Regulators and Innovators Play Tag: The Italian Historical Experience

Between the 1880s and the 1930s, three "regulatory cycles" can be identified in Italy. In the underlying model, each financial crisis gives rise to a regulatory change, which is circumvented in due time by financial innovation, that can then contribute to the outbreak of a new financial crisis. In Italy, overtrading of the banks of issue in the 1880s contributed to the 1888-1894 financial crisis, which yielded regulation concerning only these banks and restricting their activity. The German-type universal banks, created at the turn of the century and unconstrained in their undertakings, were at the core of the 1907 and the 1921-1923 crises. These led to a banking law in 1926 which, however, was born obsolete, in that it was not aimed at regulating universal banking as it had developed until then, but it contained general provisions regarding the whole range of deposit-taking institutions. Finally, the evolutionary adaptation of the universal banks into holding companies, not taken into account by the preceding law, contributed to the 1931-1934 banking crisis, followed by the 1936 bank legislation.