Maturity Mismatch and Allocative Efficiency. Long-Term Financing and Investment Banking in Italy, 1936-1975

As is well known, banks have liquid liabilities against potentially illiquid assets. Normally, such a “maturity mismatch” does not affect financial stability, as it is unlikely that all depositors would request their money back exactly at the same moment. Yet, when a wider lack of trust occurs a run could follow by menacing the very financial stability, possibly with a serious impact on capital formation and, in the end, on economic growth. Such a problem was particularly apparent up to the first decades of the last century, when financial systems were loosely regulated and central banks were rather reluctant to intervene during liquidity crises as they were tied up by gold standard constraints. In the 1930s, as the financial crisis hit hardly all major economies, maturity mismatch and related instability issues were dealt with by central authorities and lawmakers. The emerging idea was that financial intermediaries needed to be set in a more regulated environment, where commercial banking was to be separated by investment banking, in order to preserve stability. In Italy the Banking Act of 1936 was accordingly conceived. The new Banking Law mirrored the vision of a group of technocrats, connected to the Bank of Italy, who experienced directly to which extent universal banking could degenerate and produce systemic instability that could affect capital formation in the long term. The new banking law adopted specialisation as its cornerstone and, therefore, investment banking was rigidly separated from commercial banking and universal banking was at least formally banned up to the reforms of the early 1990s. The paper aims to sketch a general picture of dynamics of forms, institutions and mechanisms of long-term financing in Italy from the mid-1930s to the mid-1970s. It offers a short illustration of the genealogy of the regulatory model and its main principles depicting the main evolutionary dynamics of the model during the Golden Age when it was regarded as substantially fitting to investments and firms’ demand. The paper illustrates what factors were mostly responsible for the decreasing allocative efficiency of the model since the mid-1960s and, especially, during the 1970s when it entered a major crisis. It concludes discussing whether the model implied a trade-off between stability and efficiency or, instead, other factors, such as monetary policy, affected the efficiency of investment institutions and, in the very end, the overall allocative performance of financial intermediaries up to the late 1970s.