"Evolving landscapes of bank and non-bank finance"
Banca d'Italia-LTI@UniTo Conference
Panel on
"Institutional investors' asset allocation
and the real economy"
Opening remarks by the Deputy Governor of the Bank of Italy
Fabio Panetta
Carlo Azeglio Ciampi Centre for Monetary and Financial Education
Rome, 7 December 2018

I am very happy to be here today at this joint Banca d'Italia-Long-term
Investors conference on the evolving structure of bank and non-bank finance.
As the first session already highlighted, the conference provides useful
indications on how to stimulate firms' access to market finance, alongside
the traditional banking sector.
My role today is to chair the roundtable on "Institutional investors'
asset allocation and the real economy", which focuses on how institutional
investors can contribute to expanding the range of services and the volume
of financial resources available to businesses. The panel will benefit from the
contributions of distinguished participants, who will share their experience
in the field with us. But before we start the discussion, let me briefly explain
why, in my view, it is crucial that institutional investors play a larger role in
funding the real economy.
The global financial crisis of 2008 was triggered and amplified by
In the preceding years, banks had
developments in the banking industry.1
increasingly adopted the "Originate-to-Distribute" model, so that instead of
holding the loans they had originated on their balance sheets, they transferred
them to third parties. This weakened incentives to carefully screen and
monitor debtors. Loans were repackaged and passed on to other entities, but
in many cases the risks ended up being borne by banks' off-balance sheet
vehicles and conduits. The rapid expansion of the banking system made the
real economy highly vulnerable to financial shocks.
The risks connected with an overstretched banking sector emerged fully
during the financial and sovereign debt crises. Since then, regulatory action
has been taken to rein in the banking sector. Wider and tighter prudential
requirements at the global level2 and, in Europe, the Single Supervisory
Mechanism, the Single Resolution Mechanism and the Bank Recovery and
Resolution Directive are acting to discourage excessive risk taking by banks.
The burden of bank failures has been progressively shifted from taxpayers to
banks' stakeholders.
As an intended consequence of these regulatory changes, banks have been
steadily deleveraging, in particular by reducing the riskiest positions on their
balance sheets. The contraction of bank intermediation has been accelerated
by two factors. First, the macroeconomic environment, with its low level of
interest rates and flat term structure, has put further downward pressure on
banks' profitability. Second, banks are facing increasing competition from
fintech companies, which use technological innovation to offer services such
as payments and asset management. Even though core banking activities
have not as yet been significantly affected by these new players, there are
reasons to believe that fintech will in time become a more serious challenger
in lending and also retail funding.3
Regulatory changes, combined with competition and the low level of
interest rates, are paving the way for a contraction of the banking sector.
As a result, non-bank forms of financing for the real economy need to be
found. This need is particularly acute in the case of small and medium
enterprises (SMEs), which are more bank-dependent than larger companies.
Accordingly, as the deleveraging of the banking sector began, policymakers
started voicing concerns about SME financing. Unfortunately, those concerns
proved to be well-founded: during the crisis the deterioration in the economic
outlook - together with the tightening of credit supply conditions - led to
severe financial strains for SMEs.4
Larger firms, on the contrary, managed to weather the crisis better,
partly because they enjoyed relatively easier access to capital markets, which
allowed them to offset, at least in part, the decline in bank credit.
These observations regarding the ability of firms to finance themselves
in the post-crisis landscape emphasize the importance of facilitating the
growth of market finance. Apart from filling the void created by the
contraction of the banking system, more developed market-based finance
and the accompanying financial diversification will enhance the stability
and the efficiency of both the financial system and the real economy.
Indeed, the complementarity of bank and non-bank finance and the need
to further develop the latter have long been emphasized by Banca d'Italia
and other European institutions, which have long encouraged efforts
in that direction. A large body of literature supports this endeavour,
arguing that firms' optimal funding structure is diversified, in the sense
that it includes both bank and non-bank debt, and that diversification has
positive effects on firms' growth.5
A balanced mix of funding sources is also desirable from an aggregate
point of view. Cross-country studies suggest that economies that overly
rely on bank funding may be characterized by lower and more volatile
long-run growth than more market-based economies.6 There is no question
that healthy banks act as shock-absorbers in normal recessions; but when
recessions coincide with financial crises, as in recent years, bank-dependent
economies are more severely hit than economies with a diversified financial
system.
In order to ensure a stable and adequate supply of financial resources
to the real economy, it is therefore necessary that the deleveraging of the
banking sector be accompanied by a greater role for the financial markets
and non-bank intermediaries. Institutional investors play a key role in this
structural transformation. Indeed, one of the most important drivers of the
development of financial markets is the growth of the institutional investor
base. It has also been recently argued, for example, that an increase in pension
savings favours participation in capital markets7 and there is evidence that
institutional investors have positive effects on corporate governance.8
A look at the development of institutional investors in advanced
economies highlights the challenges ahead. Countries in continental Europe
continue to lag behind the UK and the US. The gap is all the more serious in
the pension funds sector, reflecting the relative weight of funded retirement
schemes in national social security systems. The gap is very noticeable in
Italy. For example, in 2015 the assets managed by pension funds accounted
for less than 10 per cent of GDP in Italy, compared with more than 100
per cent on average in the UK and the US. We definitely need to attain a
more comprehensive understanding of the underdevelopment of institutional
investors in most euro-area countries.
For all of these reasons, policymakers look favourably at the development
of market-based financing and the growth of institutional investors. It must be
stressed, however, that banks and market-based finance remain complementary,
rather than substituting one another, and that a level playing field should be
ensured for all financial intermediaries. If regulatory changes put banks at a
disadvantage, firms may end up having difficulties accessing both bank and
non-bank forms of external finance. Indeed, apart from remaining a vital source
of corporate funding, especially for SMEs, banks are uniquely equipped to
help firms to access the capital market. Moreover, banks offer contracts (such
as overdrafts or credit lines) and services (such as lending assistance) that are
often complementary to market-based finance. These contracts and services
can be helpful to firms, especially in periods of distress.9
* * *
To conclude, the corporate sector would greatly benefit from a more
developed market-based segment within our financial systems. Institutional
investors play a pivotal role in this structural evolution. At the European
level, this aim is being pursued by implementing the Capital Markets
Union project: enriching the types of financing available to non-financial
corporations, broadening the portfolio choices of investors, enhancing the
efficiency of financial intermediation, removing barriers to cross-border
investment, and increasing funding options for SMEs and infrastructure. In
Italy, a number of additional initiatives with similar goals have been taken
in recent years, such as minibond issues, debt funds, tax incentives for
venture capital and allowances for corporate equity. Yet in Italy, as well as
in many other European countries, the role played by the financial markets
and non-bank financial institutions is still limited. This is why I am looking
forward to discussing these issues with our eminent experts.
Designed by the Printing and Publishing Division of the Bank of Italy