Economic History Notebook n. 51 – Financial development, overbanking and bank failures during the Great Depression | New evidence from the Italian case

Title: Sviluppo finanziario, overbanking e fallimenti bancari durante la Grande Depressione: nuove evidenze dal caso Italiano

Summary:

This study examines the relationship between overbanking, bank competition, and financial instability during the interwar period in Europe, focusing on Italy as a case study. The authors conduct econometric analysis on bank balance sheet data and a systematic review of contemporaneous sources, showing that banks that failed had previously opened many branches and operated in areas with intense competition. Misguided managerial decisions led to higher operational costs, prompting banks to engage in riskier activities. The 1920s saw a profound transformation of the Italian banking system, with a massive expansion of branches and intense competition for deposits. The study argues that these changes in the banking system's structure made it more vulnerable to the negative effects of the global crisis following the 1929 Wall Street crash. Evidence from other European countries suggests that Italy was not an isolated case.