show the balance of savings banks revenues between ‘old’banking activities (the interest margin – right scale) and ‘new’ ones(revenues from services – left scale), in 1986 and 2000. What emergesfrom these data is the increased heterogeneity between savings banksover time, in terms of revenue diversification.

That diversity can be explained in the following terms. In the early 1990s,once savings banks were enabled to merge and expand on new markets,only the largest savings banks – and those integrated within a group –succeeded in diversifying their balance sheet structure. In addition,decreasing interest rates in the 1990s automatically reduced all savingsbanks’ interest margin, but those who suffered most were the banksessentially relying on lending to households and small firms – i.e. thesmaller savings banks. These banks displayed a limited capacity orwillingness to engage in new markets and the divide grew between thesebanks and the ones that did choose to invest in the development of newskills and services.

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259 Interview, 06.03.03.

Whereas, in 1994 for instance, Cariplo clearly stood as an outlier in termsof its share of revenues generated from services as opposed to gains fromtraditional banking activities, by 2000 a small group of large savingsbanks had taken the same path. This trend explains why, on average,savings banks’ balance sheet structure seems to have converged oncommercial banks’.

8.4 Discussion

8.4.1 The role of competition

Starting from the early 1980s in France, late 1980s in Italy, competitionin the banking sector accelerated and intensified. The number of bankwindows has greatly increased in Italy, along with the evolution of thevolume of intermediated funds – that is, total banking collect andlending. The first clearly outpaced the second during the 1990s. This is aclear indicator of intensified competition, although still insufficient.

Indeed, it is first of all limited to the retail segment of the banking market,in which localised contact with the clients is a key factor of success.Secondly, it is theoretically possible that the multiplication of bankwindows did not affect competition – in the case of segmented markets,where the increase in the number of bank branches helped creditinstitutions to reach out to their respective markets and clienteles,without affecting other credit institutions. This was obviously not the casein Italy in the 1990s, and the assumed correlation between the rationumber of bank windows / volume of intermediated funds and theintensity of competition seems to be valid.

A same observation could be made in France, where bank windows haveincreased in number, although to a lower proportion than in Italy. The issueis how did heightened competition affect banks’ strategy? During the1980s and 1990s, the interest margin in Italian banking has diminished.In other words, the revenue drawn from traditional banking activities(collect and lending) has decreased, revealing a compression of passiveand active interest rates260, at a time when wholesale banking is againin crisis261.

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260 Passive interests are the interests paid by banks to accounts holders; active interests arethe interests charged by banks on lenders.

261 See “Banque française: la réallocation des actifs en faveur des activités de détail seradurable”, Les Echos, April 22, 2003.

Such an outcome is often attributed in the literature, in part at least,to the effects of competition. Competition plays out either through animmediate threat on current market positions or an expected threat onfuture market positions. Competition, therefore, erodes monopoly ordominant positions in all segments of the market, thus leading to analignment of the price of credit (interest rates) across all creditinstitutions. Again, factors other than competition have certainly playeda role in the reduction in banks’ interest margins – above all, the monetarypolicy pursued by the central bank, in a context of low inflation.

Beyond prices (and interest rates), however, competition also provokeschanges in the qualitative aspects of corporate behaviour – the markets,clienteles targeted, the products and services offered. In France, allsavings banks staff interviewed insisted on competition as being the maindriver for a strategic re-positioning towards new clienteles and markets.As one of them said,

I don’t think we can disconnect ourselves from the market: CréditAgricole or Crédit Mutuel don’t do anything else [than us], but theyhave better results (coefficients d’exploitation)262.

This is a long-held view for some of the Group’s top executives. In 1989,for instance, Charles Milhaud, the future president of the CNCE and oneof the main actors of change, said in a newspaper interview

We are in a new economic and financial configuration: how not takeit into account and prepare our Caisses to analyse all constraintscreated by it ? Market demands produce changes that touch on ourtraditional activities and force us to integrate within our instrumentsall financial management tools now used by all credit institutions263.

If, in the 1970s, competition was less real than perceived (or anticipated),this changed in the early 1980s, with the creation of ‘banalised’ savingsinstruments – i.e. savings products available to all credit institutions.In addition, in August 1983 the rate served to LEP holders was set onepoint above that served to Livret A holders (8.50% against 7.50%) –which, in a context of persistent inflation, could do nothing but decreaseLivret A’s relative attractiveness compared to other savings products.

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262 Interview, 27.06.02.263 In Revue des Caisses d’Épargne, February 1991, p.19.

The same awareness of rising competition and its impact on savings banks’market shares can be found in Italy. Repeatedly, since the late 1970s,savings banks officials warned that change was an imperative in the faceof competition. A defensive strategy was called for by top officials atseveral major savings banks in the mid-1980s: savings banks ought torenew the way they did business; otherwise, they would be crowded outby new intermediaries (Acciaro, Giovando, Molinari, Tommasini, 1985).

A similar point was made in 1985 by the then president of ACRI, whoemphasised

The impossibility of survival in a niche that, sooner or later, would pushthe [bank] out of a continuously evolving market, which promises anagitated existence for those firms that do not quickly adapt264.

Although competition, whether effective or expected, did certainly play arole in bringing change in savings banks’ corporate strategies, it does not,however, explain why savings banks chose one specific strategy, or whystrategies differed from one savings bank to another (in the Italian case).Secondly, the emphasis put on competitive behaviour does not automaticallyrespond to changes in savings banks’ external environment, i.e. increasedcompetition: it reflects specific dynamics at play within the organisationof savings banks in both countries, namely what I have called the “questfor autonomy” and the “pursuit of profitability”.

