E-encyclopedia of banking, stock exchange and finance

Selected letter: M


    Financial Account, at the Macroeconomic level, is a section of the SNA, the System of National Accounts, a standard defined by a group of International Organizations under the guidance of the UNITED NATIONS (UN) (Encyclopedia).
    Strictu sensu, the Financial Account reflects the balance of financial transactions (Net Acquisition of FINANCIAL ASSET minus Net Incurrence in Liabilities) at the level of an Institutional Sector (Non-Financial Corporations, Financial Corporations, Government, Households and Non Profit Institutions, Rest of the World) or at the level of the entire domestic economy. Such transactions are broken down by Financial Instrument.
    With a statistical discrepancy due to the difference of sources, the Financial Account balance must equal the Capital Account balance, which, in turn, reflects the difference between Savings and Investments as corrected by Capital Transfers.
    The Capital Account and The Financial Account are part of the section of the SNA defined as Accumulation Accounts.
    The Accumulation Accounts are the complement to Current Accounts (that reflect transactions in the circular flow of income). The Accumulation Accounts include all the items that concur in the determining the changes in Balance Sheet from one accounting period to the other, not only Financial Transactions but also other flows such as Revaluation (or price) effects and Change in Volume effects.
    The Balance Sheet, in turn, allows to evaluate the stock (or level) of wealth as of the end of each accounting period, with the breakdown of Financial Assets and Financial Liabilities by instrument, along with the breakdown of Non-financial Assets.
    Financial Accounts and, more broadly, Accumulation Accounts and Balance Sheets have represented an important section of National Accounts since their creation in the Ninety-fifties, in parallel with development of the system of Flow of Funds by the US Federal Reserve, the most complete and systematic compilation to date. The financial crisis (SUBPRIME CRISIS) that exploded after 2007 has given further impulse to the production of information on financial flows and stocks. The new SNA 2008 Standards are to be implemented by 2014 and include many important new features and concurrent initiatives such as a quarterly release of financial stock and flow figures by the main G20 countries.

    Editor: Daniele Fano, author of "Financial Accounts in the System of National Accounts (SNA) and in the Current Economy - An Introduction", Universitalia, Rome, 2011.


    Market Abuse Directive/ Regulation.

    ©2012 Editor: House of Lords


    Dr Mahbub ul Haq (1934- 1998) was an influent Pakistani economist. He is known as the founder of the Human Development Report. He was also amongst the most influential supporters of the Human Development theory. At the international level, he worked for the World Bank (1970 -1982) and from 1989 to 1986 he was Special Advisor to the Administrator of the United Nation Development Program (UNDP). In Pakistan, he was Minister of Finance, Planning and Commerce (1982-88) and in 1996 he founded the Center for Human Development.
    Editor: Valentina GENTILE
    © 2010 ASSONEBB

  • Major Groups

    In 1992 at the United Nation (UN) Conference on Environment and Development (UNCED), better known as the ‘Earth Summit’, people realized that governments alone could not achieve sustainable development. It would require the active participation of all sectors of society and all types of people - consumers, workers, businesspersons, farmers, students, teachers, researchers, activists, indigenous communities, and other communities of interest.

    In that context, governments adopted Agenda 21, an action plan to achieve sustainable development, in which are formalized nine of these groups as the overarching categories through which all citizens could participate in the UN activities on achieving sustainable development. These are officially called “Major Groups” and are: business and industry, children and youth, farmers, indigenous peoples and their communities, local authorities, non-governmental organizations, the scientific and technological community, women, workers and trade unions.

    The United Nations Environment Programme (UNEP) believes that the commitment and genuine involvement of all social groups is critical to the effective implementation of the objectives, policies and mechanisms in the field of environment and development. Hence, any policies, definitions or rules that affect the participation of non-governmental organizations in the work of the United Nations and that are associated with Agenda 21
    must apply equally to all Major Groups.

    UNEP, www.unep.org > UNEP Major Groups and Stakeholders Branch > Major Groups

    Editor: Barbara PANCINO; Emanuele BLASI


    In the futures markets, it is the amount of money to pay in order to keep the position on the market. The Clearing House is the counterpart of the operations and requires the settlement of margins on a daily basis. Margins have to be paid as deposits, and they can be:

    - initial margin: it is a percentage of the nominal value of the contract to be bought. The percentage is settled by the Clearing House. The initial margin can be paid by means of cash, treasury bonds, and other payment methods issued by banks.
    - delivery margin: it guarantees against the risk of price changes on the very last day of the contract.
    - variation margin: on a daily basis by means of the marking to the market, profits and losses are settled on the market. It should be paid in cash.
    Hull J. (2008) Options, futures and other derivatives, Prentice Hall.
    Oldani C. (2008) Governing Global Derivatives, Ashgate, London.
    Editor: Chiara OLDANI
    © 2010 ASSONEBB


    Recording of financial instruments in the balance sheet of an investment firm at market value.

    ©2012 Editor: House of Lords


    The market is a complex network of (voluntary, peaceful and mutually beneficial) economic exchanges which, without being planned in advance, is the product of the social cooperation. In this respect, it is the social institution par excellence as a web of reciprocal dependence between actors who owe the possibility to pursue their own (economic) projects to the matching of the intentions and expectations that determine the actions of different individuals. The market system owes its origins to a series of circumstances occurred in late-Middle Age, a time characterized by the lack of a strong central power and by the birth of civil society, that society whose subjects benefit from a certain amount of liberty and rights while having the free use of their goods, their work, and their private life. There is, therefore, a historically inextricable link between the market, modernity and freedom: the “market economy” is thus equivalent, first and foremost, to an economic freedom and the economic freedom is the means to a higher end, i.e. freedom tout court.

    1. Market and Economic Rationality
    According to Max Weber the market is “the archetype of all rational social action” (Weber, 1978, vol. I, p. 635). In Weber’s opinion “[a] market may be said to exist wherever there is competition, even if only unilateral, for opportunities of exchange among a plurality of potential parties. Their physical assemblage in one place, as in the local market square, the fair (the “long distance market”), or the exchange (the merchants’ market), only constitutes the most consistent kind of market formation. It is, however, only this physical assemblage which allows the full emergence of the market’s most distinctive feature, viz., dickering” (ibid.).
    More to the point, the market is the combination of all voluntary and peaceful exchanges of goods which are property of those who exchange them. Such exchanges, which are based upon agreed prices, are both recurrent and mutually beneficial, having as their only purpose the satisfaction of a reciprocal demand. When the individuals decide to enter a temporary relation of exchange, they do it rationally, since they consider this very exchange, with its values and purposes, as the most proper way to acquire the possible quantity of resources. They could in principle achieve the same goods by adopting other courses: self-production, robbery, barter, gift, theft, distribution by the community, allocation by a central power, etc. And undoubtedly these are the methods that, for a long time, have been preferred by most of the world population. On the other hand, the choice of free exchange-characterized by its “purely economic and rational character” , (ibid., p. 639)-is explained by its being “the most impersonal relationship of practical life into which humans can enter with one another. […] The reason for the impersonality of the market is its matter-of-factness, its orientation to the commodity and only to that. […] its participants do not look toward the persons of each other but only toward the commodity; there are no obligations of brotherliness or reverence, and none of those spontaneous human relations that are sustained by personal unions” (ibid, p. 635). That is to say that the market’s order is a kind of cooperation which allows individuals to collaborate with each other regardless of their ends or personal attachments. As a matter of fact, the great value of the market lies precisely in this, that while it does not require the establishment of a shared hierarchy of goals, it nonetheless allows the collaboration of all members of a society to the fulfilment of other people’s goals, without requiring individuals to previously agree upon them-or even without any knowledge of what they are-on the basis of the sole desire of each to pursue their own goals. At the same time, the choice of free exchange is explained by the fact that the relation of economic exchange-differently from, say, gift or robbery, in which the gain is entirely on one side and the loss entirely on the other-is beneficial for all participants, who advance from a condition of lesser gratification to one of higher gratification.1 In fact, exchange “brings about an increase in the absolute number of values experienced”, since everybody “accepts in exchange what is relatively necessary [to them]” (Simmel, 2011, p. 315), while receiving an higher quantity of perceived utility-that very utility which every part is trying to achieve through the transaction, and which prevents cooperation from occurring against the interests of the counterpart. And this is precisely what preserves the continuity of social relations. Cooperation would indeed cease in the long run if exchange turned out to be a bad transaction for any of the counterparts. No social life would be possible unless the members of a society establish a mechanism of cooperation, each accepting to satisfy the conditions of those they need to cooperate with in order to accomplish their own goals. Conversely, cooperation would be extremely difficult, not to say impossible, if individuals, while trying to maximize their own utility, expected to attain other people’s collaboration without providing an adequate “compensation”.
    The hypothesis of a “maximizing” individual is thus unrealistic, for it conceals the fact that man can exist and develop only within a society, being immersed from his birth in a reality which is populated by other people with whom he has to interact, mediate, compete, on the basis of his own purposes and dispositions, provided his interest in seeing his own life-projects fulfilled.2 This state of things is due to the condition of “anthropological ignorance”-defined as the “necessary and irremediable ignorance on everyone’s part of most of the particular facts which determine the actions of all the several members of human society” (Hayek, 2013, p. 13)-and by that of “scarcity”, i.e. the fact that “our physical existence and the satisfaction of our most ideal needs are everywhere confronted with the quantitative limits and the qualitative inadequacy of the necessary external means” (Weber, 1949, p. 64). These two conditions (gnoseological and economic, respectively) constitute the two fundamental logical premises of the modern conception of man as “a social being, not only as one whose material needs could not be supplied in isolation, but also as one who has achieved a development of reason and of the perceptive faculty that would have been impossible except within society” (Mises, 1951, p. 292). By the same token, if individuals were infallible and omniscient, and if they could count on unlimited resources (both material and symbolic), there would be no impediments to the fulfilment of their projects. Conversely, their fallibility and ignorance, not to mention the limited character of available resources, induce them to cooperate with each other and to satisfy the conditions imposed by the others in the very attempt to realize their own objectives.
    In all economic relations the universal conditions of “scarcity” and “ignorance”, far from being an impediment, are precisely what allows the establishment of that complex network of economic exchanges known as the market-which, without being planned in advance, is the product of that very cooperation which is essential to the pursuit of personal goals. The market, in this respect, is the social institution par excellence, organized as it is as a web of reciprocal dependence between actors who owe the possibility to pursue their own (economic) projects to the “matching of the intentions and expectations that determine the actions of different individuals” (Hayek, 2013, p. 35); this beneficial correspondence, in other words, is precisely what produces a collective utility through the pursuit of self-interest.
    The “discovery that there exist orderly structures which are the product of the action of many men but are not the result of human design” (ibid., p. 36), i.e. that most of human institutions (not only the market but also society, the State, and the law as well) are the result of spontaneous development rather than design, is commonly ascribed to the tradition of methodological individualism. This tradition-inaugurated by Bernard de Mandeville and by eighteenth-century Scottish moralists (David Hume and Adam Smith), and further developed by political thinkers such as Benjamin Constant and Alexis de Tocqueville and sociologists such as Georg Simmel and Max Weber-found its most comprehensive expression in the work of the Austrian School of Economics (Carl Menger, Ludwig von Mises, Friedrich A. von Hayek) and of the philosopher of science Karl R. Popper.3 These thinkers were the first who argued that each individual acts in obedience to the need of pursuing his own ends; yet, since everyone is also in need of other’s people cooperation, every individual is also supposed to provide them with the services they ask for in return. Hayek elaborated the notion of spontaneous “order” (cosmos)-which he conceived as a process of deployment of relevant dispersed knowledge, i.e. as the un-programmed outcome of a long process of aggregation of single actions, having as their purpose the solution to common and recurrent problems-as an explanation of the invisible hand of the market. This well-known metaphor was propounded in 1776 by Adam Smith (1811) to account for the spontaneous mechanism occurring in modern industrialized and secularized societies which results in public prosperity-that is, the generally advantageous adjustment among reciprocal exchanges conceived by Smith as the unplanned result of each one’s attempt to accomplish his own ends by means of free cooperation.4

