Corporate & commercial Law

The Italian Financial System and the role of Banks

Financial Intermediaries in Italy

Credit represents the right of a creditor, who has provided a current service, to receive a future payment. Credit operations in Italy can be categorized as direct or indirect, depending on whether they occur directly between parties or through intermediaries. Business credit finances companies, while Consumer credit finances households. When the debtor is a business, it is referred to as credit to production, while consumer credit applies when the debtor is a family.

In Italy, banks serve as the primary financial intermediaries. They engage in banking activities such as collecting savings from the public and providing credit. The presence of banks offers several advantages: 

  • Enables the accumulation of even small savings to support the country’s productive activities.
  • Provides savers with a high level of security.
  • Offers financial services across the entire country through their extensive presence nationwide.

Types of Banks in Italy

Italy’s array of credit intermediaries channels savings into productive investments in businesses and households nationwide. Banks anchor the system with nation-spanning branch networks. Complementary intermediaries meet niche financing needs. Other intermediaries include Cooperative credit banks, that provide localized service, especially in rural areas. Popular banks are mutually owned by members. Leasing and factoring companies offer specialized lending services.

Other Italian Financial Intermediaries

In addition to banks, Italy has various other financial intermediaries:

  • Insurance companies and pension funds
  • Securities brokerage firms (SIMs) that trade financial instruments 
  • Asset management companies (SGRs) that invest through mutual funds
  • Open-end investment companies (SICAVs) that raise money by issuing shares  
  • Trust companies that manage large investments 
  • Leasing and factoring companies offering specialized credit
  • Investment banks facilitating bank-business connections
  • Poste Italiane, which has greatly expanded consumer banking 
  • Electronic money institutions (IMELs) handling credit cards
  • Cassa Depositi e Prestiti, which issues government-backed bonds to fund businesses

Non-bank intermediaries provide complementarily services like insurance, securities trading, asset management, leasing, and more. Together with mainstream banks, the variety of intermediaries creates a flexible, inclusive financial system that supports economic growth across Italy.

The Italian Bank System today

Banking Activity

A bank is a business operating in the credit and monetary settlement sector, engaging in intermediation activities and financial services that complement and intersect with the provision of numerous services. Banks operate in the tertiary sector and carry out indirect production.

Functions of a Banking Enterprise

Banks perform various functions, including:

  1. Credit function: They connect surplus entities with those in deficit.
  2. Support function for business development: Banks collect small savings from households and make them available to businesses.
  3. Monetary function: For internal and international payments, legal currency is rarely used; instead, bank money is used. Banks are responsible for fund transfers through electronic networks.

Interest Rates: What are They?

An interest rate is the cost that a lender charges a borrower for providing a loan. It is a percentage of the loan amount, known as the principal, and is charged periodically based on the terms of the loan agreement. The principal is the compensation that the lender receives for the risk of default at the end of the contract.

Lenders determine the interest rate they will charge on a loan based on various risk factors. As the risk of a particular loan increases, so does its interest rate:

  • Borrower’s Risk: The risk of the borrower not repaying the debt.
  • Collateral: If the loan repayment is guaranteed with collateral, such as property.
  • Inflation: Increasing inflation would make the agreed-upon interest rate less valuable.
  • Duration of the Contract: Longer-term contracts expose the borrower and lender to inflation risks for a longer period.
  • Cost of Funds: The expenses the lender incurs to acquire the funds that are being loaned to the borrower.

How to Calculate Interest Rates in Italy?

Interest Rates and the Economy

The level of the interest rate reflects the cost of borrowing from the central bank. Lower interest rates from the central bank make it cheaper for commercial banks to borrow money. In turn, commercial banks can offer more accessible loan rates to businesses and consumers, stimulating economic activity. When rates rise, borrowing becomes more expensive so economic growth slows.

Compound vs Simple Interest

Simple interest applies a fixed fee to the original loan amount. Compound interest calculates fees on a growing base that includes accumulated interest.

For example, a $10,000 loan at 10% interest over 3 years with simple interest costs $1,000 per year, totaling $3,000. With compound interest, the cost is $1,000 the first year, $1,100 the second year, and $1,210 the third year, totaling $3,310. The interest compounds on a larger base each period.

Nominal, Real, and Effective Interest Rates: how they are calculated in Italy

Nominal Interest Rate

As the duration of a loan increases, the effective value of the interest earned can decrease. If the economy is expanding and inflation is rising, the actual value of $10,000 would be lower in terms of purchasing power three years later. However, the lender would earn interest at the rate based on the value from three years ago – this is known as the nominal interest rate.

Real Interest Rate

When the nominal interest rate is adjusted to account for inflation, it provides the real interest rate. For example, if the inflation rate was 3% when a 36-month $10,000 loan was given at an interest rate of 10%, and inflation is at 5% at the end of the contract, the real rate would be 8% when adjusted for the 2% inflation increase.

Effective Interest Rate

The effective interest rate is used in calculating the nominal interest rate for loans with compound interest. In other words, it’s a nominal interest rate that accounts for the compounding factor.

Effective Interest Rate = [(1 + (i / n) ^ n) – 1] x 100

  • i: interest rate
  • n: compounding period

Let’s say a bank lends $10,000 at an annual nominal interest rate of 10% with quarterly compounding. The effective interest rate = [(1 + (10% / 4) ^ 4) – 1] x 100 = 10.38%. In other words, when the 10% nominal interest rate is adjusted for compounding, the bank would effectively earn 10.38% interest on the $10,000 loan.

Italian interests’ rates 2023-2024

EURIRS (Interest Rate Swap Rate)

EURIRS, or the Interest Rate Swap Rate, is an interbank reference rate used as a benchmark for indexing fixed-rate mortgage loans. It is published daily by the European Banking Federation and is equal to a weighted average of the quotes at which banks operating in the European Union conduct Interest Rate Swap (IRS) transactions.

Eurisis October 2023

DateIrs
02/10/20233,19%
03/10/20233,24%
04/10/20233,22%
05/10/20233,18%
06/10/20233,19%
09/10/20233,11%
10/10/20233,11%
11/10/20233,01%
12/10/20233,07%
13/10/20233,03%

EURIBOR (Euro Interbank Offered Rate)

EURIBOR is an interbank reference rate that is published daily by the European Banking Federation. It represents the weighted average of interest rates at which banks operating in the European Union lend deposits to each other. EURIBOR is commonly used as a benchmark for indexing variable-rate mortgage loans.

Euribor October 2023

DateEUR360EUR365
02/10/20234,20%4,26%
03/10/20234,21%4,27%
04/10/20234,21%4,27%
05/10/20234,21%4,27%
06/10/20234,19%4,25%
09/10/20234,19%4,25%
10/10/20234,15%4,21%
11/10/20234,15%4,20%
12/10/20234,16%4,22%
13/10/20234,17%4,23%

BCE Rate (European Central Bank Rate)

The BCE Rate is the reference rate set by the European Central Bank (ECB). It represents the rate at which the European Central Bank lends money to banks operating in the European Union. It is commonly used as a benchmark for indexing variable-rate mortgage loans.

Date of changeReferenced Tax
20/09/20234,50%
02/08/20234,25%
15/06/20234,00%
10/05/20233,75%
08/02/20233,00%
22/12/20222,50%
02/11/20222,00%
04/10/20221,25%
27/07/20220,50%
16/03/20160,00%
04/09/20140,05%
06/06/20140,15%
07/11/20130,25%
02/05/20130,50%
29/06/20120,75%
04/12/20111,00%
03/11/20111,25%
07/07/20111,50%
07/04/20111,25%

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