Bank Crisis Management Practices in Italy (1978-2015) and Their Perspectives in the Italian Cooperative Credit Network

Bank recovery and resolution practices so far applied have shown strong limits in the aftermath of the 2007-2008 global financial crisis. The new EU legislation concerning bank-crisis management is intended to challenge such practices. The Italian Cooperative Credit (CC)’s pioneering experience of the Guarantee Central Fund (FCG) – established on a voluntary basis in 1978 in line with the spirit of mutuality shared by the credit cooperation movement across Europe since the late 1800s – contains important lessons on how to re-conceptualize and re-design the financial safety-net of a small banks’ network within the Banking Union. Past research has shown that a private-sector approach to deposit insurance can function better than a government-based one, preventing moral hazard behaviours of small member banks and the adverse effects of their failures on the economic output of associated communities. The ex-ante self-financing mechanism implemented by FCG to support Cooperative Credit Banks (CCBs) successfully avoided depositors pay-outs, further disbursements by member banks, and pro-cyclical effects on local economies. Overall, the Italian CC financial safety net enabled the market exit of 400 CCBs over the last 40 years without any failures, contagion spillovers to the country’s economic system or societal value destruction. Two key lessons that, among others, can be drawn are that (a) a sectoral DGS should better serve as a “risk-minimizer” so as to reduce the likelihood and amount of losses for member banks; (b) cohesiveness produces high economic and social returns at both micro and macro levels. Conclusively, the fruitful results of the above experience should be contrasted with the consequences of small-bank failures in the U.S. market and the huge amount of state aid granted worldwide during the recent global financial crisis.