    2. Institutions and Modernization
    Every existing society acknowledges the institution of the market as the place (both physical and symbolic) where all relations of exchange between buyers and sellers occur. Yet, not all the existing societies are also market systems. The customary relationship between buyers and sellers, in fact, does not suffice to the establishment of a “market system” or “market economy”. To make this possible, it is necessary that those relationships of exchange are left to the free interplay among parties and regulated solely by the promise of a future payment, rather than being coordinated by a central political authority.5 This, in turn, requires a political system which allows and protects from state-interference private property, free initiative, competition, and the free interplay of supply and demand-a system, in other words, in which the distinction between civil society and state as well as the boundary between private property and sovereignty are well defined. A system which is perfectly represented by Benjamin Constant’s “democracy of the moderns” since “[t]he aim of the moderns is the enjoyment of security in private pleasures; and they call liberty the guarantees accorded by institutions to these pleasures” (Constant, 1988, p. 317).
    Accordingly, the “market”-considered as the mere place where exchanges occur-may be said to have existed since the beginnings of civilization: “since the introduction of agriculture, the most important actor of the economic life (beside the farmer) has been the merchant, i.e. that particular social actor that operates in the market” (Pellicani, 2007, p. 131).
    On the other hand, the “market system” arose only at the beginning of the Modern Age with the birth of capitalistic society, soon becoming the engine of a liberal and democratic development of society itself. In fact, “it is only thanks to the capitalistic system of production that the market becomes the core of the economic life; that exchanges occurring in the market are regulated solely by the law of supply and demand; that the factors of production, including manpower, are paid in money, and that only money is accepted in return for both goods and services” (ibid.).
    The key-role of money in a capitalist economy is explained by the fact that only through money the so-called “economic calculation”, i.e. the calculation of costs and benefits, is conceivable. Money originated as an instrument to establish comparisons and to mediate the resulting exchanges: if scarcity is one of the conditions which favour exchange, it follows that things do not possess any value other than that they acquire when compared with each other.6
    The market system owes its origins to a series of circumstances occurred in late-Middle Age, a time characterized by the lack of a strong central power. British noblemen easily took advantage of these circumstances, soon extorting from legislators concessions and exemptions which would become the institutional habitat of the civil society-that society whose subjects benefit from a certain amount of liberty and rights while having the free use of their goods, their work, and their private life. More specifically, “autochthonous towns-born after the communal revolution, which had been chiefly a class struggle between the bourgeoisie and the feudal lords-experienced the formation of a “protected free space” in which productive classes could employ their own resources in the most rational way, thanks to the establishment of the logic of catallactics” (Pellicani, 2011, p. 92).7
    The politico-juridical sanction of private property and free initiative (whether economic or not) soon allowed the emerging entrepreneurial bourgeoisie to establish a self-regulated market system, based on the private property of the means of production, on free work, on competition, and on the dialectics between supply and demand. The consequences of this process went far beyond what could be expected: the change undergone by such “right-distributing society” (société distributrice de droits)8 was not limited to its unprecedented economic development, involving on the contrary a broad transformation of institutions, beliefs, and values which would eventually create a secularized society governed by individualism and scientific rationalism. As a matter of fact, the market-by allowing the encounter with the Other (if not the radically Different), the exploration of new worlds and cultures, and ultimately the rejection of all exclusive philosophical or religious worldviews imposed by an oligarchic power seeking for its own legitimization-was the chief instrument of this process of “modernization”.
    There is, therefore, a historically inextricable link between the market, money, and modernity. In market society all payments are expressed in money, which due to its impersonal nature, its neutrality, and its abstract character “is free from any quality and exclusively determined by quantity” (Simmel, 2011, p. 301). Beside its economic value, money is thus what best exemplifies the rationality, calculability, and impersonality of modern times, as opposed to the old worldview, based on the primacy of traditions.

    3. Market Economy and Freedom
    The preconditions of such “modern and almost endless network of exchanges, i.e. the market” (Rothbard, 1993), made possible by the existence of money, are private property, individual autonomy, and the resulting web of interactions which unintentionally gives life to the price system. Prices-whose utility lay in disseminating information on the preferences of customers, and which thus constitute a reliable index of the abundance or insufficiency of goods-are neither imposed nor deliberately decided, being rather the spontaneous result of the demand of a certain commodity. In Hayek’s words: “The Marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly” (Hayek, 1996, p. 87). In a money-based economy, therefore, each good has its own price, and this implies that those who sell a good can then put their gain at the service of whatever purpose they like. The same freedom is symmetrically achieved by the buyer, as soon as he is able to pay for that good the price demanded by the market. Accordingly, we generally provide to each other the means to pursue each one’s goals-goals of which the others are not aware, and which they could in principle even disapprove. Since no acceptance of each other’s goals is required, the system of exchanges is perfectly free to develop, increasing in turn the extent of social cooperation.9 The market is thus to be regarded as a mechanism for the dissemination of knowledge by means of the essential information provided by prices-a mechanism which has as one of its outcomes “that someone is induced to fill the gap that arises when someone else does not fulfil the expectations on the basis of which a third party has made plans” (Hayek, 2002, p. 18). The actors in the market, therefore, are constantly trying to capitalize on such “dispersed” knowledge in order to fill the positions which will best allow them to satisfy other people’s needs (whether in terms of goods or services). Moreover, since the ability to explore and discover the unknown becomes effective precisely within such relationship of exchange and social cooperation, competition-and catallactic competition in particular-can be regarded as the best instrument to realize human projects in general; for only where decisions and projects-modes of production and products-are both comparable and testable, it is reasonable to expect the development of society and the advancement of civilization allowed by the ceaseless selection of what each time proves most satisfactory.10 In other words, it is only through the market that numberless activities may concur to the achievement of certain goods.
    It should also be emphasized that both exchange and social cooperation can work exclusively on the basis of the private property of the means of production. “When two goods are indeed exchanged, what is really exchanged is the property titles in those goods. When I buy a newspaper for fifty cents, the seller and I are exchanging property titles: I yield the ownership of the fifty cents and grant it to the news dealer, and he yields the ownership of the newspaper to me” (Rothbard, 1993, p. 638). Consequently, “the key to the existence and flourishing of the free market is a society in which the rights and titles of private property are respected, defended, and kept secure” (ibid.). As Hayek pointed out in his The Road to Serfdom: “Whoever controls all economic activities controls the means for all our ends and must therefore decide which are to be satisfied and which not” (Hayek, 1972, p.91).
    The “market economy” is thus equivalent, first and foremost, to an “economic democracy”; and the latter is what provides the most solid foundation of the freedom of citizens. In other words, economic freedom is the means to a higher end, i.e. freedom tout court: “As soon as the economic freedom which the market economy grants to its members is removed, all political liberties and bills of rights become humbug. […] Freedom of the press is a mere blind if the authority controls all printing offices and paper plants. And so are all the other rights of men” (Mises, 1963, p. 287).
    After all, given both the condition of “anthropological ignorance” and the “dispersion of knowledge”, any project of centralized planned economy would be substantially impracticable in the long run. Adam Smith was the first to advance the idea that human knowledge is necessarily partial, fallible, and “dispersed” among millions of individuals, and thus unlikely to be gathered by one or few people. And this amounts to an unassailable criticism against all forms of protectionism or interventionism by an administrative welfare-State, which presumes to know what “every individual […] can in his local situation judge much better than any statesman or lawgiver can do for him” (Smith, 1811, vol. II, p. 243). It was on this very bases that in the early twentieth century Ludwig von Mises (1951) could diagnose the failure of socialist regimes.
    In fact, at the core of socialism lays the public property of the means of production, namely land and capital goods. Here, a real market for either lands or capital goods is basically impossible. While in a money-based economy the information conveyed by the price system allows the calculation of costs and benefits, in a planned economy in which private property is abolished such calculation-and thus the very possibility of a rational economy-is impossible. To authoritatively impose prices, to shield them from the law of supply and demand, means to suppress both competition and the market, thus favouring the social conditions historically connected to the rise of totalitarian regimes. By necessity, as already mentioned, those who possess the means also control the ends, and they can arbitrarily decide which ones deserve to be realized and which ones do not. Therefore, any centralized planned economy, having the presumption of controlling all human activities, “removes all freedom and leaves to the individual merely the right to obey” (Mises, 1963, p. 287). Nevertheless, the presumption of assuming full control of the price system is inevitably doomed to failure. Such system would in fact require the most perfect knowledge of the information influencing the preferences and choices of the economic actors. As a matter of fact, such knowledge is just impossible. As human knowledge is necessarily partial, fallible, and dispersed among millions of individuals, no centralized planning will ever be able to foresee with absolute certainty the future developments of knowledge, let alone being effectively able to centralize an immense amount of information concerning specific circumstances of time and place. And this-as history teaches us-explains the recourse to widespread campaigns of propaganda, having as their purpose to instil into people the idea of a common prevailing goal as well as the conviction that the means chosen by those who are empowered are the most desirable. Not to mention the recourse, against the “enemy” who does not share the same “truth”, to the indiscriminate use of violence and coercion.

    1 In this regard, modern game theory draws a distinction between zero-sum games and positive-sum games. A zero-sum game is a game in which all that is lost by a participant in the exchange is gained by the other (or the others), while a positive-sum game is a game in which what is aggregately gained by all participants is more than what they have lost.
    2 Accordingly, the theory of homo oeconomicus, i.e. the infallible calculator of the utilitarian tradition, who acts rationally by maximizing his own utility, cannot provide a plausible explanation of the formation of the social order. Cf. Fallocco (2012).
    3 See Infantino (1998).
    4 The saying “private vice, public virtue”, formulated by Bernard de Mandeville (1988) in his well-known Fable of the Bees (1715), may be regarded as the first expression of the “mechanism” which Adam Smith later referred to as the “invisible hand”. Mandeville, a Dutch scholar, had in mind the seventeenth-century mercantile society, which was held together and made prosperous neither by selfishness nor by individual benevolence, but rather by the reciprocal advantage of the individuals who took part in those interactions animating commercial activities. Cf. the Appendix in Moroni (2005, pp. 157-169).
    5 For an analysis of the difference between “market” and “market system” cf. Lindblom (2001).
    6 Beside being “impersonal” in its freeing the relation of exchange from any specific object or person, money is “abstract” in its conveying the economic nature of things-that is, their exchangeability-being exclusively concerned with the quantitative aspects of reality rather than individual goals or specific contents. Money is intrinsically quantitative since it allows to express numerically the fungibility of things. Cf. Menger (2009) and Simmel (2011). For a synthesis see also Fallocco (2011).
    7 Adam Smith (1811) was the first to call attention to the so-called “feudal anarchy”, although in this regard he owed a certain to debt to Montesquieu and Hume (see Infantino, 2008, p. 43 n.). The same thesis was later defended by other distinguished scholars who studied the origins of capitalism, e.g. Baechler (1975), Weber (1978), and more recently Pellicani (1988, 2011).
    8 The expression recurs in Maalouf (1983, p. 301) and is adopted by Pellicani (2011, p. 88).
    9 Cf. Hayek (2013, pp. 269-271).
    10The competition between the actors of the market, conceived as a procedure of discovery of the unknown, is not dissimilar to the condition of the scientist who is trying to solve a scientific riddle: in both cases, since not all the relevant information is available, different solutions (e.g. products) are proposed and then submitted to critical judgment (e.g. that of customers). For an analysis of the analogy between the competitive logic of the market and the logic of scientific research, see Kirzner (1973), Popper (2002), and Hayek (2002).

