Bank of Italy

The Bank of Italy is the central bank of the Italian Republic, instituted in 1893. The origins and the evolution of the Italian monetary system are, in several respects, pecu- liar. After national unification in 1861, Italy adopted a single currency, the Italian lira. Nevertheless, banknote circulation was fragmented owing to the persistence of strong regional interests (Polsi, 1993): a provision of 1874 recognized six banks of issue, all of which were already performing this function in the pre-unification states.

The resumption of convertibility in 1883 and the building boom triggered by the new national capital, Rome, kindled a large credit expansion, which inflated a real-estate bubble. Most major banks were engaged in generous credit to the building sector, favored by the regulatory vacuum in which they operated (see Fratianni and Spinelli, 1997). The burst of the bubble resulted in a banking crisis, which erupted into a true political and judicial scandal in 1892, when the unsustainable position of Italian banks of issue, and evidence of serious irregularities committed by one of them, the Roman Bank, became public. The scandal highlighted the need to put a limit on banknote issues and to foster the transition towards a single bank of issue (De Cecco, 1990). The Bank of Italy was then instituted by the Banking Law of 10 August 1893 through the merger of three existing banks of issue: the National Bank of the Italian Kingdom, the Tuscan National Bank, and the Tuscan Credit Bank.

In the first post-war period, within the monetary stabilization plan launched by the fascist government (1926-29), several major reforms triggered the transition of the Bank of Italy from a "bank of issue" to a true central bank. This culminated, after the turmoil of the Great Depression and the 1931-33 Italian banking crisis, in the 1936 new Banking Law. The first part of this provision, still in force, defined the Bank of Italy as "a public law institution", redefined its equity structure, and entrusted it with several new regula- tory tools reinforcing its function of "banker to banks".

While in the immediate aftermath of the Second World War Italy was engaged in a severe struggle to tame the runaway inflation, the 1950s were characterized by sustained growth in a context of monetary stability (Cotula, 1998-2000). Nevertheless, by the end of the 1960s the situation was completely reversed. The Italian monetary system began to falter under the pressure of the first oil crisis and the collapse of the Bretton Woods regime, and throughout the 1970s suffered tremendously from the "stagflation" phenomenon.

Despite the fact that in 1978 Italy joined the European Monetary System, inflation rates were significantly higher than the average rate of inflation of industrial countries. The persistence of high inflation rates in Italy, being imputed to excessive public spend- ing, provided a strong support in favor of the independence of the central banking func- tion (Ciampi, 2011). In 1981, the "divorce" with the Treasury was therefore carried out, and the Bank of Italy was given full autonomy to decide whether or not to purchase Treasury bills not bought by brokers at auctions.

The 1980s were also characterized by the transition from "structural" to "prudential" supervision at the Bank of Italy, which set the stage for the deregulation process of the banking sector. Liberalizations and privatizations, supervised by the Bank of Italy, went hand in hand with the European process of economic integration, which reached its climax in 1992, when the Treaty of Maastricht was signed. The requirements to be admit- ted in the European System of Central Banks (ESCB) resulted in a further reinforcement of the Bank of Italy's autonomy: in 1992, the fully independent power to set official inter- est rates was established; by the end of that year a further provision prohibited the State from financing itself by current account overdrafts with the Bank of Italy. The launch of the European single currency in 1999 marked the definitive incorporation of the Bank of Italy into the ESCB.

In 2005, a new law on the protection of savings and the regulation of financial markets modified the organization and institutional structure of the Bank of Italy, and in 2006 a new statute was approved, which repealed the constraint on the subjects allowed to par- ticipate in its capital as well as the legal obligation to maintain public control of the Bank of Italy, which was never applied in fact. The share distribution has remained essentially unchanged since 1948, the only variations being due to bank mergers and acquisitions. Since 2005, the complete list of shareholders is available on the Bank of Italy's website.

The current functions of the Bank of Italy are defined by European Union law, within the framework of the ESCB, and by a number of national provisions addressing its over- sight powers and its relationships with the Treasury and other national authorities.

Within the Eurosystem, the Bank of Italy contributes to monetary policy decisions through the participation of its Governor in the Governing Council of the European Central Bank (ECB) and of its experts in the Eurosystem committees and working groups. The Bank of Italy is then responsible for implementing these decisions in Italy through operations with domestic credit institutions, open market operations, standing facilities, and the management of required reserves. It may carry out foreign exchange operations in accordance with the rules laid down by the Eurosystem. It manages Italy's foreign exchange reserves and a part of those of the ECB on the latter's behalf. It is responsible for producing the quantity of euro banknotes established by the Eurosystem, managing the currency in circulation and fighting against forgery.

The Bank of Italy is also in charge of promoting, through its supervisory powers, the soundness and efficiency of the Italian financial system and the smooth functioning of the payment system, while an indirect reference to its functions can be traced in Article 47(1) of the Italian Constitution (1948): "the Republic encourages and protects saving in all its forms, it regulates, coordinates and controls the provision of credit".

See also:

Banking supervision; Bank run; Bretton Woods regime; Bubble; Central bank independ- ence; European Central Bank; European monetary union; Financial crisis; Housing bubble; International reserves; Open-market operations; Reserve requirements.