8.4.2 The role of changes in the regulatory environment

The impact of regulatory change on savings banks’ change in corporatebehaviour is multi-faceted. First of all, the intensification of competitionanalysed above can be partly attributed to key macro regulatory changes,especially banking market de-segmentation (see chapter 5), which put anend to ‘top-down compartmentalisation’ (see chapter 4 as well).Secondly, regulatory changes specifically aimed at the savings bankssector (the 1983 and 1999 reforms in France, the 1990 reform in Italy)might have induced savings banks to opt for specific courses of action.For instance, the lift of restrictions on corporate lending, in the case ofFrench savings banks, certainly helps to explain the rapid entry of savingsbanks into the corporate market.

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264 Ferrari, 1985, p.1039.

However, again, as mentioned in chapter 4, changes in the regulatoryframework led to the transformation of the framework of constraintsand incentives faced by savings banks in both countries. It did not forcesavings banks into a specific course of action. To illustrate this distinction,one should think of the case of check accounts, which French savingsbanks were first authorised to offer in 1978: until 1981, very few Caissesactually explored this new opportunity, showing that other forces were atplay than orient Caisses’ behaviour – organisational capacity, management’savailability, clients’ responsiveness…

The issue here is first to understand to what extent changes in corporatebehaviour were determined by regulatory changes. It is, secondly, tounderstand how the variety of strategies pursued by savings banks canbe explained by regulatory change. As for the first issue, it seems that,especially in the Italian case, those savings banks that preserved theirspecific business identity did so in the absence of any political-legalsupport or protection. Historically, as mentioned above, no substantiallimitations were attached to savings banks’ activities (vis-à-vis commercialbanks’ ones). Rather, until the mid-1980s the existing regulatory regimeestablished a strong “firing wall” between short and long-term credit.Savings banks, as most publicly owned and commercial banks, wereentitled to provide only short and medium term lending. But the ItalianCasse di risparmio were on a much more equal footing with their commercialcompetitors than were their French counterparts. In addition, a 1978decision by the Credit and Saving Governmental Committee (ComitatoInterministeriale per il Credito e il Risparmio, o CICR) ended the ban onthe creation of new bank branches, which led to a rapid increase of thenumber of bank windows in Italy. A further 1989 decision by the CICRtotally liberalised the ATM opening regime265. Finally, a 1993 law, theTesto unico in materia creditizia, while incorporating the SecondEuropean directive on Credit institutions, drastically reduced the numberof legal categories of banks266.

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265 CICR deliberation of January 20, 1989.266 Until the 1993 Testo unico, Italy had 10 broadly defined legal categories of banks: Istituti

di credito di diritto pubblico (they were 6 in 1988) and Banche di interesse nazionale (3),which were state-owned (through the public holding IRI), Banche di credito ordinario orcommercial banks (110), Banche popolari cooperative that had a cooperative status (127),Casse di risparmio (76), Monti di credito su pegno 1a categoria (7) and Monti di creditosu oegno 2a categoria (2), both categories which were attached to savings banks, Casserurali e artigiane that became the cooperative banks (726), foreign bank subsidiaries (38),and Istituti di categoria (5), that is,

In his speech to the Camera dei Deputati to present the Ciampi-Viscoreform design, the relatore said that “Too many banks still limitthemselves to collect and lending. Everybody knows that the rise ofrevenues from services is fundamental for banks to stay on the market.[…] Savings management, product personalisation, corporate financerepresent the challenge of the future. […] The legislator’s duty is toprovide a certain framework for that process”267.

As for the second point, the Italian case clearly shows that a single set ofregulatory constraints and incentives led to a variety of behaviours, thusquestioning the explanatory strength of ‘regulation’ as a source of change.

The French case is more ambiguous, since a) the internal cohesion of savingsbanks and of the savings bank group was strengthened by regulatoryauthorities and b) there is no strong variety of strategies among savingsbanks. However, regarding the first point one can point out that the“privileged” status of the Livret A has been repeatedly questioned bypolicy-makers and regulators alike. In the 1996 annual report of theCommission Bancaire, Jean-Claude Trichet, the then Governor of theBanque de France, called for “restoring French banks’ profitability” andfor ending the “distribution of certain specific products”. Behind thatformulation many observers saw an implicit reference to the Livret A268.A few months later, a report by the Senate Finance Commission (so-called“Rapport Lambert”) called for the generalisation of the distribution ofde-taxed bankbooks, such as Livret A (savings banks and Postal office)and the “Livret bleu” (distributed solely by the Postal office) – as well asa broader re-definition of the missions of savings banks. More recently,the Nasse-Noyer report, commissioned in 2003 by the Minister of theEconomy, further questioned the necessity to maintain alive the Livret A.

Therefore, if, on the one hand, the principle of sector and group cohesionwas regularly supported by regulatory authorities, on the other handthe latter did not support savings banks’ specialisation. Regulatory de-segmentation, which started in the 1970s and continued in the 1990s,was clearly aimed at creating a level-playing field within bankingand finance and did not create pockets of protection and privilege fornon-commercial banks.

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267 Camera dei Deputati, Atti Parlamentari, Disegno di Legge n.3194, February 18th, 1998.268 See for instance “Les Caisses d’épargne en danger”, in L’Humanité, December 13th, 1996.

