The Return to Lending

November 2014 will go down in history as a key date for the EU and European banking system. The whole activity of financial oversight has been transferred from national authorities to the ECB and this is an event of fundamental political and economic relevance. Perhaps the transfer such a significant portion of national sovereignty to a supranational authority will give a decisive push (more than the introduction of the euro) to the construction of a political identity for the EU. Not only that, the new role of the ECB will inevitably lead to consider the European banking system as a single market area where that mobility of financial services already enshrined in Italy's Consolidated Banking Law of 1993, and in the Consolidated Law on Finance of 1996, can finally find its application.

The net balance between risks and benefits of this epochal leap is strongly positive. On the benefits side, the presence of a common financial regulator will ensure homogeneity of treatment for all European financial intermediaries and will contribute to remove the barriers that still hamper capital mobility and the circulation of financial services. The results that can be expected are the diffusion of more effective forms of governance, the growth of competition and transparency, especially in the retail credit market, a push to contain costs, and the absolute, perhaps even excessive, financial stability of banks.

The risks are about the knots that still need to be untied. The inevitable process of asset quality review, i.e. verifying the effective value of all assets present in portfolios, will provide an accurate picture, a lot more accurate that any stress test, of the banks' real state of health. Not by coincidence, in the course of 2013 and 2014 all the latent problems of certain Italian banks have become apparent, and massive devaluations of assets have ensued. However, this healthy operation of taking stock of things before the migration of powers to Frankfurt is likely to lead to massive operations to raise capital, in order to compensate for the excessive level of risk present in their portfolios. But this time around solutions will no longer be just domestic: they are bound to take an international perspective, so that major changes in the ownership of banks cannot be ruled out in the new season that has opened for the banking industry.

In fact, if banks re-emerge as solid parts of the European infrastructure, assisted as they are by major injections of liquidity by the ECB, they could return to lending, by granting additional loans to firms. However, firms are to be aware of the tacit agreement implicit in this operation. Higher capital for banks will enable more loans, only if companies enjoy good ratings and are likewise capitalized. This means the latter will have to resort to capital markets with more frequency to finance their activities. Italian firms thus have not only an economic and industrial challenge before them, they must also win a financial and cultural challenge, which requires the coordination of family governance with the opening up to non-banking sources of funding and the search for new areas of market growth.