Miscarried innovation? The rise and fall of investment banking in Italy, 1860s-1930s

The affirmation of Italian investment banking appears as an evolutionary process of innovation aimed at allowing big banks to root in a newly emerging financial system, tweaking to the developments of markets and institutions, mainly in response to crises. Financial innovation, though, was not always attended and steered by ‘regulative’ and ‘institutional’ innovation, thus compelling banks to adapt their strategies to the specific kinds of guarantees and risks they can rely upon and have to cope with. Persistent segmentation of the banking system and the presence of large shares of non-contestable financial intermediaries limited universal banks’ external growth and curtailed their ability to collect resources. Big banks’ responses to those issues tended to improve capital markets weaknesses and instability, exposing the banks themselves to liquidity risks and financial crises. Hazardous credit policies and highly risky asset-liability management strategies they adopted in the 1920s transformed universal banks into quasi-holding companies, an ‘innovation’ in the pattern of investment banking that eventually led to its failure in the early 1930s.