In France, savings banks’ belated access to checking accounts (1978) andcorporate lending (1985) coincided with the opening of “administeredsavings products” to other credit institutions: the Livret d’Epargne Populaire(popular savings book, or LEP) and the Compte d’Epargne ValeursIndustrielles (or CODEVI) were created in the early 1980s as a means givento commercial banks to tap into administered savings, while differentiatingthe sources of long-term finance (for housing and industry). In thiscontext, the enlargement of savings banks operational scope was meantto balance commercial banks’ entry into administered savings.

In addition, the numerous changes that took place during the 1970s and1980s did not lead the banks to automatically seize the new opportunitiesoffered to them. For instance, deposit accounts, authorised in 1978, remaineda marginal activity for many years. In 1984, for instance, or six years afterthe 1978 authorisation, deposit accounts still represented less than onepercent of the Caisse d’Épargne des Bouches du Rhône’s total liabilities.

In both countries, therefore, neither the specific character of savingsbanks’ strategies nor their variety (in the Italian case) can be attributed tochanges in regulation. A final argument against the regulation-drivenexplanation of change in corporate behaviour lies in the fact that, asshown in chapter 3, regulatory change in France (and, to a lesser extent,in Italy) was largely driven by savings banks themselves, since the postwarperiod (see Duet 1991). Duet speaks about “almost thirty years of endlesslobbying for the authorisation to open checking accounts.” (Duet, 1986).Similarly, a top French savings banks official used the expression of “longmarch” in an article published in La Revue des Caisses d’Épargne in 1976,to qualify savings banks’ lobbying.

As emphasised in chapter 2, the various approaches inspired by newinstitutionalist theories claim that institutions shape (or structure)individual behaviour. The previous section already examined the relationbetween savings banks’ behaviour and regulation, which could bebroadly understood as ‘political-legal’ institutions. VOC scholars oftenfocus on the role played by several other institutions, among whomcorporate finance and corporate governance. In the present case, itwould be tricky to identify corporate finance institutions distinct frombanks’ behaviour, since banks’ business is to “create” corporate finance.The next section will therefore discuss the role corporate governanceinstitutions played in the shift in savings banks strategies, starting fromthe already mentioned IEF report, which argues that “the absence ofmajority [private] shareholders restricts market forces from being whollyeffective in influencing banks’ current performances” (p.123).

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Since both competition and regulation played a role in bringing aboutchanges in savings banks’ strategies, but since neither competition norregulation explains either the substance of such changes (Italian savingsbanks’ localism, French savings banks’ persistent reliance on traditionalsavings products) or the variety of strategies pursued, one has to turn toother two explanatory factors: the drive towards autonomy and thedivergent quest for profitability.

8.4.3 The drive towards autonomy and the pursuit of profitability

The drive towards corporate autonomy has been a powerful factor behindthe French savings banks’ gradual enlargement of their operational scope– while managerial autonomy was a strong driving force behind Italiansavings banks’ changes in corporate behaviour. Corporate autonomy canbe defined as the capacity of a firm to autonomously make key decisionsabout its resources and investment strategies. As seen in chapter 4, theemancipation of French savings banks from the CDC’s umbrella was a keymotivation for savings banks executives. The transformation of Frenchsavings banks into ‘real’ banks, through the full control of their resourcesand the ability to determine autonomously the range of products theyoffered, meant a full emancipation from state-directed intermediationcircuits. One does not need, however, to accept Duet’s teleologicalargument about the inevitability of such a transformation, akin to a returnto the XIXth century origins (Duet, 1986: 148-149).

The issue of corporate autonomy is, however, a complex one. As we sawin chapter 6, French savings banks’ shift towards autonomy went hand inhand with group centralisation, which led to a decrease of autonomy atthe local banks. As an interviewee, at the CNCE, said:

The CNCE’s principle is to say «OK, les Caisses, you are grown ups,you take care of the means to reach those objectives»269.

Managerial autonomy, in contrast to corporate autonomy, can be definedas the capacity of managers to build on their technical (and managerial)legitimacy to make key decisions about a firm’s orientation. Managerialautonomy was a factor in French savings banks modernisation, too.

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269 Interview, 23.04.02.

In fact, gaining autonomy from the State (corporate autonomy) wasassociated with increased managerial autonomy, at least until the 1999law and the apparition of owners. But as the previous chapter has shown,savings banks managers were then in a (strong) position to limit theeffective exercise of control by owners.

In the Italian case, corporate autonomy was less an apparent problem.Savings banks were already autonomous entities by the early 1980s (fromboth a legal and economic point of view), in contrast to their Frenchcounterparts. As Figliolia noted in 1981, “there is no regulation thatattributes to other banks the autonomy given to Casse di Risparmio”(Figliola, 1981: 1017). However, as noted in chapter 5, at least the largestsavings banks were closely knit within power networks dominated by theChristian Democrat party on the ‘political’ side, and the Treasury on theinstitutional side. It is probable, therefore, that corporate autonomy played arole as a force for change – but its effects are likely to have been ambiguous.

Managerial autonomy is also an ambiguous factor in the Italian casesince, as we saw in chapter 5, Foundations remain an important role asminority owners in many savings banks.

A second powerful factor for generating change has been the shift insavings banks’ corporate objectives. Here the concepts developed byQuack and others around the “social structure of performance” areuseful. Morgan and Quack (1999), and Salomon (1999), have shown thatdifferent measures of performance, which entail different socialstructures, are at play in the banking sector. Beyond performance,however, one could argue that corporate objectives are social structuresas well, and their substance does not automatically follow from changesin the external environment – such as competition.

