The Banca d'Italia, the central bank, was the sole bank of issue and exercises credit control functions until Italy's accession to the European Central Bank, which now controls monetary policy and the euro, the EU's common currency (excepting the United Kingdom, Denmark, and Sweden). La Banca d'Italia is still responsible for controlling domestic inflation and balance of payments pressures.
In March 1979, Italy became a founder member of the European Monetary System (EMS) and its Exchange Rate Mechanism (ERM). During the first ten years of its membership, the lira was allowed to diverge by up to 6% against other member currencies before action had to be taken, compared with2.25% for other ERM currencies. Uncertainty about Italy's ability to meet the convergence targets of the 1992 Treaty for European Union (Merastricht) for inflation, interest rates, and participation to stabilize the rate, the lira was withdrawn from the ERM in September 1992, after which the lira declined to just under DM1:L1,000. At the beginning of 1996 it began to appreciate again, and immediately after the April election it rose to L1,021:DM1. The introduction of the euro in 2002, however, made all that irrelevant.
In 2002, five banks are of nationwide standing: Intesa-Bci, San Paolo-IMI, the Banca di Roma, Unicredito Italiano, and the Banca Nazionale del Lavoro. There are many major international banks with branches in Italy. Among the more important are Chase, Citibank, Bank of America, HSBC, and others. The Istituto Mobiliare Italiano is the leading industrial credit institution; it also administers important government industrial investments. In 1987, the government privatized Mediobanca, another major industrial credit institution.
Two major banks, formally part of the Instituto per la Ricostruzione Industriale (IRI) group, were privatized in 1993-94: Unicredito Italiano (CREDIT) and Banca Commerciale Italiana (COMIT). The privatization of another IRI bank specializing in medium- and long-term lending, the Instituto Mobiliare Italiano (IMI), was completed in 1996.
A new banking law was passed in 1993, to bring Italy into conformity with the EU's Second Banking directive, and to introduce two major innovations which aim to move Italy toward a model of universal banking. It allows banks to hold shares in industrial concerns; and it eliminates the distinction between banks (aziende di credito) and special credit institutions (aziende di credito speciale) , thus allowing all banks to perform operations previously limited to specific types of intermediary.
On 30 January 1997, the government drafted legislation to promote restructuring and consolidation in Italy's largely inefficient and highly fragmented banking sector. The bill is the latest in a series of attempts since 1990 to rationalize the sector. However, it comes just as Italy's two biggest banks, CARIPLO and what is now San Paolo-IMI, announced plans to begin privatization by the end of 1997, and other banks in the private sector begin to negotiate strategic alliances, notably between: the private sector bank Ambroveneto and CARIPLO; Cassa di Resparmia di Torino and the Cassa di Risparmio di Verona. Mergers are also changing the face of the Italian banking industry. In early 1999, four of the five largest Italian banks were involved in such deals. Unicredito Italiano and Banca Commerciale Italiana merged to form Eurobanca, while San Paolo-IMI and Banca di Roma also planned to combine their operations. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $458.4 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $628.9 billion. The money market rate, the rate at which financial institutions lend to one another in the short term, was 4.26%.
There are 10 stock exchanges in operation. The most important is that in Milan (established in 1808). The others, in order of importance, are Rome (1812), Turin (1850), Genoa(1855), Bologna (1861), Florence (1859), Naples (1813), Venice(1600), Trieste (1755), and Palermo (1876). Since 1974, the markets have been regulated by the National Commission for Companies and the Stock Exchange.
Radical reforms have been introduced in recent years in order to vitalize the stock market, which is greatly undercapitalized considering the size of the Italian economy. At the end of 1995, the capitalization of the Milan bourse was the equivalent of just 18% of GDP, compared with 32% in France and 122% in the UK. However, by 2002 market capitalization had increased to 41% of GDP.
In September 1991, stock market intermediation companies (SIM), a new form of stockbroking and fund management firm, were introduced to accompany the shift from the open-outcry call auction system to a screen-based continuous auction market, which was completed in July 1994. In order to stimulate the demand for shares, in 1994 shareholders were given the option of paying a 12.5% flat tax rate instead of declaring dividends as part of taxable income. At the beginning of 1996, proposed Services Directive included the privatization of the stock market and the administrative bodies that run it as one of its main objectives.
Despite a certain amount of volatility, the Milan stock exchange index (MIB) has risen by 10.6% on 26 March 1997 since the end of 1996 and daily volume of transactions were up substantially. In early-mid-2000, the MIB index hovered between 31,700-31,800. However, since the onset of the global recession, the index has dropped significantly. From January 2002 to January 2003, the MIB dropped 4.4%, down to 16,208, slightly more than half of its peak value.