    Baechler J. (1975), The Origins of Capitalism, Blackwell, Oxford.
    Constant B. (1988), The Liberty of the Ancients compared with that of the Moderns, in Id., Political Writings, ed. by B. Fontana, Cambridge University Press, Cambridge, pp. 307-328.
    Fallocco S. (2011), “Denaro”, in Rivista Bancaria Minerva Bancaria, vol. 4, pp. 102-110.
    Fallocco S. (2012), Il soggetto dell’azione nella spiegazione individualistica, in S. Maffettone, A. Orsini (Editors), Studi in onore di Luciano Pellicani, Rubbettino, Soveria Mannelli.
    Hayek von F.A. (1973), The Road to Serfdom, The University Press of Chicago, Chicago.
    Hayek von F.A. (1996), Individualism and Economic Order, The University of Chicago Press, Chicago-London.
    Hayek von F.A. (2002), “Competition as a Discovery Procedure”, in Quarterly Journal of Austrian Economics, vol. 5, n. 3 (Fall 2002), pp. 9-23.
    Hayek von F.A. (2013), Law, Legislation and Liberty: A New Statement of the Liberal Principles of Justice and Political Economy, Routledge, London-New York.
    Infantino L. (1998), Individualism in Modern Thought. From Adam Smith to Hayek, London, Routledge.
    Infantino L. (2008), Individualismo, mercato e storia delle idee, Rubbettino, Soveria Mannelli.
    Kirzner I.M. (1973), Competition and Entrepreneurship, The University of Chicago Press, Chicago-London.
    Lindblom C.E. (2001), The Market System: What it Is, How it Works, and What to Make of It, New-Haven- London, Yale University Press.
    Maalouf A. (1983), Les Croisades vues par les Arabes, Lattés, Paris.
    Mandeville B. (1988), The Fable of the Bees, or Private Vices, Publick Benefits, ed. by F.B. Kaye, Liberty Classics, Indianapolis.
    Menger C. (2009), The Origins of Money, Ludwig von Mises Institute, Auburn (AL).
    Mises von L. (1951), Socialism: An Economic and Social Analysis, Yale University Press, New Haven.
    Mises von L. (1963), Human Action: A Treatise on Economics, 4th Revised ed., Fox & Wilkes, San Francisco.
    Moroni S. (2005), L’ordine sociale spontaneo. Conoscenza, mercato e libertà dopo Hayek, UTET, Torino.
    Pellicani L. (1988), Saggio sulla genesi del capitalismo, SugarCo, Milano.
    Pellicani L. (2007), “Capitalismo”, in Mondoperaio, Dicembre, n. 6, pp.131-134.
    Pellicani L. (2011), Dalla città sacra alla città secolare, Rubbettino, Soveria Mannelli.
    Popper K.R. (2002), The Logic of Scientific Discovery, Routledge, London-New York.
    Rothbard M. (1993), “Free Market”, The Fortune Encyclopedia of Economics, Warner Books, New York, pp. 636-639.
    Simmel G. (2011), The Philosophy of Money, Routledge, London-New York.
    Smith A. (1811), An Inquiry Into the Nature and Causes of the Wealth of Nations, 3 vols., J. Maynard, London.
    Weber M. (1949), The Methodology of the Social Sciences, ed. by E.A. Shils and H.A. Finch, The Free Press, Glencoe (IL).
    Weber M. (1961), Economy and Society: An Outline of Interpretative Sociology, ed. by G. Roth and C. Wittich, University of California Press, Berkeley-London-Los Angeles.

    Editor: Simona FALLOCCO


    Various types of market conduct, in particular insider dealing and market manipulation, which are prohibited by the EU Market Abuse Directive and the Financial Services and Markets Act 2000.

    ©2012 Editor: House of Lords

  • MARKET EFFICIENCY (Encyclopedia)

    A market is efficient with respect to information when price variations cannot be forecast and when prices completely incorporate the expectations and the available information that investors are supposed to have. Fama (1970) describes this concept as "efficient", assuming that in a market prices always and completely reflect the available information. The satisfactory conditions to define a market as "efficient" are very stringent:
    - The existence of a majority of investors who act in a rational way (attempting to attain the maximum gain) and not connected between themselves (they are price takers);
    - The set of information (I) available for agents without cost in various moments of time t;
    - The investors have homogenous expectations, they have the same opinions about the effect that information could have on the present and expected asset price;
    - There are no transaction costs or taxes.
    Maikiel (1992) states that efficiency based on a certain set of information I implies the impossibility to gain profits through trading based on the same information. Basically, if prices do not vary after the divulgation of specific information, the market can be considered efficient with respect to the aforesaid information. Naturally, considering the previous affirmations, a crucial point of modern economic theory emerges; that is, the question of information asymmetry.
    The classical rate structure in terms of market efficiency requires the following division:
    - Weak efficiency: the set of information only considers the prices’ "past history".
    - Strong efficiency: the set of information includes all the information publically available (for instance: gain forecasts given by analysts, periodical communications compulsory for the specific firm, and obviously the prices’ "past history", etc.).
    - Semi-strong efficiency: represents a level of efficiency higher than the previous and implies that the set of information I contains all the information which every market investor knows. Obviously, this last context is very unlikely in real financial markets.
    Returning to the previously introduced concept of the impossibility to forecast asset returns, their "random
    nature" deserves some explanation in order to avoid confusion.
    Indeed, individuals generally believe that in an efficient context, the asset price has to follow a "smooth" route and not a random one. The assumption of "randomness" entails the improbable supposition of a small increasing (or decreasing) set of variations of the asset price.
    When the price rises, this increase will occur all at once and not through a series of small variations. In this manner, it is difficult to get gains since the price changes quickly once the information is available for market participants.
    The result is that the price of subsequent transactions is a random process and not a continuous one.
    Therefore, in contrast with the general opinion, efficiency does not require the market price to systematically coincide with the true value, but implies unbiased error in the market-price determination.
    To sum up, prices could increase or decrease but these deviations from the true value should be random, that is, the stock over/under value probability is assumed as identical each time (future values are not predictable). Furthermore, these variables need to be uncorrelated with any other variable. In consequence of the previous reasoning where market-price deviations from the true value are random, no investors can pick under/over-valued assets by adopting well known investment strategies.
    It is also possible that several markets may be efficient while others are not, or that a specific market is efficient with respect to a certain group of investors and not with respect to another one: this is the direct consequence of differences in rates and transaction costs which can give advantages to particular categories while hindering others.
    The market efficient hypothesis could be formalised as follows:

    b. ,
    is the set of information available in ; this set is decisive in determining the stock quotation at time and the expected quotation at time t;
    is the set of information used by investors;
    Ptis the stock price at time t;
    and are the conditional probability distribution functions of the stock quotation at time t.
    The first of the previous equations (hypothesis a) states that all the information available at time is used immediately by the market. Therefore, the second one states that the function is formulated by investors considering the set of information available at . The same equation implies the following:
    . Briefly, it is possible to state that the efficient market hypothesis suggests the following price formation process:
    1. The set , liberally available, is used by investors () to forecast the distribution probability and the expected value
    of the price at time t ;
    2. Once the expectations have been established, the market, on the basis of a specific equilibrium model (for instance the Security Market Line notation), determines the expected return equilibrium .
    3. The expected return of a period can be defined in the following way:

    Therefore, the price will be:

    4. Subsequently, the asset price at time should be the following

    Where is not coherent with the expected price and the expected return, the quotation at time could vary. In order to clarify where:
    , considering and the price at time would rapidly increase in the presence of instantaneous market activity: if such a situation should occur (i.e. ), an effective return which coincides with that of equilibrium will be registered (this return comprehends the information acquiring costs). With respect to the equality , this suggests the exact and complete incorporation of the set of information in the price; however, in order for this phenomenon to occur, that set of information should be reflected in and . According to this situation, it is not possible to gain extra-returns by simultaneously carrying out more than one transaction at time t-1 based on the knowledge of the set. The correction of to this equilibrium value occurs quickly as long as the set of information that is available to all the investors at the same instant is correctly interpreted by the operators.
    Fama, E. F., 1970, Efficient Capital Markets: A Review of Theory and Empirical Work, in Journal of Finance, Vol. 25(2), pp. 383-417;
    Fama, E. F., 1991, Efficient Capital market: II, in Journal of Finance, Vol. 46, No. 5 (dicembre), pp. 1575-1617;
    Grossman, S. J., 1976, On the Efficiency of Competitive Stock Markets Where Traders Have Diverse Information", in Journal of Finance, Vol. 31 (maggio), pp.573-85.
    Grossman, S. J., Stiglitz, J. E., 1980, On the Impossibility of Informationally Efficient Markets", in American Economic Review, Jun 1980, Vol. 70(3), pp. 393-408.
    Editor: Rocco CICIRETTI
    © 2009 ASSONEBB


    A person who holds himself out on the financial markets on a continuous basis as being willing to deal on own account by buying and selling financial instruments against his proprietary capital and at prices defined by him.

    ©2012 Editor: House of Lords


    Persons responsible for the operation of organised venues (see below).

    ©2012 Editor: House of Lords


    Persons involved in a professional capacity in the transaction or execution of investment business. The term excludes “buy-side firms”.

    ©2012 Editor: House of Lords


    It is the price of a good on the internal market. It is fixed in the free trade of goods and therefore market ratios are expressed in units of account generally represented by the national currency.
    Editor: Carmen NOTARO
    © 2010 ASSONEBB


    Market risk is the probability that the value of a financial asset, traded on a sufficiently liquid markets, changes due to not predictable factors. These factors can be linked to the uncertainty connected to some financial indicators such as the interest rates (e.g. EURIBOR and LIBOR), the spread between risky and risk-free government bonds, exchange rates, and real indicators like inflation or unemployment rates.

    Typically, risk market evaluation aims to quantify the unexpected loss for a financial asset, by using ad hoc models (e.g., value at risk (VaR) (Encyclopedia)). These models quantify the maximum potential loss, to which a confidence interval applies, that can be generated by the above-mentioned market factors over a given time horizon.


    Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU

    Date of entry into force

    2 July 2014

    Date that the rules apply

    3 January 2018 (extended from 3 January 2017)


    • It aims at making financial markets in the European Union (EU) more robust and transparent.
    • It creates a new legal framework that better regulates trading activities on financial markets and enhances investor protection. The new rules, called ‘MiFID 2’, revise the legislation currently in place and will apply from January 2018.


    • 1.

      Ensuring financial products are traded on regulated venues

    The aim is to close loopholes in the structure of financial markets. A new regulated trading platform is established to capture a maximum of unregulated trades. This is the so-called Organised Trading Facility (OTF), which will exist alongside existing trading platforms such as regulated markets.

    • 2.

      Increased transparency

    The rules strengthen the transparency requirements that apply before and after financial instruments are traded, for instance when market participants have to publish information regarding the prices of financial instruments. These requirements are calibrated differently depending on the type of financial instrument.

    • 3.