In France, as mentioned in the previous chapters, until the mid-1970ssavings banks were considered as a quasi-public institution collectingsavings. Their transformation into real banks started through the ranks ofa minority of savings banks managers and executives who carried on adifferent vision of the corporate mission savings banks should pursuethan the non-profit, localised objectives then in vigor. This ‘businessprofitability’ objective grew in importance over the years, and became thetop priority for savings banks.

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As Charles Milhaud said in 1989: “The Spanish started [lending to businessfirms] in 1978. Since then they have become hyper-performing”270.According to a CNCE staff, the current commercial strategy of the savingsbanks group is entirely geared towards generating

new potential for growth in revenues (PNB) – since that in retail, thereare no longer important growth potentials271.

In contrast, several interviewees (in particular the union members) spokeof savings banks abandoning their core mission, which is, according tothem, to focus on lower middle class and poor households. As one ofthem stated,

What can we say? The savings banks are losing their soul272.

There is, therefore, a “conflict of visions” within savings banks, betweenthose who wish to pursue profitability objectives similar to those ofcommercial banks, and those arguing that savings banks should followmore ‘social’ corporate objectives.

This conflict of visions draws on the drive towards autonomy analysed inthe previous section. Managers – and in particular CNCE staff – built theirtechnical legitimacy, and therefore their autonomy and power, on theprofitability goals underlying savings banks’ performance273. In contrast,the staff who have remained ‘faithful’ to the old corporate objectives arelocked in a minority power position, de-legitimised by managers’ use ofexternal factors to buffer their arguments – which repeatedly surfacedduring interviews, through references to ‘competition’, ‘our competitors’,or ‘customers’. Interestingly, however, the actual balance of power dependson a new factor, namely, the sociétaires, whose present non-involvementin savings banks’ strategies maintains managers’ autonomy and thedomination of profitability goals over other objectives. This could changein the future.

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270 Charles Milhaud interviewed in Professions du Sud-Est, September 1989.271 Interview, 25.07.02.272 Interview, 01.07.03.273 Interestingly, among the specificities of the savings bank category emphasised by a former

president of ACRI in the early 1980s were the fact that governance structures includedpersons (board members) who did not gain direct economic profit fromtheir decisions; this allowed, in his words, to “temper that merchant’s instinct describedby Bagehot” .

What about Italy? There, too, change in corporate behaviour was precededby a shift in corporate objectives that reveal a conflict of visions. Alongthe 1980s, the ‘pursuit of profitability’ objective became widely sharedamongst savings banks’ officials and top managers. This evolution can beobserved through the proceedings of the multiple seminars, conferences,and annual meetings that took place during the period. At a meetingorganised in 1981 by the Cassa di Risparmio della Spezia, for instance,several participants worried that in the name of functional specialisationsavings banks would be forced into a specific role (that of guaranteeingsavings), which would create an “operational cage” (Lisanti, 1981). In thesame meeting, savings banks officials expressed their reluctance toindexing interest rates paid to depositors on inflation, and talked insteadof fine-tuning pricing to specific products and clients; and of pushing forthe development of services paid by the clientele. During the 1980s and1990s, with the intensification of competition profitability received evenmore emphasis.

However, turning into for-profit enterprises did not necessarily mean losingsavings banks’ specific business identity. In the 1980s, Italian savingsbanks could still be defined as “innovative firms in the roots of tradition”(Ferrari, 1985). Tradition, that is – especially savings banks’ specificgovernance structures according to Ferrari – were good at ‘temperingthe merchant’s instinct’ (Ferrari, 1985 – a reference to Bagehot’s famousformula). Ferrari also distinguished between profit seeking and profitmaximising, arguing that in the case of savings banks, seeking profits wassubordinate to ensuring high levels of equity and funding local publicinterest activities. Turning to services was, according to Figliolia (1981),the best way to re-assert savings banks’ peculiar identity.

However, again, those changes are not all-encompassing. Onado’s 1990work on a sample of 108 Italian banks showed, for instance, that bankingcompetition undeniably increased in Italy during the 1980s, but it did notresult in fundamentally altering banking performance or business (Onado1990). Increased competition was, according to Onado, a kind of “lop-sided process”, characterised by a mere transformation of bank revenuesfrom direct intermediation to placement fees. “Alternatively stated, hecontinued, banks have not lost their relationship with the customer andthat certainly helped maintain segmentation (by location, type of deposit,class of customer, size of accounts, etc.)” (Onado, 1990: 104). If the situationhas changed much since the early 1990s, savings banks remained, atleast until the early 2000s, characterised by their localism and orientationtowards small and medium firms (see section 8.3 above).

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Figure 8.6: Italian savings banks' revenues from 'old' and'new' banking activities in 2000 (in bn lire)

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9.1 Summary of findings

Finding # 1: Simultaneous convergence and divergenceof regulatory regimes

The regulatory reforms of savings banks in France and Italy presentseveral commonalities: in both cases, the reforms aimed at (i) statutorynormalisation, (ii) sector re-organisation and (iii) market de-segmentationand increased operational homologation. At the same time, however,there are considerable differences in the final (as of 2004…) outcome ofthe regulatory process. In Italy, the savings banks lost their specific legalstatus in 1990, and regulators and policy-makers encouraged savingsbanks to form alliances with other types of banks, thus encouraging thebreak-up of the sector. In France, by contrast, policy-makers guaranteedthe unity and cohesion of the sector and transformed the nascent groupinto a cooperative holding. In other words, savings banks were placedat the opposite ends of the renewed public (cooperative) vs. private(commercial) balance in banking in the two countries.

