Abstract: Is a More Regulated Investment Banking Sector More Efficient? Tendencies in Regulatory Policies and the Italian Case, 1936-1993

Giandomenico Piluso

Abstract

The regulation of financial markets and intermediaries is periodically debated, but especially when a dramatic downturn is occurring and regulation bounces back offering a panacea. The degree of financial regulation is related to the previous stability, and a major crisis usually provides a highly regulated financial industry. In fact, lawmakers and central authorities intervene after major shocks and, as even recently stated, the ensuing higher regulation tends to produce a less effective financial system. If the former phenomenon is quite easy to catch, the latter is instead rather tricky to assess properly. The paper deals with regulatory trends in the investment banking sector in Italy between two major banking acts, from the early 1930s crisis to the early 1990s deregulation wave. Even if the Italian banking system is commonly regarded as homogeneously (strongly) regulated, indeed regulation varied significantly over time. The analysis scrutinizes main changes in the allocative efficiency of the largest Italian investment/merchant banks operating during the period (IMI and Mediobanca) as a result of regulation. The paper argues that regulation is not per se sufficient to explain the actual outcome of a tougher regulation. One needs to take also into account the level of competition within the banking system and the ownership structure of financial institutions. This approach suggests that the regulatory architecture, as it emerged in the mid-1930s, was responsible for reducing the allocative efficiency only partially, even if a higher regulation became associated to low competition, State ownership and specific credit policies with overall negative effects on the intermediaries' efficiency.