Finance-led divergence in the regions of Italy

Abstract

The article evaluates finance-led growth as an explanation for regional divergence in Italy over the years 1890–1910. Regional banking disparities are documented and the hypothesis developed that the financial crisis of the early 1890s struck the fledgling Southern Italian banking system at a vulnerable moment, distorting its subsequent development and handicapping the region's economy. The South is revealed to have been a chronically (over the entire period) and comprehensively (on every indicator) unhealthy environment for banks. Further evidence indicates that regional divergence in bank assets was largely due to the South's failure to develop the entire range of large banks. Size-class transition matrix analysis reveals that the typical Southern bank failed to reach a large size because it was born smaller (and less frequently) than in the North, suffered a higher mortality rate, especially in the smaller classes, and had lower growth probabilities, especially in the larger categories. The salience of deposits on the liability side and government securities on the asset side suggests that they reflected more than directly caused the development of their local economies.