      Limiting speculation on commodities

    Speculation on commodities - a financial practice that can lead to the prices of basic products (such as agricultural products) soaring - is restricted by introducing a harmonised EU system setting limits on the positions held in commodity derivatives. National authorities may limit the size of a position that market participants can hold in commodity derivatives.

    • 4.

      Adapting rules to new technologies

    Under the new rules, controls must be established for trading activities which are performed electronically at a very high speed, such as ‘high-frequency trading’ (a type of trading which uses computer programs to perform trades at high speed using rapidly updating financial data). Potential risks from increased use of technology are mitigated by a combination of rules aiming to ensure these trading techniques do not create disorderly markets.

    • 5.

      Reinforcing investor protection

    Investment firms should act in accordance with the best interests of their clients when providing them with investment services. These firms should safeguard their clients’ assets or ensure the products they intend to launch are designed to meet the needs of final clients. Investors will also be provided with increased information on products and services offered or sold to them. Moreover, firms must ensure that staff remuneration and performance assessments are not organised in a way that goes against clients’ interests. For instance, this may happen when remuneration or performance targets provide an incentive for staff to recommend a particular financial product instead of another that would better meet clients’ needs.

    Delegated acts

    • In April 2016, the European Commission adopted a delegated directive which deals with aspects of investor protection:
      • safeguarding clients’ funds and financial instruments;
      • product governance (this ensures that firms which manufacture and distribute financial instruments and structured deposits act in their clients’ best interests); and
      • monetary and non-monetary compensation.
    • It also adopted a delegated regulation on organisational requirements and operating conditions for investment firms.
    • Implementing Regulation (EU) 2016/824 lays down technical standards for the description of the functioning of multilateral trading facilities and organised trading facilities and the notification to the European Securities and Markets Authority (ESMA).


    It applies from 3 January 2018 (i.e. postponed by one year by Directive (EU) 2016/1034). EU countries have to incorporate it into national law by 3 July 2017.


    For more information, see:


    Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast) (OJ L 173, 12.6.2014, pp. 349-496)

    Successive amendments to Directive 2014/65/EU have been incorporated in the original text. This consolidated version is of documentary value only.


    Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits (OJ L 87, 31.3.2017, pp. 500…517)

    Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive (OJ L 87, 31.3.2017, pp. 1…83)

    Commission Implementing Regulation (EU) 2016/824 of 25 May 2016 laying down implementing technical standards with regard to the content and format of the description of the functioning of multilateral trading facilities and organised trading facilities and the notification to the European Securities and Markets Authority according to Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments (OJ L 137, 26.5.2016, pp. 10-16)

    Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (OJ L 173, 12.6.2014, pp. 84-148)

    See consolidated version.


    MiFID stands for Markets in Financial Instruments Directive (Directive 2004/39/EC). Approved by the European Parliament in April 2004, the MiFID replaces and repeals the previous Investment Services Directive (Directive 93/22/EEC or ISD), radically changing the community legislative framework on the offer of investment services. Together with the Market Abuse Directive (MAD), the Prospectus Directive, and the Directive on Transparency Requirements for listed companies, the MiFID is an integral part of the Financial Services Action Plan adopted by the European Commission in May 1999.
    Pursuant to the approach proposed by the Lamfalussy Commission, MiFID regulations consist of three levels:
    - the first level, represented by the cited Directive 2004/39/EC, defines the regulation's general principles;
    - the second level, represented by Regulation 1287/2006/EC (on market discipline and pre and post-trade transparency issues in particular) and Directive 2006/73/EC (on the conduct and organisation of intermediaries providing investment services);
    - the third level, corresponding to the Committee of European Securities Regulators (CESR) guidelines, designed to ensure uniform reception and application at the national level of all regulations at the first two levels.

    From ISD to MiFID

    The first MiFID Consideranda clearly outline the difference in approach as compared to the ISD Directive. While the ISD aimed at harmonising only “[] initial authorisation and operating requirements for investment firms, including conduct of business rules, [...]” and “[...] some conditions governing the operation of regulated markets […]”, the MiFID is designed to ensure “[…] the degree of harmonisation needed to offer investors a high level of protection and to allow investment firms to provide services throughout the Community [...] on the basis of home country supervision […]” (Directive 2004/39/EC, Consideranda 1 and 2).
    Compared to the ISD - where “minimum harmonisation” principles prevailed - the MiFID and related execution measures represent a switch to a “very wide harmonisation” approach, identified as the tool for developing an effectively integrated and single financial market. Even when it assumes the form of a Directive, the European legislation looks very detailed: this tightly limits the possibility for Member States to introduce additional rules, when EU standards are transposed into national law.

    MiFID’s objectives

    Despite the complexity and variety of the issues addressed, the objectives of the MiFID and the related implementation provisions are clear:
    - to stimulate competition, by repealing regulated market trading concentration obligations and by facilitating the offer of cross-border investment services (free provision of services in EU member countries, otherwise known as the “single passport”);
    - to strengthen market integrity, efficiency, and transparency by setting out detailed rules on trade execution;
    - to ensure investor protection and to set uniform rules of conduct in relations between investment firms and their clients;
    - to introduce minimum organisational requirements for investment firms.

    Market organisation

    As far back as 2002, with the first draft of the new Directive, the European Commission noted that: “[...] since the ISD was adopted, the EU financial market has become more complex and the line between markets and intermediaries has become more blurred [...]”: alternative trading systems (ATS) have developed alongside regulated markets - known in the Italian law as Sistemi Scambi Organizzati (SSO).
    The MiFID addresses this blurred line between intermediaries and markets in an ambitious and highly innovative way. Considerandum 5 of Directive 2004/39/EC reads: "It is necessary to establish a comprehensive regime governing the execution of transactions in financial instruments irrespective of the trading methods used to conclude those transactions so as to ensure a high quality of execution […] and to uphold the integrity and overall efficiency of the financial system […]. It is necessary to recognise the emergence of a new generation of organised trading systems alongside regulated markets which should be subjected to obligations designed to preserve the efficient and orderly functioning of financial markets”.
    To achieve these objectives, the EU legislation has developed along several lines:
    - elimination of the faculty previously attributed to Member States to impose that negotiations of listed securities concentrate on regulated markets;
    - recognition of “systemic internalisers” - i.e.: investment firms which, on an organised, frequent and systematic basis, deal on their own account by executing client orders;
    - inclusion of the “operation of multilateral trading facilities-MTF” among investment services;
    - obligation that systematic internalisers, multilateral trading facilities and regulated markets abide by pre- and post-trade transparency rules, in order to avoid the negative effects deriving from the fragmentation of execution venues.
    The repeal of trading concentration obligations means that buy and sell orders for financial instruments may currently be executed using three different trading venues in competition between themselves: regulated markets, multilateral trading facilities, and systematic internalisers. Readers can view an updated list of authorised trading venues on the CESR website.

    Client relations

    The MiFID regulates relations between intermediaries and their clients through:
    - a more complex set of know-your-customer rules, centred on the notions of suitability, appropriateness, and execution only;
    - the introduction of a different client categorisation, consisting of two general levels … “retail” and “professional” clients - and the new category of “eligible counterparties”;
    - the requirement that investment firms establish and implement procedures capable of channelling orders to the trading venue that offers the best execution conditions, “[...] taking into account price, costs, speed, likelihood of execution and settlement …” (i.e. best execution, article 21, paragraph 1 of Directive 2004/39/EC);
    - tight discipline over the intermediary's duty to provide clients with information;
    - prohibition for banks and investment companies from receiving fees, commissions or non-monetary benefits (inducements) in connection with providing an investment service, except under particular conditions;
    - extension of the notion of investment services, to include investment advice.

    Suitability, appropriateness, execution only

    In the MiFID framework, the intermediary’s assistance to the client is categorised at different levels depending on the nature of the service provided (see article 19 of Directive 2004/39/EC and related application provisions).
    In the case of more complex and value-added services … i.e. portfolio management and investment advice … investment firms are required to have in-depth knowledge of the clients and to assess that recommended services or investments are “suitable” for them (so-called “suitability assessment”). Investment firms must gather information regarding the clients’ knowledge and experience in the fields relevant to the specific type of product or service, their financial situation and their financial goals. Afterwards, they must ensure that the service or product effectively corresponds to the clients’ stated goals and that it does not expose them to risks that they are not able to understand or to bear. If the investment firm does not obtain the information necessary for the suitability assessment, it must refrain from offering investment advice and / or portfolio management services.
    For financial services other than advice and portfolio management, investment firms must carry out an “appropriateness” assessment. In other words, they have to assess whether the clients have sufficient knowledge and skills to understand the risks involved with the specific type of product or service offered or demanded, by gathering information on financial instruments they have most knowledge of, the frequency of transactions in the past, their level of education and profession. In case the investment firm considers, on the basis of the information received from the clients, that the product or service is not appropriate to them, it shall warn the clients. Once notification is given, the investment firm may proceed with providing the product or service.
    Finally, in the case of "execution only", the investment firm is not obliged to assess whether the transaction is appropriate for the client's profile; therefore, it does not have to gather any information. The “execution only” procedure may be applied only when the service offered refers to shares listed on a regulated market, money market instruments, bonds and other debt securities, harmonised funds, and other non-complex financial instruments.

    Professional clients, retail clients, eligible counterparties

    The MiFID offers different degrees of protection according to different client categories.
    Pursuant to Directive 2004/39/EC, a professional client is defined as “[...] a client who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs […]” (Annex II). This category includes credit institutions, investment firms, insurance companies, collective investment schemes and their management companies, pension funds, other institutional investors, national and regional governments, public bodies with mandates to manage public debt, entities dedicated to the securitisation of assets, central banks, international and supranational institutions (World Bank, IMF, ECB, EIB, etc.). The following may also be classified as professional clients: a) large companies, subject to certain conditions1); b) clients other than those mentioned above, provided that they file a specific application with the investment company (so-called "professional clients upon request”) and that they satisfy the cases, conditions, and procedures described in Annex II, Section II of Directive 2004/39/EC2.
    According to the MiFID, “eligible counterparties” are a sub-set of professional clients3. The attribution of the status of eligible counterparty is relevant only with reference to specific investments and related ancillary services4: dealing on own account, execution of orders on behalf of clients, reception and transmission of orders.
    Finally, all persons not included among professional clients and eligible counterparties are classified as “retail clients”. The “retail” category also includes clients applying to be treated as such: as a matter of fact, the categorisation as eligible counterparty or professional client does not prevent the client from enjoying a more protective treatment, in general or for individual transactions. Obtaining a different status is subject to the consent of the investment firm.
    Retail clients enjoy the highest level of protection pursuant to the MiFID. Directive 2004/39/EC specifies that, within a reasonable time before the service is provided, the investment firm must spell out for the retail client all the terms of service, together with a set of information about the investment firm and its services, the nature and risks of its financial products, the instruments designed to protect the client’s instruments and funds, and all the costs and charges for the service.
    On the contrary, professional clients have to be provided with information exclusively regarding the nature and risks of the products and services on offer, the protection of the client's financial instruments and funds, the existence and terms of any rights of guarantee or privilege that the investment company has or could have on its financial instruments or funds.
    Before providing investment advice and portfolio management services, the investment firm must acquire from the retail client all information useful for a “suitability” assessment. If the service is other than investment advice or portfolio management, the investment firm will ask the clients for information only about their knowledge and experience of the specific product or service recommended or requested (“appropriateness” assessment).
    When the counterparty is a professional client, the presumption pursuant to the MiFID is that they have the necessary knowledge and experience to understand the inherent risks of products, transactions, and services in relation to which they are categorised as a professional client. Applicable to such services, the investment firm may omit the appropriateness assessment. If the financial service in question consists of investment advice, the investment firm has the right to presume that the professional client is financially capable of sustaining any risk connected to it and compatible with its investment objectives. Hence the suitability assessment will be simpler than the one conducted for a retail client.
    Some of the MiFID rules on retail and professional client protection do not apply to eligible counterparties. In detail, when providing to such counterparties the services of dealing on own account, execution of orders on behalf of clients, and reception and transmission of orders, investment firms are not required to comply with the obligations pursuant to articles 19, 21, and 22(1) of Directive 2004/39/EC … which deal respectively with the general rules of conduct to follow when providing services, the obligation of executing orders at the most favourable conditions, and the obligation of applying procedures that ensure rapid and efficient order execution.

