Banks' Advent on Italian Bourse Comes in Uneasy Time

The vitality of the Italian banking sector contrasts sharply with the negative climate surrounding the Milan Stock Exchange. Here, new legislation and reforms are being digested with difficulty.

The law reforming the Italian Bourse, which takes effect in January, introduces a new type of trading institution, called societas di intermediazione mobiliare, or SIMs, that would do stock broking, fund management, and underwriting and placements.

These new stock broking companies will initially be formed by existing brokerage firms and banks. Later, in 1993, banks will be able to form SIMs on their own, without the participation of one of Italy's 220 stock broking companies.

Layoffs of stock traders caused by the SIM reforms sparked strikes all through the month of October. Traders asked the Italian stock market's watchdog authority, Consob, to require that the new SIMs give hiring preference to floor traders from the brokerage firm partner over employees from the bank partner.

Two broker bankruptcies, the introduction of a confusing capital gains tax this year, and widespread uncertainty over application of the SIM reforms - along with other new laws regarding insider trading and subscription rights - are taking their toll on the stock market's image.

Pre-Election Paralysis

Furthermore, the generally sluggish economy does not look like getting any relief from the Italian government. With elections just around the corner, it appears unlikely that Parliament will pass a 1992 budget with any courageous cuts in public spending.

This pessimistic economic outlook alongside poor company earnings is creating an unrelenting bear market. During 1991, the Milan Stock Index fell 8.4%.

Milan Stock Exchange authorities and brokers are turning more and more to banks for a boost to restore confidence in the market and to stimulate equity financing.

"Italy is about to leave a system based on bank relations and move into one based on equity financing," said Paul Dionne, an analyst at the Milan-based investment firm Pasfin.

Stock Brokers' Plea

In a November letter to the Italian Banking Association, stock brokers asked for "signals to reassure the market." Banks had been indicating that carryovers - a credit instrument based on stock lending - would no longer be automatically rolled over each month.

In response to the plea, the banking association decided this month that the carryovers would be renewed. "The banking system will be careful not to disturb the market," said association president Tancredi Bianchi.

Mr. Bianchi has been very vocal in insisting that banks play a greater role in the development of the stock market. He said that it is "the banks' job to facilitate the listing of companies on the Bourse and, in so doing, strengthen their financial positions."

The fundamental banking reform, the Amato law itself - allowing publicly held banks partially to privatize and to seek stock market listing - was heralded by the Milan Bourse. Analysts hoped that banks would take advantage of the changes and list in Milan.

That would give greater depth to Italy's undercapitalized market, where only 218 companies are quoted on the Milan Stock Exchange. These represent just 18% of gross domestic product, compared to a European average of 30%.

"The potential complementarity of the banking system and the stock market is enormous," concluded Mr. Dionne of Pasfin.

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