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financial intermediaries in italy

The role of financial intermediaries in Italy for transforming savings into productive investments

Saints, poets, navigators are just some of the things Italians are known for, but they are also known for being savers.

Among European countries, Italians are known for placing a high value on personal savings and being thrifty. Savings levels in Italy are lower than in the past and there continues to be a growing sense of uncertainty resulting from the financial crisis, the aftermath of which is still felt, even today.

Although debt levels are high, Italy has one of the highest levels of private wealth in the world, which is well above the average of European families. On this count, Italy is behind only the United States, Japan, Belgium and the Netherlands. In recent years, the wealth of Italian families is on the rise.  In particular, taking into account all real assets, financial assets and liabilities, between 2016 and 2017 the wealth of Italian households increased by 98 billion, or one percentage point.

This was reported by the Italian newspaper IlSole24Ore, who analyzed this data in a more granular way, stating that the total wealth of families last year amounted to more than 10 trillion, with a growth in financial wealth (shares, bonds and deposits for 4.400 billion) compared to real (housing and land precisely, equal to 6.300 billion). Real wealth is equal to 5.5 times disposable income and financial income is 3.8 times disposable income. Total wealth net of debts (equal to 80% of disposable income) is 8.5 times income. This is similar to the situation in France and Spain while the United States and Germany are ahead when it comes to financial income.

 

Italian-style savings 

The ways Italians save have changed in some significant ways.

Real estate, for example, is confirmed as one of the main investments in which wealth is used (4.6 times the disposable income) because it is a relatively safe investment in times of economic and social uncertainty. However, bonds are considered to be a less secure investment. 

Such a change is significant.

Italians were some of the leading holders of bonds between the 1950s and 70s. Instead, today, most public securities are held not by citizens or banks but by pension funds. But the really impressive data on the structure of Italian savings is a large amount of economic resources “parked” on non-interest bearing accounts: the total would be €1.371 billion and this is expected to grow. Why is this happening?

First of all, because Italians are actually very careful savers who are guided much more by fears than by their own personal convenience. This is confirmed by the fact that when asked what they would do if they were given €100,000, 47% of those interviewed said that they would put the money in savings.

However, this approach does not always pay off, as many savings accounts are not interest-bearing accounts. By pursuing this philosophy, savings may be slowly eroded by operating expenses and inflation. For example, in the space of 5 years, €10,000 left in a non-interest-bearing account becomes just over €9,000. 

Secondly, the aversion to investment is also linked to the fact that Italians perceive the world of finance as one that is too distant and too technical to understand, a world that is difficult to enter and where it is equally difficult to understand who is really working in the interest of the investor.

In other words, there is a lack of real financial education, which allows citizens to understand, at least in broad terms, how to invest their savings in a sensible way.

It is no coincidence that, from this point of view, Italy, together with Spain and Portugal, is at the bottom of the list of European countries when it comes to the financial literacy of its citizens, especially for women.

Moreover, it is clear from the 2017 survey on savings and financial choices of Italians by the Luigi Einaudi Research and Documentation Centre that there is a strong link between investment and financial knowledge. 

In fact, those who have more financial knowledge, including basic knowledge, tend to give less value to obtaining a return in the short term and, at the same time, adopt behaviors to safeguard their savings.

To sum up: Italians are savers, as evidenced by the ISTAT results, which report that after several years of decline, the propensity to save has increased to 8.6%.

Despite this, every citizen could earn much more from their savings if only they were more interested in the subject or if they relied on experts in the field. In this sense, financial intermediaries are fundamental they can help transform formerly frozen assets into liquid assets available for investment.

But exactly what is a financial intermediary, and who are the main financial intermediaries operating in Italy?

 

Financial intermediaries: roles and functions

Consob provides a functional definition of the term: Financial intermediaries are institutions that connect the subjects with financial surplus, typically individuals and families, and units of financial deficit (which intend to make investments), typically enterprises, to transform savings into productive investments.

At the basis of their activity, there is obviously a relationship of trust: those who put their savings into the hands of intermediaries trust their ability to collect and correctly manage data and information.

In fact, only if the institution is able to acquire and continuously process information of an economic nature, will it be able to make winning choices in terms of return on investment and take reasonable and measurable risks.

Traditionally, the bank has been the financial intermediary but compared to all other banks, it has specific characteristics. One of these concerns the collection of resources for use in financial activities. It consists mainly of deposits and current accounts, which is debt that is repayable in the short term.

These resources are then transferred to companies and to the Public Administration, in exchange for financial assets issued by the latter.

Obviously, banks are not the only subjects that act as financial intermediaries. For example, securities brokerage firms (SIMs), are firms that provide investment services and activities.

SICAVs (investment companies with variable capital) or SICAFs (investment companies with fixed capital) are joint stock companies that can provide individual asset management. Given the type of service they offer, these types of companies are subject to very stringent requirements, in order to prove their financial strength and the transparent and proper management of the savings entrusted to them, which is subject to audit. 

The only other financial intermediary that can carry out collective asset management is Asset Management Companies.

The activity of collective management, in particular, is divided into two phases, namely the establishment of the fund, which asset managers must deal with subscriptions, refunds, etc.. and the actual management of the portfolio.

In general, financial intermediaries carry out a series of activities, including:

  • payment/receipt transactions
  • management of credit/debit cards
  • loans 
  • issuing of guarantees and signature commitments
  • non-discretionary intermediation (without delegation) of financial instruments for the investment of private savings
  • Discretionary intermediation (by proxy or mandate) of private financial savings with diversification of portfolio risks (collective and individual asset management activities)
  • direct investment of financial resources, and more

Precisely because of this specific role, which in some cases is even more delicate because of the nature of the resources to be administered, Italians would need to have greater knowledge of the basic financials and the services available in order to be inclined to invest. 

To do so, institutions will need to develop a marketing and communication strategy that supports this, with the goal of building a relationship of full trust with the customer. 

On the contrary, the customer must be an active and involved part of the process and decisions, ensuring that they understand them enough to be part of the investment process in order to create wealth for himself and for the community.

In this sense, it is very useful to follow some trends and best practices put in place by those who, like asset managers, find themselves having to collectively manage private savings and therefore have an even greater need to create a relationship of trust with their present and future customers.

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