    Investment firms’ organisational requirements

    As already mentioned, among the MiFID's objectives is to introduce minimum organisational requirements for investment firms.
    The Directive features a principle-based framework, setting general objectives and minimum requirements, and leaving investment firms the freedom to autonomously structure their organisational models. Hence the organisational and control set-up must be proportional to the type, size, and complexity of the firm’s operations, as well as the type and range of services offered (so-called “proportionality principle”).
    The provisions on organisational requirements are contained in article 13 of Directive 2004/39/EC and detailed in Title II, Chapter 1 of Directive 2007/69/EC.
    In short, these provisions set out investment firms' obligations regarding general organisational requirements, compliance, risk management, internal audit, and the responsibility of senior management. They also define guidelines for establishing sound policies and procedures to ensure accurate and regular provision of services; to monitor compliance with regulation; to prevent conflict of interests; to regulate personal transactions. Finally, they define conditions for outsourcing essential / important functions and mitigating related risks.

    The transposition of the MiFID into the Italian legislation

    The passage of Law Decree17 September 2007, no. 164, started the process of transposing the MiFID into the Italian legislation, by adding a series of significant amendments to the Consolidated Law on Financial Intermediation (Testo Unico della Finanza, TUF). The Decree came into effect on 1 November 2007.
    On 29 October 2007, after a market consultation, the Italian Securities and Exchange Commission (CONSOB) introduced pertinent amendments to Regulation no. 16190 (“Regolamento Intermediari”) and Regulation no. 16191 (“Regolamento Mercati”). At the same time, the CONSOB and the Bank of Italy jointly published the “Regulations on the organisation and procedures of investment firms” (so-called “Regolamento congiunto” or “Joint Regulation”).
    In pursuit of the objective of reducing fragmentation risks to a minimum and to ensure effective parity of treatment between all investment companies operating in the European market, Italy's reception laws and regulations show very little deviations from the EU legislation.

    Assessment and review process

    Pursuant to EU legislation, the European Commission should periodically review the MiFID and its application provisions: see article 65, paragraphs 2, 3, and 4 of Directive 2004/39/EC; article 44, paragraph 5, and article 51, paragraph 5, of Directive 2006/73/EC; and article 40 of Regulation 1287/2006/EC.
    Since 2008, the CESR started checking several aspects of the Directive’s effectiveness, publishing, together with the Committee of European Banking Supervisors (CEBS) a report “CESR/CEBS’s technical advice to the European Commission on the review of commodities business” (CESR/08-752 and CEBS 2008 152 rev., 15 October 2008). Then in June 2009, the CESR published an assessment report on the Directive's impact on the functioning of secondary markets (“CESR’s assessment on the impact of the Markets in Financial Instruments Directive - MiFID - on the functioning of equity secondary markets”, CESR/09-355), and another report on the transparency of corporate bond, structured finance products, and credit derivatives markets (“Transparency of corporate bond, structured finance product and credit derivatives markets”, CESR/09-348).
    In the same year, the Commission began work on the review of other aspects of the Directive. In July 2010, the CESR published a first set of technical reports on equity markets (“CESR Technical Advice to the European Commission in the Context of the MiFID Review - Equity Markets”, CESR/10-802), the transparency of non-equity markets (“CESR Technical Advice to the European Commission in the Context of the MiFID Review: Non-equity Markets Transparency”, CESR/10-799), transaction reporting requirements (“CESR Technical Advice to the European Commission in the Context of the MiFID Review … Transaction Reporting”, CESR/10-808), and on investor protection (“CESR Technical Advice to the European Commission in the Context of the MiFID Review - Investor Protection and Intermediaries”, CESR/10-859). It also published responses to questions that the European Commission addressed to the Committee regarding the Directive review process (“CESR’s Responses to Questions 15-18 and 20-25 of the European Commission Request for Additional Information in Relation to the Review of MiFID” - CESR/10-860).
    A second set of technical reports was released by the CESR on 13 October 2010, addressing issues of standardisation and organisation of over-the-counter derivatives trading (“CESR Technical Advice to the European Commission in the Context of the MiFID Review … Standardisation and Organised Platform Trading of OTC Derivatives” - CESR/10-1096), post-trade transparency standards for the equity market (“CESR Technical Advice to the European Commission in the Context of the MiFID Review … Equity Markets: Post Trade Transparency Standards” - CESR/10-882), and client categorisation (“CESR Technical Advice to the European Commission in the Context of the MiFID Review - Client Categorisation” - CESR/10-1040). It also published a second set of answers to questions posed by the European Commission (“CESR’s Responses to Questions 1-14 and 19 of the European Commission Request for Additional Information in Relation to the Review of MiFID” - CESR/10-1254).
    In 2011, the European Commission should submit a draft revision of Directive 2004/39/EC, to be passed by year-end. Revision of Directive 2006/79/EC is scheduled for 2012.
    1Large undertakings that meet two of the following size requirements on a company basis are considered professional clients: 1) total balance sheet, EUR 20M; 2) net turnover, EUR 40M; 3) own funds, EUR 2M.
    2Recognition of professional client status “upon request” presupposes that the investment firm carries out “[…] an adequate assessment of the expertise, experience, and knowledge of the client […]” which reasonably allows it to deem “ […] in light of the nature of the transactions or services envisaged, that the client is capable of making its own investment decisions and understanding the risks involved [...]” (Directive 2004/39/EC, Annex II, Section II, paragraph II.1). In the assessment, at least two of the following criteria should be satisfied: 1) that the client has carried out transactions, in significant size, on the relevant market with an average frequency of 10 transactions per quarter over the previous four quarters; 2) that the size of the client’s financial portfolio exceeds EUR 500,000 - including cash deposits; 3) that the client works or has worked in the financial sector for at least one year in a professional position that presupposes knowledge of the transactions or services envisaged. The client must state in writing that they wish to be treated as a professional client, either generally or with regard to a particular investment service or transaction, or type of transaction or product.
    3According to Article 58, paragraphs 1 and 3, of Regulation n°16190 (Regolamento Intermediari) the following are identified in Italy as “eligible counterparties”: 1) investment firms, banks, insurance companies, UCITSs and their management companies, pension funds, financial intermediaries enrolled in the list pursuant to articles 106, 107, and 113 of the Consolidated Law on Banking (Testo Unico Bancario, or TUB), companies pursuant to article 18 of the TUB, electronic money companies, bank foundations, national governments and their divisions, including government agencies with a mandate to manage public debt, central banks, and supranational government organisations; 2) companies whose main activity is trading on own account in commodities and derivative financial instruments on commodities; 3) companies whose exclusive business is trading on own account in the markets for derivative financial instruments and … for mere hedging purposes … on spot markets, provided that they are backed by members of settlement houses of such markets; 4) entities as listed above, resident in non-EU countries. Also professional clients pursuant to Annex 3 of Regulation n°16190, Section I, points (1) and (2), not included in the list above, may be treated as eligible counterparties: among them are stock brokers and large companies.
    4According to Annex I of Directive 2004/39/EC, “investment services and activities” include: reception and transmission of orders in relation to one or more financial instruments; execution of orders on behalf of clients; dealing on own account; portfolio management; investment advice; underwriting of financial instruments and / or placing of financial instruments on a firm commitment basis; placing of financial instruments without a firm commitment basis; operation of Multilateral Trading Facilities (see Section A). “Ancillary services” include: safekeeping and administration of financial instruments for the account of clients, including custodianship and related services; granting credits or loans to an investor to allow him/her to carry out a transaction in one or more financial instruments; advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings; foreign exchange services where these are connected to the provision of investment services; investment research and financial analysis; services related to underwriting (Section B).

    CESR: http://www.esma.europa.eu/ - http://mifiddatabase.cesr.eu/
    CEBS: http://www.c-ebs.org/
    CONSOB: http://www.consob.it/

    © 2010 ASSONEBB

  • Markov process

    It is a stochastic process with a probability distribution function depending only by the present status and not on the historic series of the random variable.


    The martingale hypothesis defines that the level of any variable in is equal to the price of the same variable in t using all the past information set.
    Analytically, the martingale is a stochastic process of if the conditions , and hold. If It represents the information set available at time t built on the past history of the variable, we obtain , or equivalently: (using the iterated expectation law).
    Note that the stochastic process is also defined as fair game because the expected value of the variable in a defined interval, given the information set available, equals zero. Using an alternative definition, the expected variation, influenced by the past history of the variable, is zero. It follows that the probability of positive/negative variation of the variable is the same.
    Using the asset price as an example, we can say that the best forecast of tomorrow’s price is today’s price, where the "best" is understood as "with lower average square root".
    The martingale hypothesis is generally associated with the efficient market theory. We can use the martingale to define the weak form of market efficiency: if the market is efficient, in a weak form, it is not possible to systematically generate return trading on the information of past prices. Hence, the expectation on a future variation of price influenced by the price history set must be equal to zero. Consequently, the more efficient the market, the more random the variation of price. The most efficient market is the one in which changes in prices are completely random and unpredictable.
    The martingale hypothesis is not related in any way to the risk hypothesis. The trade-off between expected return and risk is a fundamental pillar of the modern finance theory. Even with this limit, the martingale hypothesis is widely used in the pricing theory after checking for the risk correction model.
    Campbell, J.Y., Lo, W.A., MacKinlay, A.C., 1997, The Econometrics of Financial Markets, Princeton University Press, Princeton New Jersey;
    Becchetti, L., Ciciretti, R., Trenta, U., 2007, Modelli di Asset Pricing I: Titoli Azionari, in Il Sistema Finanziario Internazionale, Michele Bagella, a cura di, Giappichelli, Torino.
    Editor: Rocco CICIRETTI
    © 2009 ASSONEBB



    Systemic risk plays a pivoltal role in financial market and stability, but despite the importance of having a comprehensive knowledge of this phenomenon, the literature fails in providing an exhaustive understanding about measuring the effects and magnitude of what a systemic failure implies both from a horizontal perspective (spreading of the crisis across institutions, banks and firms) and from a vertical perspective (how deep the crisis is, and which agents will be involved, from big investment funds to private investors). The paper reviews the most recent literature on the issue and contributes to the debate.

