Italy Guns For Glass-Steagall-Type Law to Break Up Banks, Cut Bailout Costs for Taxpayers

The banking lobby and the ECB will have a cow.

On Friday, Italy’s coalition government unveiled new banking regulations that it hopes to pass in the coming months, including a rule that would separate banks’ commercial and investment arms. It would be the Italian equivalent of the Glass-Steagall Act, the 1933 U.S. law that separated commercial banks that took deposits, made loans, and processed transactions, from riskier investment banking activities. The law was designed to protect deposits. Its repeal in 1999 led to the consolidation of the U.S. banking sector, unfettered risk-taking by deposit-taking banks, and arguably the Financial Crisis just eight years later.

In Italy investment and commercial banks have been able to operate in unison since 1993, but that could all change if this new law is passed. Breaking up the banks would remove a lot of the risk, such as derivatives and other speculative instruments, from Italy’s deposit-taking banks. Without these hedge-fund and investment-banking activities, large banks such as Unicredit and Intesa Saopaolo would become smaller, less interconnected and less systemically risky.

In an economy as large, chronically weak and systemically risky as Italy’s, that would be no bad thing. The country has already experienced a string of bank collapses in the last couple of years.

Less than a month ago, Italy’s populist government, in its eighth month in power, held its nose, ate its words, and agreed to bail out mid-sized Banca Carige with public funds, adopting virtually the exact same playbook it had criticized its predecessor for using in the previous three bank resolutions… 

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