To modernize the Italian banking system, the Bank of Italy has been stimulating internal competition through a broad deregulation of the industry.

Backed by the 1990 Amato banking legislation, the central bank has also been promoting concentrations within the highly fragmented and regionalized banking sector, made up of about 1,085 institutions -- twice many as the European average.

The central bank would like to see five or six national, multiservice banks emerge that would be able to compete in a unified European market.

Confirming the complete transformation of the Italian banking system over the past 10 years, the Bank of Italy reported that the process of concentration and specialization has resulted in the mergers of some 180, generally small-size banks with other credit institutions.

Among state-held banks, 24 mergers, many involving major banking groups, have been approved. There are 65 institutions involved in the consolidated into regional bank holdings and national banking groups. Together, they cover more than one-fourth of the country's total banking industry, the central bank said.

While most bankers agree with the need to create several national "super banks," some executives say they fear that competitiveness in the national market could be hurt. Others say simply that mergers must be motivated by quality, not quantity.

"Merger candidates must be complementary in terms of territory or clients or operations -- and best of all three," said one executive, adding bluntly: "Bigger is not necessarily greater."

For the past five years, the Bank of Italy has accompanied the Italian banking system "toward the open sea, and with great intelligence," said Cesare Ceronzi, director general of the new Banco di Roma group. He said that changes were initiated "gradually, by inspiring innovation and pushing through legislative reforms."

Italian banking executives said they would like to see further liberalization and reforms, however. "Deregulation must go further, restructuring must go deeper," stressed Mario Arcari of the state-owned Banco Comerciale Italiana. And, according to Mr. Geronzi, "the system needs everything that would make a bank a business, including risk."

Bank executives also said they feel strapped by rigid labor laws and contracts that greatly limit mobility and flexibility of the workforce.

But the major hurdle for the Italian banking system revolves around the question of privalization, banking officials say. Approximately 80% of Italy's banking sector is state-owned.

The Amato law banking reforms stipulates that the state can reduce its holding in public banks to 51% -- and, under special circumstances, to less. But there have been few inroads made toward privatization.

"Until banks are freed from political influence, real privatization -- not just minor share listings -- will continue to be impossible," concluded one senior bank source.

Overcoming Ideologies

"The market is stronger than all," assures Mr. Geronzi, adding: "It is inevitable that we will overcome current ideologies."

Sandro Molinari, general director of Cassa di Risparmio delle Province Lombarde, or Cairplo, said in reference to the benefits of restructuring, consolidation, and expansion at the bank that he is anxious "to see it all work together.

"Now that we have been able to pursue a strategic design linking local savings banks, increase the level of efficiency, and expand our branch network, and enlarged banking group [including IMI] would give us leadership and insure our competitive position in Europe," he said.

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