    Bank failures and subsequent macroeconomic breakdowns constitute a threat for the overall financial stability, and at the same time, a financial dislocation with incalculable consequences for both the financial and real economy. The de Larosière Group (2009) on financial supervision in the EU has analyzed many drivers as causes of the recent turmoil in the financial system. The first concerns the failure in risk assessment procedures, both from the side of financial banks and firms, and from the side of institutions that have been established with the mandate to guarantee efficient regulation and supervision (Basel I and II) 1. The overestimation of regulators of the ability of the financial firms to manage situations of financial distress, and the corresponding underestimation of minimum capital requirements, have represented a weak factor that has to be considered for a full understanding of the macroeconomic forces of financial soundness. Secondly, the exponential development of derivative instruments has complicated the evaluation of risky assets in any field of financial engineering, shedding light on the unreliability of current model-based risk assessments (i.e. CAPM and VaR 2). It has contributed to generate a parallel hidden banking system with reduced information about the size or origination of credit risks, highlighting a lack of transparency in many segments of the international financial system. In this regard, a special role has been played by the sudden growth of Over-the-Counter credit derivatives markets. Even if these markets were initially envisaged as a powerful risk management instrument mitigating the likely negative states of nature, in reality they have spread the threat of a systemic risk. Thirdly, the "originate-to-distribute" model has created huge possibilities and incentives for speculators, by diverting attention from the solvency capacity of third-party counterparts (BIS, 2009).
    Despite the importance of having a comprehensive knowledge of this phenomenon, the literature fails in providing an exhaustive understanding about measuring the effects and magnitude of what a systemic failure implies both from a horizontal perspective (spreading of the crisis across institutions, banks and firms) and from a vertical perspective (how deep the crisis is, and which agents will be involved, from big investment funds to private investors). Furthermore, considering the lack of consensus of what a systemic risk is (see also"On the Different Meanings of Systemic Risk") and the difficulty in detecting an independent and clear measure suitable for any scenario and market, there are a distinct number of reliable quantitative indicators 3 utilised to measure the first signs of financial distress.
    In this contest, we propose a dual classification to study the principal measurement tools of systemic risk. We opted for a different choice from that recently proposed in Billio et al. (2010), as we consider that the contagion among banks and the subsequent spillover effects coming from the insolvent bank can be classified in one category in order to have a whole understanding of this topic. Then we carried out our review of systemic risk measures in two broad categories:
    a)The first group focused on monitoring traditional macroeconomic indicators of financial soundness and stability;
    b)The second group analysed the interlinkages between financial institutions through the analysis of the financial institutions' assets.
    The first group of contributions relied on bank capital ratios and bank liabilities showing that aggregate macroeconomic indicators can provide a valid and useful instrument to predict systemic risk threat. Through the study of macroeconomic fundamentals, Gonzalez-Hermosillo et al. (1997), Gorton (1998) and Gonzalez-Hermosillo (1999) proved the evidence supporting the functioning of macro analysis in estimating systemic risk. More recently, Bhansali et al. (2008) derived the "systemic credit risk" variable from index credit derivatives and found that systemic risk during the 2007-2009 financial crisis showed a double value as compared to May 2005. De Nicolò and Lucchetta (2010) firstly used a dynamic factor model to work out joint forecasts of indicators of systemic real risk and systemic financial risk, and secondly they elaborated stress-tests of these indicators as impulse responses to structurally identifiable shocks. The use of aggregate indicators, if on one side it looks like the most suitable instrument for systemic risk assessment, on the other side illustrates its limitations for the infrequent character of the data under analysis. Macroeconomic indicators are characterised by monthly observations and are unreliable in capturing market-tensions released by sudden news and unexpected events, that, as the recent financial crisis has illustrated, can develop very rapidly with dramatic consequences on capital markets. Furthermore, by focusing on broad drivers of the financial system, this approach is bounded by the scarce information about the state of individual financial institutions, in particular about interlinkages between institutions.
    The second group analysed the interlinkages between financial institutions as well as exposures among banks that through their business can influence each other in situations of financial distress. De Bandt and Hartmann (2000) provided an interesting survey of this category of studies. A more recent contribution was given by Lehar (2005), assessing the probability that a certain number of banks within a time period go bankrupt due to the decreasing of their asset value below a well-defined liability value. This view comes from the structural model by Merton (1974) wherein a bank’s default occurs when the asset banking values stand below a given threshold value.4 Adrian and Brunnermeier (2009) defined CoVaR as the VaR of financial institutions conditional on other institutions that experience, at the same time, financial distress. De Nicolò and Lucchetta (2009) investigated the transmission channels and contagion effects of certain shocks between the macroeconomy, financial markets and intermediaries. Huang et al. (2009) used as a proxy of systemic risk the price of insuring a dozen of the major US banks against financial turmoil by using both ex-ante bank default probabilities and forecasted asset-returns correlations. As the recent financial crisis has underscored, the need to understand the interlinkages between financial firms and the use of aggregate indicators is of crucial importance in order to construct better macro prudential indicators for policy makers and regulators and, at the same time, to have a deep understanding of the key drivers of systematic financial risk. For this purpose, the analysis of interlinkages between financial institutions is of key importance, both from a domestic and international point of view. With regard to this, the IMF (2009) surveyed four different methods to assess interlinkages between financial institutions:
    -The network approach: here the interbank market spreads the transmission of financial stress through the banking system. Allen and Babus (2008) stated that network analysis is the best approach to lead an in-depth analysis of systemic risk, as it allows the regulator to analyse not only the fulcrum of the problem, but also the spillover effects from direct financial linkages 5through the construction of a matrix of inter-institution exposures that includes gross exposures among financial institutions (both national and international).
    -The co-risk model (or co-movement risk model): in this specification, the probability of default of one institution is directly linked to the default risk of another institution. As underlined in Brunnermeier et al. (2009, p.5), "It may be that the best way to assess the implications of endogenous co-risk measures that measure the increase in overall risk after conditioning on the fact that one bank is in trouble". Empirical studies during the past ten years, such as de Vries et al. (2001), Longin and Solnik (2001) and Chan-Lau (2004) found a clear evidence that co-movement between financial variables is stronger during troubled times than during normal times.
    -The distress dependence matrix studies the probability of default of a pair of banks, by taking into account a panel of financial banks. Through this method, it is possible to assess the probability of a financial institution experiencing distress conditional on another institution that shows clear signs of financial troubles. Goodhart and Segoviano (2008) offered a brilliant contribution to this technique.
    -The default intensity model is able to capture the probability of default of a large part of financial institutions through linkages between some institutions. These kinds of models are worked out in terms of default rate jumps that occur at failure events, reflecting the increased likelihood of further events due to spillover effects. In this regard, Giesecke and Kim (2009) captured the clustering of the economy-wide default events as represented by the fitted intensity.
    Notwithstanding the insightful IMF classification, there are still substantial empirical contributions that deserve to be included in this analysis, even if it is not possible to specify them in the above four categories.
    Prices of financial assets, interest rates, financial stocks and flows represent good proxies as indicators of systemic risk. Their characteristics of being continuously available on the market with the capacity of representing the mirror of firm and banking performances make these variables valuable tools of systemic risk measurement. In this contest, Bartram et al. (2005) proposed three different approaches to estimate systemic risk. The first methodology assessed the risk of a systemic failure by observing the market reaction to global financial shocks for a subset of banks that are not directly exposed 6 to the shock. Stock market reactions of unexposed bank to the shock will be interpreted as a measure of systemic risk. The second approach was given by an assessment of the default probabilities of banks during the time of crisis. In order to estimate the default probabilities, they took into consideration a structural model, an idea developed by Merton (1974), of default estimated from an observed series of equity prices. In the third and last approach, they followed the estimation procedure applied by Duan (2000), Duan et al. 7 (2003), and Camara 8 (2004) by assessing systemic risk in the banking system through the bank default probabilities implied in their equity option prices.
    One of the most recent contributions of this class of indicators is provided by Capuano (2008) by developing a framework to derive a market-based measure of probability of default. This probability of default is defined as the probability that the value of the underlying asset will fall below a given threshold value that constitutes the default barrier itself. In contrast to Merton’s (1974) work, Capuano (2008) does not fix any predetermined ad-hoc default barrier, but it is rather endogenously determined.
    Using a VaR approach, Acharya, et al. (2010), defined systemic risk as the likelihood of experiencing cumulative losses in a financial system that exceed that predicted by the VaR model. Furthermore, they proposed a tax (fee) that would require two components: (i) a component directly linked to the institution-risk and representing the expected loss on its guaranteed liabilities, and (ii) a systemic-risk component; namely, the risk is measurable when the financial sector becomes undercapitalised.
    1As expressed in Acharya et al. (2010) "Basel I and Basel II are designed to limit each institution's risk seen in isolation; they are not sufficiently focused on systemic risk even though systemic risk often is the rationale provided for such regulation".
    2The CAPM (Capital Asset Pricing Model), is a model able to describe the relationship between risk and expected return that is used in the price of risky securities. For an exhaustive explanation about CAPM, see Jensen, M, C., Balck, F., and Scholes, M.S "The Capital Asset Pricing Model: Some Empirical Tests" Studies in The Theory of Capital Markets". Praeger Publishers Inc., 1972.
    3Despite the fact that a major focus of the literature on systemic risk is focused on quantitative measures, there are also some contributions that take into consideration qualitative measuring instruments (Nelson et al.2005). For qualitative information tools we mean formal surveys of investors and bank senior loan officers, and informal contacts with market participants. In particular, considering the short amount of time available for decision making in the investment banking sector, this qualitative information assumes a remarkable connotation when unexpected events come up quickly, and there is no time to wait for an official response from quantitative surveys and analyses.
    4These models use option prices to approach credit risk by measuring on equity markets. See also KMVmodels.
    5For a comprehensive survey of the literature, see Upper (2007).
    6Bertrand et al. (2005) argued that in efficient capital markets, negative information (as 9/11) will affect bank performances that are exposed to the events in question. Unexposed banks will be unaffected by these effects.
    7Duan et al. (2003) derived a maximum-likelihood approach where the likelihood function for the equity value of the firms is derived in a structural model framework. Through maximizing this function, it is possible to obtain the implied default probabilities of the firm.
    8Camara (2004) developed an option pricing model in which asset prices follow a geometric random walk but may jump to zero (bankruptcy) with a finite probability distribution.
    Editor: Claudio DICEMBRINO
    © 2011 ASSONEBB

  • MEDIOBANCA (Encyclopedia)

