The Italian government is intensifying pressure on banks to provide more favorable lending terms to businesses, part of a broader economic strategy that could reshape financing across the country’s commercial landscape.
Finance Minister Giancarlo Giorgetti called on Italian banks Thursday to leverage their robust profits to offer more advantageous lending conditions to businesses. This push comes as many Italian firms struggle with tightened credit standards and elevated interest rates that have persisted despite the European Central Bank’s recent rate cuts.
“Banks should use part of their record profits to offer better lending conditions to businesses,” Giorgetti stated during a parliamentary hearing. His comments reflect growing government frustration with the disconnect between banking sector performance and broader economic challenges.
The Italian banking sector has indeed posted impressive earnings. According to European Banking Authority data, Italian banks’ return on equity averaged 11.2% last year, outpacing many European counterparts. UniCredit, Italy’s second-largest bank, reported a record profit of €8.6 billion in 2023, while Intesa Sanpaolo posted €7.7 billion.
These profits stand in stark contrast to the lending environment faced by Italian businesses. The Bank of Italy reports that business loan volume has contracted by 3.7% over the past year, while interest rates for small and medium enterprises remain significantly higher than pre-pandemic levels.
Economic analyst Maria Rossi from Prometeia notes that this creates a challenging dynamic. “Italian banks have benefited from higher interest rates without proportionally passing those benefits through to the economy. This creates tension between banking stability and economic growth objectives,” she told me during a recent financial conference in Milan.
The Italian government’s position is not without precedent. Last year, Spain imposed a temporary windfall tax on banks to capture some of their interest rate-driven profits. Italy has taken a different approach, preferring to apply political pressure rather than direct taxation.
Banking industry representatives have pushed back against government criticism. The Italian Banking Association contends that lending decisions reflect genuine risk assessment in an uncertain economic climate. “Banks must balance their desire to support the economy with prudent risk management,” said Antonio Patuelli, the association’s president.
For small business owners like Marco Bianchi, who runs a manufacturing company outside Florence, the situation feels increasingly dire. “We’ve seen our borrowing costs nearly double since 2021, while banks are reporting record profits. Something doesn’t add up,” he explained when I interviewed him for a previous story on Italian manufacturing.
The tension highlights the complex relationship between monetary policy, banking profits, and economic growth. While the ECB has cut its benchmark rate three times this year, the most recent reduction bringing it to 3.5%, these cuts haven’t fully translated to the real economy.
Financial Times data shows that the average interest rate on new business loans in Italy stands at approximately 5.3%, down only marginally from peaks last year despite the ECB’s policy shift. This sticky pricing behavior has drawn criticism from government officials and business advocates alike.
The Finance Minister’s comments also arrive amid broader debates about Italy’s economic trajectory. The country’s debt-to-GDP ratio exceeds 140%, limiting fiscal policy options and placing additional importance on private sector credit conditions.
Economists at Nomura Securities suggest the government’s approach may yield limited results without more direct intervention. “Moral suasion has historically produced mixed results in banking behavior,” noted Paolo Gentiloni, chief European economist at the firm. “Without regulatory or tax incentives, banks will prioritize shareholder returns over public policy objectives.”
The issue transcends Italy’s borders. Across Europe, policymakers are grappling with the appropriate balance between banking sector profitability and broader economic needs. The European Banking Federation reports that while eurozone bank profits have reached post-financial crisis highs, business lending volumes remain subdued in many countries.
For Italy specifically, improving credit conditions represents a critical component of economic strategy. The country’s economic growth has persistently lagged behind European averages, with the European Commission forecasting just 0.8% expansion this year.
As this situation unfolds, the government appears willing to escalate its approach if banks don’t respond to current pressure. Treasury sources indicate that more direct measures haven’t been ruled out should lending conditions fail to improve in coming months.
Whatever the outcome, this tension between government expectations and banking sector independence will likely remain a defining feature of Italy’s economic landscape through 2024 and beyond. For businesses caught in the middle, the resolution can’t come soon enough.
