A’Hearn B. (2005) The not-so-mighty finance

A’Hearn, Brian (2005) Finance-led divergence in the regions of Italy. Financial History Review, 12/1: 7-41.


After the unification, the Italian South did not catch up with the North, on the contrary they engaged on a divergent path as the per capita income gap increased from 15-25% to 55% in the first 50 years (p.7). This continuing disparity may be explained by the sore state of the southern banks which could have been unable to support and finance local development (finance-led growth argument; p.9). However, initial evidence seems not to support this hypothesis, as the share of the Mezzogiorno in the banking activity of the country was in line with the relative economic weight of the region (p.10).

The crisis

In the 1880s, abundant capital (in great part from foreign creditors) fuelled investment in the defense industry, railroads and above all real estate. However, by 1887, this bonanza had ended (p.14). Numerous banks failed in the following 8 years of great economic distress (including the very large Credito Mobiliare and Banca Generale; p.15). In the North, the crisis seem to have been weathered well by most financial institutions both small local ones and larger ones; from the late 1890s to 1910, their total assets more than doubled.

In the South, on the other hand, medium and lesser local banks collapsed. Private institutions lost the trust of their client-base, which turned itself towards the safety of government-backed postal saving banks. The result was that the financial structures able to gather local savings for local development had vanished (p.16).

“On the eve of Italy’s most rapid phase of industrialization a crisis struck the Southern banking system – a crisis that might be regarded as an exogenous shock, rather than an internally generated and necessary purgative, given its origins in high finance, international capital markets, and national fiscal and commercial policies. Because that system was young and immature, the crisis had greater effect than in the North, permanently diverting the course of financial development in the South” (p.17).

Finding the tumors

A significant amount of the asset destruction that went on during the first 50 years of the Italian kingdom in the Mezzogiorno can be attributed to the excess “mortality rate” of the region’s banks, but it does not explains the bulk of this destruction, moreover the crisis of the early 1890s seems to have little effect here (p.19). The North also enjoyed a significant advantage (3 to 1 ratio) in terms of “birth rate” for its joint-stock banks (p.20) but here again this element was important but not decisive.

The key factor was less dramatic but its effects were far-ranging nonetheless: the growth rate of these institutions that did not fail was significantly higher in the North (about 100% over 20 years; p.22) while in the South the assets of the survivors actually shrank by 72%. Thus “the South suffered a disadvantage on every indicator and throughout the period, suggesting it was a chronically and comprehensively less healthy environment for banks”.

Structural consequences

As a result of its healthy growth rate, the Northern banking system grew over the board and the mean bank size increased substantially. On the other hand, in the South, not only did banks grew much slower, but no establishment managed to move into the class of large banks (while the North enjoyed nearly a hundred of those; p.22). So unlike what has been recognized as normal for the sector (Gibrat’s Law of Proportionate Effect), the size of the bank did affect the probability of its growth rate, and in this case affected negatively (p.24). High principal-agent information asymmetry and legal restrictions on branching may explain this inefficient bank size distribution, even accounting for local market size.

In the North, there seem to have been a threshold for viability (36,000 lire of assets; p.28), in the South mortality decreases with size in a more gradual fashion, so there is no obvious minimal optimal size (p.31). Without large banks, the South missed out on a key partner for development. Indeed, in the North (unlike what is usually expected of universal banks), the sizeable establishments did not gather a significant share of resources from saving deposits but relied instead on accounts from banks and large firms (p.35). 

Vicious circle

Lesser banks, the country over, concentrated disproportionally more on small savers and on – poorly-performing – commercial loans. Faced with competition of postal banks and the limits of pauper and segmented markets “Southern small banks simply experienced difficulty raising funds” (p.36). They consequently enjoyed “much less leveraged position and consequently lower returns on capital” (p.37). Medium banks performed well but grew slowly. In the South, an establishment was so much more likely to fail that few ever managed to reach this size.

Overall, the Southern banking disarray is unlikely to have fostered economic development, but it cannot either be assumed to be the sole cause of the region’s retardation in the second half of the 19th century and the opening decade of the 20th. Actually, “economic development was determining financial development as much as vice versa” (p.38).

Disclaimer: this summary is written by the contributors of the blog and not by the author of the article. Any mistake is Manuel’s fault (and he shall be punished).

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