Finding # 2 – Divergence as change rather than persistence

The factors of divergence and convergence do not fit neatly with theexternal pressures vs. internal (institutional) resistance story. The Frenchcase, in particular, shows that both divergence from the Italian case andfrom the “market-based” ideal-type resulted from a change of path, i.e.the transformation of savings banks into a cooperative group.

9. CONCLUSIONS

Finding # 3: Regulatory reform as a mix between ideas, interestsand institutions

Regulatory reform in both countries resulted from the intertwining ofpolitical change, change in economic conditions and the coming of ageof specific ideas regarding the nature of the banking firm and the role ofthe state in the economy.

Finding # 4: In both countries, one can observe the same shift fromsector to group coordination…

Changes in savings banks’ corporate and sector boundaries have led to ashift from sector to group coordination in both France and Italy.Corporate boundaries have been profoundly transformed in bothcountries, where most savings banks have merged or formed closealliances with other banks. Simultaneously, there has been a decline insector associations’ strength; and the re-shuffling of “sector banks” orcentral cashier corresponded to an increased centralisation at the grouplevel – and the gradual obsolescence of sector financial solidarity.

Finding # 5: …However, group coordination came with increasedsector cohesion in France, while in Italy it accompanied thebreakdown of the savings banks sector

Despite finding # 4, there is no unambiguous convergence at thecoordination level between the two cases. In France, group centralisationoccurred strictly within the (old) sector boundaries, benefiting from themaintenance of sector-specific protections guaranteed by policy-makers;and the sector bank and head of network functions were merged into apowerful holding. In Italy, in contrast, group centralisation took place atthe expense of sector cohesion: large savings banks “quit” the categoryto form powerful, integrated banking groups with commercial andprivatised banks. In addition, savings banks’ specific financial linkages wereeither abandoned or subsumed within the banking system as a whole.

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Finding # 6: Such institutional change at the coordination levelowes much to organisational dynamics

Shifts in corporate and sector boundaries, and in coordination modes,cannot be attributed solely to increased returns to scale or to politics.Indeed, politics did play a role, but regulatory reforms were stronglyinfluenced by some key savings banks actors and cannot, therefore,be considered as a purely independent variable. As per increased returnsto scale (the key mechanism invoked by tenants of the narrow version ofpath dependence theory), it is difficult to identify, especially in the Italiancase, a homogeneous set of actors all pushing for institutional change (inthe same direction). Rather, shifts in coordination resulted fromorganisational dynamics: i.e., the alliance between a small group of topsavings banks actors and of regulators and policy-makers interested infavouring the emergence of strong banking groups (either within oracross the savings banks sector), while other savings banks actorsfollowed suit (French case) or chose another path (Italian case).

Finding # 7: Divergence as a by-product of change

Again, divergence in the evolution of coordination modes is not simplythe result of institutional stickiness. In both cases, the gradualdisengagement of the State, along with the activism of the groupsmentioned above, led to the re-organisation of coordination along“principles of differentiation” already present, although under a latentform, in the past: territorial dualism in Italy, versus “sector” (cooperativeversus commercial) competition in France.

Finding # 8: French and Italian savings banks differ as to whatsolutions were brought, during the 1980s and the 1990s, to theownership problem…

The lack of clear ownership was one of the issues at the top of policy-makers and savings banks’ top executives’ agenda in both countries theearly 1980s. However, this same problem was solved by different meansin the two countries. In France, after a long period (1983-1999) in whichownership was never clarified, the 1999 reform “created” new ownersby transforming savings banks into a cooperative group.

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In Italy, the 1990 reform addressed the ownership issue upfront byseparating savings banks, which became joint-stock companies, fromnew owners, the Foundations, in turn owned by public and local entities.The subsequent decade saw a struggle between Foundations and policy-makers around the issue of effective control of savings banks.

Finding # 9: …However, the renewed corporate governancearrangements, in both cases, reflect the rise of managerial power

In practice, however, the new corporate governance mechanisms implementedin the 1990s ended up, in both cases, strengthening managerial controlover savings banks. In Italy, political conflicts around the issue of banks’ownership and control allowed managers to gradually strengthen theirpower. In France, the creation of new owners (the “sociétaires”) did nottranslate into effective ownership. Corporate governance mechanismsproposed by savings banks’ management, as well as the effective balanceof power within the savings banks group and the lack of interest of thenew owners towards their power of control, all played in favour of thestrengthening of managerial power to the expense of the sociétaires.

Finding # 10: Again, institutional factors are not sufficient toexplain these changes in savings banks’ ownership and governance

Regulatory changes had a direct impact on ownership and governance ofsavings banks in both countries. However, those changes were partlyendogenous. Other institutional factors, such as the shift in coordinationmodes, co-evolved with ownership patterns, rather than shaping them.

Finding # 11: Over the past two decades, savings banks in bothcountries have aligned their business practice to that ofcommercial banks

Market de-segmentation, shifts from structural to prudential regulations,changes in clients’ attitudes and preferences, technological innovation, allcontributed to a sharp increase in competitive pressures in the bankingsector. Such pressures have led savings banks to enlarge the scope oftheir operations; adopt commercial targets and strategies widespreadamong commercial banks; behave more like a profit-making firm and lesslike a non-profit institution.