    Mediobanca is the leading Italian investment bank. It is organized into three divisions: a) corporate and investment banking, which provides financial services to large and medium-sized companies in Italy, and internationally through its branch offices located in London, Frankfurt, Paris, Madrid, New York and Moscow; b) principal investing, which manages the Group’s most significant equity investments, including its 13% stake in Assicurazioni Generali, 14.9% of RCS MediaGroup, and 11.6% of Telco (primary shareholder of Telecom Italia); c) Retail and private banking, which brings together the Group’s activities in consumer credit (Compass), retail banking (CheBanca!) and private banking (Compagnie Monégasque de Banque and Banca Esperia). Mediobanca’s shares are owned by 59,000 shareholders, who include several leading industrial and financial groups which are parties to a shareholders’ agreement controlling 42% of the Bank’s share capital. As at 31 December 2012 the Group had some 3,500 staff on its books, and assets totalling €79.6bn.
    Mediobanca, short for Mediobanca … Banca di Credito Finanziario S.p.A., was set up straight after World War II on the initiative first of Banca Commerciale Italiana (now Intesa San Paolo), then Credito Italiano (now UniCredit) and later Banco di Roma (subsequently Capitalia, which in 2007 was merged into UniCredit), in order to “meet the medium-term financing requirements of Italian manufacturing enterprises” and to forge a “direct link between the investment community and the need for finance to rebuild Italian industry” (Banca Commerciale Italiana annual report, 1945).
    It was thus one of the instruments that allowed Italian companies to finance, with permanent resources, first the reconstruction of their war-damaged production facilities, and second their growth, international and domestic, as part of the transformation process which turned Italy into one of the world’s leading industrialized countries. At first Mediobanca confined itself to granting medium-term credit, in accordance with the regulations in force at the time. But in October 1973, a formal decision was made to extend the Bank’s operations to provide finance on terms of up to twenty years.
    Its primary commitment following its inception was to design operations to collect medium- and long-term deposits, to be used in financing companies. In this connection, market analysis … domestic and international … was fundamental, as was application of advanced techniques in terms of granting finance and handling placements. From the outset the Bank adopted the practice of publishing information prospectuses describing the business of the issuers whose securities were to be placed, in line with international standards, the objective being to attract flows of foreign investment to a country where resources were still scarce. In the 1950s, a network of international trading companies was established, chiefly in Africa, to facilitate the development of Italian mercantile activities. In the same years Mediobanca enhanced its own capabilities to operate on international markets by entering into agreements with leading European and US banking groups (Lazard, with headquarters in New York, London and Paris, Lehman Brothers, Berliner Handels Gesellschaft, and Sofina). In 1956 Mediobanca was admitted to listing on the stock market, the first in this sector after banks’ shares had been withdrawn from the official lists following the stock market crisis of the 1930s; and it was Mediobanca which brought the three large IRI group banks … its founders … back to the market in 1970. Until the 1980s the business of granting credit to industry was an important one, in which Mediobanca demonstrated its unparalleled capabilities by basically not incurring any losses as a result of customer insolvencies. Of equal importance was the work of coming alongside companies as they came to the market (Mediobanca managed 30% of all Initial Public Offerings - IPOs in the 1983-93 period, 41% if measured by value), along with action to stabilize the ownership of the most important Italian companies (Olivetti, Montedison, Fiat, Snia, Pirelli, Italcementi), also linked to the most critical phases in the selection of efficient managers. Mediobanca played a key role in the restructuring of Italian industry, especially between the 1970s and 1980s, strengthening its profile as the bank of choice for the leading groups in Italy.
    In 1988 the Bank’s shareholder structure, which until that point had consisted of a small set of banks, was altered to introduce a distinction between public and private shareholders. The former, namely the state-owned banks, were in turn privatized following the sell-off programme implemented by the Italian government in the 1990s. In this period Mediobanca was one of the leading players in the privatization processes with the main deals in which it was involved the placements of shares in Telecom Italia and Enel.
    Since the 1990s, following changes to the scenarios in Italy and elsewhere and changes also to sector regulation (with the end of specialization and the introduction of mixed banks), Mediobanca has developed its activity in the area of advisory and capital market services provided to corporates, and strengthened its portfolio of equity investments, chief among which is its stake in Assicurazioni Generali, of which it became the leading shareholder. At the same time new branch offices have been opened outside of Italy. In 2000 Mediobanca entered the private banking sector, setting up Banca Esperia (50:50 joint venture with Mediolanum), and acquiring Compagnie Monégasque de Banque in 2003. In recent years it has enhanced its operations in consumer credit via Compass, which has operated in this sector since 1960. In 2008 a new retail bank, Che Banca!, was established, using a multichannel distribution platform (internet, call centre and branches).
    Mediobanca has based its growth on the independence of its management and development of internal resources, continually equipping itself with the skills it needs to adapt to changes in the markets and the companies it serves. The Bank’s founder, Enrico Cuccia, led Mediobanca until 1982, but until his death in 2000, continued to act as mentor to his pupils Silvio Salteri (1982-1988) and Vincenzo Maranghi (1988-2003). Management of the Bank eventually passed on to two of Maranghi’s closest collaborators, Renato Pagliaro and Alberto Nagel, who continue to lead it to this day (the former as Chairman, the latter as Chief Executive Officer - CEO).
    Link: http://www.mediobanca.it

    Editor: Fulvio COLTORTI


    Regista americano di lungometraggi che descrive i fatti recenti di cronaca politica ed economica americana; ha un blog molto visitato e ha vinto numerosi premi. (http://www.michaelmoore.com/)I più famosi lungometraggi sono:
    Bowling for Columbine, sulla strage di studenti fatta da studenti nella scuola Columbine e sulla povertà del servizio educativo pubblico americano
    Fahrenheit 9/11 sulla strage del 11 settembre 2001 a New York e il coraggio dei passeggeri del velivolo precipitato prima di colpire la Casa Bianca e il Pentagono
    Capitalism: a love story sulla crisi subprime e l'egemonia delle banche sul sistema produttivo industriale

    Redattore: Chiara OLDANI
    © 2010 ASSONEBB


    American film director who describes recent economic and political facts of the USA. He has a famous blog and has won various prizes. (http://www.michaelmoore.com/)
    His most famous films are:
    Bowling for Columbine, on the killing of students by other students at Columbine High School, and on the poverty of public education in the US, according to which "bowling" is a class; Fahrenheit 9/11, on the 9/11 terrorist attack to New York, and the courage of the passengers of the hijacked flight which did not hit the White House and the Pentagon; Capitalism: A love story, on the subprime crisis and the super power of banks over the productive and industrial US system.
    Editor: Chiara OLDANI
    © 2010 ASSONEBB

  • Microcredit


    Microcredit is a loan of a small amount, provided to beneficiary in the absence of appropriate collateral guarantee. In this paper we describethe main features of microcredit and its possible application as an alternative way to access to credit. Subsequently, we describe the evolution of this financial instrument in the last decades: the microcredit started in Bangladesh during ’70 years, when Muhammad Yunus founded the Grameen Bank(ETHICAL BANK). Then, we describe the European framework and the Italian regulation, with the recent ministerial decrees. We offer some considerations about its structure, showing its potentials, but also the possible drawback effects, and finally we conclude.


    Microcredit could be defined as the supply of small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families (Grameen Bank, What Is Microcredit?, http://www.grameen.com/index.php?option=com_content&task=view&id=32&Itemid=91), or as the supply of loans without guarantee of a low amount provided by financial intermediaries of different legal nature. Microcredit is provided to single person or group of people that haven’t normal requisites to access traditional credit circuit, both for developing a formal or informal business and for socio-assistance initiatives (translated by Becchetti, 2009: p. 594).

    Microcredit doesn't require that beneficiaries give collateral guarantees, consequently institutes that provide microcredit adopt different warranty systems (Becchetti, 2008; Ciravegna, 2003).

    Characteristics of microcredit

    Microcredit (Mc) includes a large range of different lending activities; however, all these ones have two main characteristics:

    a small amount;

    the absence of appropriate collateral guarantees produced by beneficiaries.

    This last element represents the main difference with a traditional loan: microcredit is provided in the absence of appropriate collateral guarantees and this element “breaks” the link consolidated in traditional banking system between the supply of a loan and the ownership of sufficient collaterals by the beneficiary. This has created an oxymoron since banks are inclined to give money only to those who already have economic resources, and consequently they exclude those who need but don’t’ have any asset (Becchetti, 2008).

    Microcredit has both social inclusion and economic development scope, since it funds man and women with entrepreneurial ideas and strong professional skills, without sufficient personal resources for realizing their own business (Ciravegna, Limone, 2007). The meaning of microcredit does not match that of microfinance (Mf) (MICROFINANCE (Encyclopedia) because the first represents only a part of the second. Microfinance includes different activities, among which the provision of small loans (that is microcredit), micro-insurances and micro-leasing, the collection of private savings and the supply of other financial services (Microcredit Summit Campaign, What Is Microfinance, http://www.microcreditsummit.org/what-is-microfinance2.html).

    In relation to the economic sustainability of microcredit, in developing countries there have been many successful experiences, contrary to developed countries where traditional banking dominates. The reasons are different: a high competition with traditional banks, the high demand of Mc but a constrained supply, the high operating costs and a rigid legal framework (Limone, 2007; Orsini, 2014). Researchers agree that the provision of microcredit has to tend toward an efficient management system, whereas there is an intense debate concerning its economic sustainability. Some stakeholders underline the relevance to gain a complete economic sustainability to supply microcredit for a long time; others highlight the importance to maximize social effects and positive externalities of Mc, even if it weakens the economic reliability of microcredit institutions (Becchetti, 2008; De Vincentiis, 2007).

    System of collateral guarantees

    Due to the absence of appropriate collateral guaranties, the microcredit providers adopt different strategies to attain the engagement of Mc recipients for repaying their debts. The providers select the potential beneficiaries of microcredit analysing deeply their moral status, their professional skills and the potentials of their business ideas. Microcredit brings the concept of credit back to its first meaning, that is “to give faith”. There are different categories of warranties for microcredit:

    personal warranties, in which one or more subjects (family members, friends, colleagues or professional players as a confidi[i] [link to “Confidi” voice of Bankpedia]) repay the loan if the debtor is insolvent (Isaia, 2007). The surety is an example of personal warranty;

    accessory warranties (SUSTAINABLE FINANCE (Encyclopedia)), that are assets with a low economic value but a high notional value for the debtor, that will engage deeply to repay his debt and consequently to keep the ownership on these assets. The accessory warranties can be objects related to the work of the debtor (for example, a truck for a carrier or a plough for a farmer) or ones with a relevant sentimental value for him (ceramics, a watch, jewellery, a wedding dress, etc.) (Becchetti, 2008).

    Microcredit can be provided to a group of beneficiaries following different schemes. The provision of microcredit to a group of recipients, called “group lending”, is a pillar of “Grameen methodology”, the scheme applied by Grameen Bank (ETHICAL BANK) to supply microcredit in Bangladesh. Recently, Grameen Bank philosophy has been diffusing in many different areas of the world by activities and initiatives of Grameen Foundation. The group lending is very common in rural areas of developing countries where social relationships are very close among members within a community, but it’s rare in Europe where society is more individualistic and social relationships are less binding.

    Short history

    Microcredit under the modern meaning was introduced in Bangladesh during ’70 years, when Muhammad Yunus founded the Grameen Bank (that means “Village Bank”). Grameen Bank started to supply small loans in the absence of appropriate collaterals. The beneficiaries were small groups, composed mostly by women. Grameen Bank helped millions of households to come out of misery by microcredit during the last forty years.

    In 1997 the first session of Microcredit summit campaign was held in Washington (USA) on February 1997. This campaign aimed for supplying microcredit to 100 million of poor households in the world until 2005 (Microcredit Summit Campaign, http://www.microcreditsummit.org/). This goal was not achieved, but in eight years microcredit allowed to supply loans to 92 million of households, 66.6 million of them with a daily income less than a dollar. United Nations (UN) declared 2005 “International Year of Microcredit” (UN, 2003; UN, 2004).

    The current target of Microcredit summit campaign is to provide microcredit to 175 million of households in extreme poverty until 2015, taking out from misery 100 million of them (Microcredit Summit Campaign, http://www.microcreditsummit.org/). The choice of 2015 as deadline for the new target is due to the correspondence with the term of the current UN Millenium Development Goals (MDGs).[ii]

    European framework

    According to law of European Union (EU), microcredit is a loan with a maximum amount of up to €25,000 (European Parliament, Council, 2013).

    In 2011 European commission published an European Code of Good Conduct for Microcredit Provision, code updated on June 2013. This code is not binding for Mc operators, but it lists behaviours and good practices that are positively acknowledged by Mc institutions and stakeholders and that concern different aspects of a microcredit business. The respect of these practices advantages clients, investors, bankers, owners, regulation authorities and partner organisations. In relation to its application, the Code of Good Conduct is primarily addressed to non-bank microcredit providers which make available to micro-entrepreneurs or self-employed people loans of up to €25,000 (European Commission, 2013).

