For the past 10 years foreign banks have looked upon the Italian market with the eyes of a child in the week before Christmas, looking at their presents only to be told by their parents that they cannot open them. With the Bank of Italy playing the role of the naysaying parent, time and time again foreign financial institutions have banged their heads against a wall of administrative inflexibility, cutting them out of a market where fees on retail accounts have been far higher than in other EU member states.
Recent changes to the regulatory structure, as well as the replacement of the former Governor of the Bank of Italy Antonio Fazio by Mario Draghi, now have foreign institutions looking at Italy with far more optimistic glances.
From a competition point of view, the Italian market has been protected for far too long. Chairman of the Italian Competition Authority Antonio Catricalà has said that “the Italian banks are tasty bites for their profitable results”. However, he added that the Italian banks “are still too small and not capitalised enough, and this makes them vulnerable”. He adds: “A stronger spirit of aggregation would allow them to also expand in other countries, to benefit from economies of scale and to have lower costs, to the benefit of consumers.”
To have a competitive market, it is not enough to have a high number of players if none of them are strong enough to compete with the others. This is why the competition authorities are emphasising the need for consolidation – even if this means consolidation with non-Italian banks. Given the difficulties encountered in the past by foreign and domestic players attempting such consolidations, European and national competition authorities have questioned whether the regulatory and other barriers to entry are still too high.
While previously the Italian Competition Authority was powerless to intervene in this area (although its non-binding opinion was de facto taken into account), under the new law on the protection of savings, the power to clear acquisitions of major holdings in banks (the first threshold being set at 5 per cent of the share capital) is now vested jointly with the Competition Authority and the Bank of Italy. In this regard it was felt that giving joint power to the Competition Authority would help prevent the Bank of Italy from imposing too rigorously its historically more traditional views on the market.
The Italian legislator may have gone too far this time, since an acquisition of only 5 per cent of the shares should be reviewed by an antitrust authority only in the unlikely event that it gives rise to a change of control. But in any event, the new law on the protection of savings is aimed at bringing more transparency to the Italian banking market, which many feel has not operated in a competitive way for decades. In order not to overburden the Competition Authority with investigations that are clearly not of antitrust relevance, this provision will hopefully be amended soon. In the meantime, the Competition Authority is focusing on what it believes really matters: it is investigating the current account and credit card sectors. It is also insisting on the need to abolish the rules that allow banks to change unilaterally the contractual conditions of their customers.
Opening up the market
Perhaps the key change in the window of opportunity for foreign institutions has been the appointment of Draghi as the new Governor of the Bank of Italy. Draghi, who led the major reform of Italian financial law in 1998, has considerable experience in viewing the benefits of more open banking/financial markets elsewhere. Indeed, with his international background and his experience at Goldman Sachs, Draghi has spoken unabashedly in favour of effective competition and consolidation in the banking sector. Among other things, Draghi has noted that “protectionism has had its day”. The Italian banking sector is in the position to develop further, in particular in terms of banks’ size. This would improve the financial system’s competitiveness and would strengthen the overall economy, since firms operating in this sector and facing strong competition are more likely to become successful.
Indeed, Draghi has indicated repeatedly that he believes the Italian banking sector can benefit from the competition of foreign banks. In his final considerations for the annual meeting of the Bank of Italy, held on 31 May, he cited with approval that, as a result of the ABN Amro-Banca Antonveneta and BNP-BNL acquisitions, the percentage of foreign ownership in Italian banks had increased over the past year from 8 to 14 per cent. One might say that the proof is in the pudding, as the BNP offer was approved in only 29 days, a very quick time by Italian standards.
Draghi has also taken a stand in favour of greater transparency in the market. In this regard he has indicated that he plans to abolish a tool most effectively used by his predecessor in the past to block acquisitions in the banking sector. Under the supervisory instructions of the Bank of Italy, any purchaser of a material holding in an Italian bank with the aim of eventually acquiring control of the same was required to prepare an additional detailed prior notice for the Bank of Italy so that it could evaluate any potential obstacles to the merger/acquisition. The ordinary request for authorisation would follow later. In a number of cases, some of them quite high profile, the Bank of Italy used this procedure to informally reject mergers/acquisitions before there needed to be any official reply to a request for authorisation. The removal of this anomalous provision would only be applauded by foreign (and perhaps domestic) institutions.
The newly elected Italian Prime Minister Romano Prodi has also confirmed the intention of the government to accelerate the process of liberalisation in the banking sector in order to eliminate the existing legal and regulatory barriers that unnecessarily hold back competition in this area, and in other areas, of the market. One would thus hope that there is continuing political support for the positions avowed by Draghi.
With two major recent acquisitions over the past few months, the ferment in the Italian banking sector is almost visible. A number of foreign players are busily examining potential targets. Others are exercising a more cautious, but optimistic, approach by opening more of their own branches in Italy. In any event, the terrain is certainly now more favourable to significant acquisitions in the Italian banking market. And as the market continues to appeal, there is a strong basis for believing that the make-up of the major players in the Italian banking sector will, as a result of these changes, be far different 12 months from now. n
Veronica Pinotti is head of competition and EU law in Italy and Jeffrey Greenbaum is a partner, both at Lovells