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Finding # 12: However, savings banks have retained key distinctoperational features

French savings banks’ collect is still heavily dominated by administered orsemi-administered savings products. Their lending is still mainly orientedtowards households and, to a lesser extent, local governments and non-governmental organisations. The cooperative status of the French savingsbanks group has sanctified the traditional redistributive mission of savingsbanks – although actual practice is ambiguous. In Italy, savings banks orformer savings banks still lend to small-and medium enterprises and area key financial partner of industrial districts. Again, the maintenance oflocal rooting is not a homogeneous phenomenon across the Italiansavings banks sector.

Finding # 13: Such operational and business distinctiveness is,again, the outcome of various factors – the drive to autonomy,compartmentalisation…

9.2 Discussion

9.2.1 Research questions

The two overarching questions formulated at the outset of this study where:(i) what are the changes undergone by savings banks in France andItaly in the 1980s and 1990s – and do such changes show convergenceor divergence across the two countries? and (ii) what explains Frenchand Italian savings banks’ apparent different trajectories in frontof common pressures to adjust?

The findings synthetised above help us respond to these two questions.A further discussion of this findings follows.

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9.2.2 Multiple patterns of change

• Convergence and divergence

The findings presented in chapter 6, 7 and 8 show that convergence,co-evolution and divergence forces are simultaneously at play in theFrench and Italian banking sectors. There is convergence on a thirdmodel: the two cases show a move from the state-administeredmodel to a hybrid bank-market model of finance. There is co-evolution: both countries have moved (in parallel) from state-administered financial systems to this new hybrid. There is divergencebetween the two cases: French savings banks have become anintegrated cooperative banking group, epitomising France’s newfunctional dualism; Italian savings banks have ceased to exist as acategory and taken on various paths mostly linked to territories,epitomising Italy’s new geographical dualism. One can thereforeagree with Boyer, who argues that modern capitalism tends towards‘homeostatic equilibria’ characterised by mixed convergence anddivergence, both being two among a multiple array of possibleconfigurations (among which collapse, catch-up…) (Boyer, 1996).

These observations are consistent with two hypotheses recentlyexplored by the literature on comparative capitalisms, namely: (i) firms(economic actors in general) face a multiplicity of orders and (ii) thevery nature of institutional complementarities might favour changeinstead of resilience. The first hypothesis is both empirical andtheoretical (see Whitley, 1992b and 1999; Fligstein, 1996; Hanckéand Goyer, 2005). Empirical observation tells us that multiple patternsof adjustment (or behaviour) exist throughout economic systems.Theoretically, the hypothesis derives from the argument that nationalbusiness systems are characterised by the co-existence of multiplelogics or conventions that influence the behaviour of single firms.This hypothesis does not need to lead to a constructivist view of firms’behaviour; as Hancké and Goyer point out, it is perfectly consistentwith the view that “while institutional frameworks may beconsiderably more malleable and open than the conventional viewsassume, systemic constraints of internal coherence impose limits onthis openness” (Hancké and Goyer, 2005: 60).

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• Variety in time

As noted in Chapter 2, new institutionalist approaches to economicand industrial change mainly rely on one specific theory of change,namely, path dependence theory. Yet the conclusions exposed abovepoint to a much murkier nature of changes in the political economy.The corporate strategies pursued by French and Italian savings banksperhaps best illustrate these multi-layered characteristics of change.The 1980s and 1990s showed the capacity of savings banks to quicklyadapt to a changing competitive environment – through productdiversification, entry into new markets, targeting new clienteles,adopting new business practices. There was, clearly, a change of path.At the same time, however, savings banks in both countries pursueda niche strategy, building on the segments of a banking market wherethey had the stronger position: administered savings products, mortgagelending, lending to small firms – thus relying on their territorialrooting. These are clear instances of path dependence. In addition,firms (savings banks) played a central role in the transformation of thebanking system in both countries – a role recognised central in themost recent theories of institutional change (Pierson, 2003; Thelen,2004; Streeck and Thelen, 2005), and is explored below.

9.2.3 A management-led modernisation process

• The role of institutions

What is the role of institutions in fostering and shaping change insavings banks’ behaviour? As seen in chapter 2, the neo-institutionalisttheory at the basis of most comparative works on modern capitalismassumes that actors’ behaviour is shaped or influenced by institutions– through various mechanisms, as Hall and Taylor (2001) point out:coercion, mimetism, constraints and incentives… The evidence presentedin this research suggests apparently contradictory observations.

Institutions have certainly played an important role in shaping the pathof change in both countries. Polity-linked institutions have determinedthe pace of the reform and its outcome. Among those institutions,the electoral system and the party structure certainly played a role inthe gap between reforms in France (early 1980s for the first wave)and in Italy (late 1980s).

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As for the reform’s outcomes, the linkages between reform-mindedpolicy-makers, technocrats and top savings banks officials helpexplain how the actual reform mostly embodied designs previouslyelaborated by the savings banks themselves. There is, therefore, acontinuous and bilinear interaction between (policy) institutions and(banks’) strategy.

The role of coordination institutions is much more ambiguous.As chapter 6 has shown, at the outset of the 1980s sectororganisation was stronger in Italy than in France; this relationship wasreversed in the subsequent decade. Therefore, differences inoutcomes (the diverging cohesion of the savings banks sector in bothcountries) cannot be attributed to institutional differences. As shownin chapter 6, the shift in corporate and sector boundaries within theFrench and Italian savings banks sector has much to do with a shift inthe internal balance of power, to the benefit of savings banks’ seniormanagers. In the French case, top officials at the savings banks alliedwith bureaucrats and policy-makers to push forward the aggregationand centralisation of the savings banks group. As chapter 7 hasshown, moreover, the acquisition of cooperative status and theinstitution of new owners did not threaten managers’ power withinthe group, since governance mechanisms were carefully designed soas to prevent direct control from them, and since the state regulatorsshowed little interest in the effective exercise of ownership rightswithin the group.

In an interesting study of British clearing banks, Morison notes the“traditional supremacy of geography as the primary organisationaldimension, both domestically and internationally” (Morison, 1994: 84).As mentioned in Chapter 1, Morison mentions two other “organisingprinciples” in banking: pace of change, and interdependencebetween various banking businesses. These three principles, however,do not maintain equal importance throughout the years. In fact,according to Morison’s periodisation of organisational change inBritish clearing banks, “phase five” (the early 1990s) is characterisedby the lowering importance of geography, which he could see, forinstance, in the decline of the role of the regional director.

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Morison’s historical analysis can be transferred to cross-countrycomparisons – since, in methodological terms, both types of analysesshare an interest in variation-finding, be it across time or across space.This framework becomes especially enlightening for our comparisonbetween France and Italy. It seems that the divergence that occurredbetween France and Italy, in the 1990s, operated precisely at the levelof the organising principles: in France, regulatory, pluralisticsegmentation gave way to functional specialisation, while in Italy, thesame type of segmentation, once abandoned by the State, gave way togeographical dualism. In other words, geography as an organisationalprinciple has seen its importance grow along with the dismembermentof state-sponsored segmentation – in contrast to the British case.Such thesis is close to the arguments put forward by Verdier (2002,2003), cited in chapter 2: banking structure in industrialised countriesis shaped by historical state centralisation.

All these observations point to the non-univocal relationship betweeninstitutions and individual (or aggregate) behaviour on the one hand;and between institutions and change on the other. In the cases ofFrench and Italian savings banks, there are three distinct institutionaldynamics. First, shifts in the macroeconomic and macro-regulatoryregime (including the international monetary regime) have changedthe matrix of constraints and incentives facing savings banks.Secondly, savings banks have reacted by adjusting their behaviourAND modifying (or helping to modify) the micro institutions they weresubmitted to: specific regulations, sector organisation, ownershipand control. In this case, findings can illustrate the double-looprelationship between firms and institutions proposed elsewhere:“the degree of complementarity between institutions varies acrosssocieties and firms are able to use this variability, both within societiesand across them, to develop new patterns of action that in turncontribute to the reshaping of institutions at the national and theinternational level.” (Morgan, 2005: 415) Third, the adjustmentprocess has revealed the role played by the “meta-institutions” justmentioned: state centralisation and territorial segmentation.

• The forces of change: competition and management’s quest for autonomy

As chapter 5 has shown, the regulatory reforms at the root ofmodernisation were strongly influenced by the policy ideas promotedby savings banks managers, who benefited from their proximity topolitical power (at the regulatory and parliamentary levels).

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Macroeconomic shocks and policy shifts in the 1970s left those actorswith the conviction that the structural conditions of banking businesswould be unequivocally altered in the subsequent decade; byanticipating change, savings banks could shape the reform outcomein the direction wished by top management. In particular, savings bankscould hope to (i) free themselves from the state; (ii) give themselvesthe means to build banking groups able to compete in a liberalisedbanking market. Both objectives fit within the top managers’ questfor managerial autonomy (from the state and the market).

Such quest for autonomy also drove the post-reform corporaterestructuring process in both countries (chapter 6), as well as thechanges in corporate governance (chapter 7). Savings banks’ topmanagers succeeded in building integrated groups, either encompassingthe whole sector (as in France), or through cross-sector alliancesmainly at the regional and inter-regional level (Italy). At the sametime, management carried a move from state control and blurredownership to private ownership and control; but this was a gradualchange, and in both countries senior management kept the banksunder control – either through specific corporate governance devices,as in France; or through minority but controlling stakes by Foundationsin Italy, impeding new owners to take control.

9.3 Implications of the research

9.3.1 The implications of changes in the savings banks sectorfor the banking system as a whole

Changes in the savings banks sector may have, and in fact have had strongimplications for national banking systems as a whole. First, as argued inchapter 1, savings banks represent a sizeable part of national bankingsystems throughout Europe – both in terms of assets (lending, especially tolocal government, small firms and mortgage to households) and liabilities(collect of households’ savings). French savings banks, for instance,accounted for 17.8% of all deposits in 2003, and 42.3% of lending toNGOs. Italian savings banks, in the mid-1990s, represented around 30%of deposits and 26% of lending to firms. More recent data are difficult tocollect given the restructuring trend in the Italian banking sector that ledto many mergers among savings banks or between savings banks andother categories of banks. The sheer quantitative importance of the savingsbanks sector means, as emphasised in the Introduction, that changes inthat sector cannot leave other segments of the banking system unaffected.

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Secondly, patterns of change in the savings banks sector show manysimilarities with those followed by other bank categories, i.e. commercialand cooperative banks. Such similarities can be attributed to two factors:(i) the occurrence of external shocks that force all banks to adjust in asimilar way – that is, the de-segmentation of markets and the shift fromstructural to prudential regulation; (ii) mimetism, or isomorphismbetween banking categories.

Third, savings banks interact with other segments of the banking sector,through competition or corporate restructuring processes. Many large andmedium-sized Italian savings banks, as we have seen, have participatedin the mergers and acquisitions wave that has led to the constitution ofItaly’s four major banking groups. On the business level, if savings bankshave engaged in isomorphic behaviours, adopting business practices andgoals from other banking categories, it is not unconceivable to think thatin the process savings banks increased the creditability and the attractivenessof such business practices and goals for other banking actors.

9.3.2 The implications of changes in banking on nationaleconomic systems

A second broad implication of the research has to do with nationalcapitalisms as a whole. As argued in the introduction, many scholars haveemphasised the centrality of financial systems in national capitalisms.More precisely, financial systems generate some of the definingcharacteristics assumed by national economies. For instance, bank-basedsystems enable firms to access long-term finance in exchange for stableownership and control patterns. As a consequence, changes in financialsystems cannot leave other (real) economic sectors unaffected.

In the case of savings banks, their traditional clientele (low incomeearning households, small firms, local government) might be adverselyaffected by a shift away from their needs towards other segments of themarket. In other words, savings banks in particular, and banks in generalgenerate their own sets of constraints and incentives to which otheractors are exposed; changes in banks’ behaviour lead to changes in thoseconstraints and incentives.

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9.3.3 Theoretical implications

The findings presented in the previous sections have theoreticalimplications as well, which might inform future research in the field ofcomparative political economy. First, as argued above, patterns of changeare multiple and are not limited to the binary logic emphasised in theneo-institutionalist literature. It might be more useful to rely on broaderand looser theories of change. Secondly, if the systemic congruencehypothesis does not hold, one might want to look at the dynamics at playwithin each national capitalism. This research agenda does not mean thatany comparative perspective should be abandoned. Actually, onepotentially interesting implication of the findings presented here is thatinternal differentiation processes helps explain cross-country differences.In other words, the various types of segmentation/fragmentationcharacterising each national financial system might constitute the centraldifferentiating factor between national systems. Varieties within capitalismgenerate varieties of capitalism.

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a. Sources

The study relies on descriptive statistical data on savings banks’ balancesheets. For Italy, all the data come from the Bilbank database compiled bythe Italian Banking Association, available upon request. For France, balancesheet data has been collected from various sources: annual reports of theCommission Bancaire; annual reports of the CENCEP, later the CNCE.Balance sheet data were not manipulated since the research only usesrough indicators (such as the ratio of liabilities on own funds or the ratioof liabilities over assets). Balance sheet data for other categories of banks(mainly commercial banks) are aggregate data compiled from variouscentral bank annual reports.

The study also uses data on various indicators, such as: the number ofbanks, the number of banking mergers and acquisitions, etc. Those datahave been compiled from official publications by the regulatoryauthorities in each country. Those documents were consulted at theBanque de France library, at the Banca d’Italy library, and at the ItalianSenate library.

Semi-structured interviews

The study draws on 52 semi-structured interviews conducted with keyinformants in both countries. Interviewees include: parliamentarians(former or current), one former Minister, savings banks managers, staff atthe sector association, union members, and other stakeholders (such asexperts involved in the various reforms). The table below recapitulates thenumber and quality of informants.

BIBLIOGRAPHY / REFERENCES

France Italy Total

Savings banks association 11 5 16

Savings banks management 8 5 13

Savings banks union members 3 2 5

Parliamentarians 3 2 5

Ministers 0 1 1

Central Bank staff 1 5 6

Ministry of the Treasury staff 3 2 5

Total 29 23 52

Sampling was made on the basis of the role played by the informant inthe policy/change process (key stakeholders) and on the informant’sexperience with savings banks. The goal of such semi-structuredinterviews was, indeed, twofold: (i) gather first hand information concerningthe dependent and independent variables; (ii) question informants on themeaning they gave to the changes under study. Various interview protocols,along with the list of interviewees, are included in the appendix.

Documents and archives

The study relies extensively on savings banks’ documents and archives,especially: (i) annual reports (in France, the annual reports of the CENCEP,later Caisse Nationale des Caisses d’Épargne; of the Caisse d’Épargne dePicardie; of the Caisse d’Épargne Provence Alpes Corse Réunion; in Italy:the annual reports of the Cassa di Risparmio delle Provincie Lombarde;of the Cassa di Risparmio di Roma; of the Cassa di Risparmio di Salerno)(ii) internal journal (in France: the Journal des Caisses d’Épargne, part ofwhich became Culture Groupe); (iii) external journal (in France: the Journaldes Caisses d’Épargne, later Épargne et Finance; in Italy, Il Risparmio);(iv) other documents (such as internal reports, transcripts of publicinterventions from major stakeholders – journal articles, speeches,interventions at conferences…). Most of this material was either obtainedfrom savings banks themselves or consulted in savings banks’documentation centres. In addition, relevant material and documentshave been obtained from the main bank trade unions in both countries.Moreover, the research builds on the analysis of legal and regulatory texts,mostly published in the Journal Officiel in France and the Gazzetta Ufficialein Italy, and in regulatory authorities’ various bulletins and annual reports.

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Finally, the research draws from an extensive analysis of the parliamentaryproceedings related to the major regulatory reforms in both countries, inparticular: the 1983 and 1999 laws in France and the 1990 and 1998laws in Italy. Those parliamentary proceedings were mostly consulted atthe Senate library in Italy, and the library of the Assemblée Nationale inFrance. Part of these proceedings was also published, either in the Journaldes Caisses d’Épargne or the book by Senator Cluzel (1984).

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