    Italian regulation

    In Italy microcredit has been introduced officially in the national regulation by the legislative decree no. 141 of 13 August 2010. It modified articles n.111 and n.113 of “Testo Unico Bancario” (TUB), the italian code that regulates banking. In 2014 the Ministry of Economy and Finances published a decree that has made operational the above-mentioned national regulation (Ministry of Economy and Finances, 2014).

    Microcredit is supplied in the absence of collaterals, but personal warranties and other forms of guarantees are allowed. The provider of a microcredit has to supply some consultant services to the debtor in order to support this one to manage his business or to reorganize his household balance sheet.

    There are two categories of microcredit: Mc for entrepreneurial purposes, focused on micro-entrepreneurs and self-employed people, and Mc for social or solidarity purposes, focused on single persons in specific situations of socioeconomic vulnerability. In relation to the maximum amount of a microcredit, Mc for entrepreneurial purposes concerns loans of up to €25,000, and in some specific cases of up to €35,000; furthermore, the same beneficiary can receive different loans, one after the other. Otherwise, Mc for social purposes concerns financings of up to €10,000 and the provider has to supply this loan with better conditions than the prevalent ones in the reference market.

    The microcredit providers are divided in two main categories: the traditional credit providers, as banks and financial intermediates, and the non-banking operators. The non-banking operators are regulated by article n.111 of “Testo Unico Bancario” and the above-mentioned ministerial decree, and they have to respect specific criteria.

    Regarding the beneficiaries, microcredit for entrepreneurial purposes focuses on natural persons, partnerships and cooperatives: all these categories of recipients have to respect clear criteria relating their size, their debt level and their stay time on the market. Apart from some exceptions,[iii] corporations and limited companies are kept out as possible recipients of microcredit. Microcredit for social and solidarity purposes focuses on natural persons that are in specific conditions of socioeconomic vulnerability, stated in details by the above-mentioned ministerial decree.

    General scheme of public intervention

    Currently, in most cases the programmes of microcredit are fostered or conducted by participation of public subjects. Most of these programmes follow a “quadrangular intervention scheme” (Andreoni, Sassatelli, Vichi, 2013), where four different categories of players are present:

    1. public bodies, that procure the financial resources to supply microcredit and/or to found a guarantee fund for insuring those who provide effectively the loans;
    2. qualified operators, that select the potential beneficiaries;
    3. banks, that supply effectively the loans;
    4. social operators - in most cases subjects belonging to no-profit sector - that support the beneficiaries of a microcredit before and during the repaying period of each loan.

    Microcredit's effects

    Analysing the microcredit, it’s important to balance sensibly its merits and positive results with its real contraindications and potential drawback effects (Orsini, 2014). Microcredit can have various positive effects. Firstly, it improves the socioeconomic relationships within a community (Becchetti, 2008): in fact, the poor is involved in a business transaction, he receives faith by another person and he gains a respectable social acknowledgement within own community (Orsini, 2014). The selection of potential beneficiaries of microcredit isn’t based on collaterals owned by a person, but on his business idea, moral qualities and professional skills (Orsini, 2014). Microcredit represents a possible way for a person to gain an economic independence and a higher social position. Moreover, micro-enterprises and small businesses (SMALL AND MEDIUM SIZED ENTERPRISES - SMEs) are often excluded from traditional credit circuit and consequently they can use microcredit to access to financings for making investments (Orsini, 2014).

    In developing countries most of microcredit projects are focused on female entrepreneurship because the condition of women is usually worse than the men’s one. Analysing different empiric surveys in developing countries, women who received a microcredit have on average a higher social status and better health conditions than the others (Bonaga, Tinessa, 2014).

    In relation to the general issue of unemployment, microcredit doesn’t represent a “magic” tool and it can’t be the solution for all unemployed workers; however, microcredit could represent an useful instrument to support many people to gain an economic self-sufficiency. Consequently, it’s very important to select carefully which people and business projects have to be financed by microcredit (Orsini, 2014).

    In the author’s opinion, microcredit burdens the public balance sheets less than the traditional non-repayable aids supplied by public bodies; furthermore, the Mc beneficiaries will engage deeply to invest in the best way the financings received since they have to repay their debts.

    Microcredit in Italy

    Considering data until 31th December 2012, there were 172 operational programmes of microcredit in Italy, and 29 of them started in 2012. All these programmes have financed 12,418 beneficiaries, supplying €115,900,000.

    There are four main categories of players that supply microcredit:

    1. public bodies;
    2. banks;
    3. private non-banking subjects (non-banking operators, foundations, associations and the so called “Mutua AutoGestione”[iv]);
    4. religious bodies.

    According to data on 2012, most of programmes have been promoted both by private (53) and public (51) subjects. In relation to the beneficiaries, the private operators have provided microcredit to 4,048 beneficiaries, banks and religious bodies have supplied financings respectively to 2,914 and 2,612 recipients, and finally public bodies have provided loans to 2,844. Regarding the amount of money lent, the beneficiaries have received almost €42 million by private bodies and about €39 million by public ones (CamCom Universitas Mercatorum, Borgomeo, 2014, pp. 68-69).

    However, most of financial resources to grant microcredit have been supplied to other providers by banks (almost €99 million out of €116 million). Concerning the categories of beneficiaries, the natural persons have received nearly €64 million, while the legal persons have benefited from microcredit of €8,750,000; moreover, the programmes that funded indifferently natural and legal persons have provided more than €40 million. Considering data until 31th December 2012, in Italy the group lending appeared secondary because only about €3 million out of €116 have financed businesses of people joined in repaying groups of two or more units (CamCom Universitas Mercatorum, Borgomeo, 2014, pp. 70-71).

    In relation to the geographical distribution of microcredit in Italy, considering data until 31 December 2012, Calabria, Piedmont and Tuscany were the three regions where the supply of microcredit seemed to be more widespread, with over 3,500 financings in each region. On the contrary, Valle d’Aosta, Trentino-Alto Adige, Friuli-Venezia Giulia, Umbria, Molise, Apulia and Campania were the regions with the fewest number of microcredits supplied (less than 500 in each of these regions). Most of programmes of microcredit had a regional or local range; in fact, only 16 among them had a national relevance (CamCom Universitas Mercatorum, Borgomeo, 2014: pag. 72-73).

    Analysing the available data, the most common profile of a Mc beneficiary seems to be a single person who applies for a loan of an amount less than €5,000 to overcome financial difficulties related to his/her household (CamCom Universitas Mercatorum, Borgomeo, 2014: pag. 68).

    Finally, according to the National Agency for Microcredit it has supported the creation of nearly 20,000 jobs in Italy between 2011 and 2013 (National Agency for Microcredit, Lavoro: ENM, da Microcredito oltre 20mila Posti tra 2011-2013, http://microcreditoitalia.org/images/pdf/lavoro.pdf).


    The current debate about microcredit is evolving, but the literature confirms that microcredit can improve the financial sustainability of large number of persons, unable to access credit otherwise[v].

    The supply of microcredit on a large scale can produce both positive and negative results; the correct implementation of Mc programmes allows to maximize their effectiveness. However, a necessary condition to accomplish this goal is that policy makers and the Mc stakeholders succeed in establishing regulations, actions and measures to build a suitable network for supporting both the creation of new start-ups and new employment, and the supply of microcredit within a specific socioeconomic context.


    Andreoni A., Sassatelli M., Vichi G. (2013), Nuovi Bisogni Finanziari: La Risposta del Microcredito, Bologna, Il Mulino.

    Becchetti L. (2008), Il Microcredito, Bologna, Il Mulino.

    Becchetti L., Milano R. (2009), “Microfinanza”, in L. Bruni, S. Zamagni (edited), Dizionario di Economia Civile, Rome, Città Nuova.

    Bonaga G., Tinessa F. (2014), “Le Conseguenze Psicologiche del Microcredito: Indicatori e Protocolli di Valutazione dell’Impatto”, in L. Brunori (edited), La Complessa Identità del Microcredito, Bologna, Il Mulino.

    CamCom Universitas Mercatorum, Borgomeo C. (edited) (2014), Microcredito e Inclusione, Rome, Donzelli editore.

    Ciravegna D. (2007), “Il Ruolo e le Problematiche del Microcredito e della Microfinanza nell’Economia Moderna”, in D. Ciravegna, A. Limone (edited), Otto Modi di Dire Microcredito, Bologna, Il Mulino.

    Ciravegna D., Limone A. (edited) (2007), Otto Modi di Dire Microcredito, Bologna, Il Mulino.

    De Vincentiis P. (2007), “I Meccanismi Finanziari del Microcredito”, in D. Ciravegna, A. Limone (edited), Otto Modi di Dire Microcredito, Bologna, Il Mulino.

    European Commission (2013), European Code of Good Conduct for Microcredit Provision. Version 2.0, Brussels (Belgium), Europea Union.


    European Parliament, Council (2013), Regulation (EU) No 1296/2013 of the European Parliament and of the Councilof 11 December 2013on a European Union Programme for Employment and Social Innovation ("EaSI") and Amending Decision No 283/2010/EU Establishing a European Progress Microfinance Facility for Employment and Social Inclusion, Brussels (Belgium), Europea Union.


    Ferraguti D., Hunt K., Pellegrini F. (2014), “L’Identità del Microcredito”, in L. Brunori, E. Giovannetti, G. Guerzoni (edited), Faremicrocredito.it. Lo Sviluppo del Potenziale del Microcredito attraverso il Social Business in Italia, Milan, FrancoAngeli.

    Grameen Bank, What Is Microcredit?, http://www.grameen.com/index.php?option=com_content&

    Gui B. (2009), “Bene Relazionale”, in L. Bruni L., S. Zamagni (edited), Dizionario di Economia Civile, Rome, Città Nuova.

    Isaia E. (2007), “Il Processo Creditizio e le Garanzie”, in D. Ciravegna, A. Limone (edited), Otto Modi di Dire Microcredito, Bologna, Il Mulino.

    Italian Parliament (1993), Testo Unico Bancario. Decreto Legislativo 01 Settembre 1993, No 385. Testo Unico delle Leggi in Materia Bancaria e Creditizia, Rome.


    Italian Parliament (2010), Decreto Legislativo 13 Agosto 2010, No 141. Attuazione della Direttiva 2008/48/CE Relativa ai Contratti di Credito ai Consumatori, Nonché Modifiche del Titolo VI del Testo Unico Bancario (Decreto Legislativo No 385 del 1993) in Merito alla Disciplina dei Soggetti Operanti nel Settore Finanziario, degli Agenti in Attività Finanziaria e dei Mediatori Creditizi, Rome.


    Italian Parliament (2012), Decreto Legislativo 19 Settembre 2012, No 169. Ulteriori Modifiche ed Integrazioni al Decreto Legislativo 13 Agosto 2010, No 141, Recante Attuazione della Direttiva 2008/48/CE, Relativa ai Contratti di Credito ai Consumatori, Nonché Modifiche del Titolo V del Testo Unico Bancario in Merito alla Disciplina dei Soggetti Operanti nel Settore Finanziario, Degli Agenti in Attività Finanziaria e dei Mediatori Creditizi, Rome.


    Limone A. (2007), “Il Microcredito nei Paesi Industrializzati: Soluzione ai Problemi, Problemi a Dare Soluzioni”, in D. Ciravegna, A. Limone (edited), Otto Modi di Dire Microcredito, Bologna, Il Mulino.

    MAG4. Strumenti di Finanza Etica e di Economia Solidale, Chi Siamo, http://www.mag4.it/

    Microcredit Summit Campaign, http://www.microcreditsummit.org/.

    Microcredit Summit Campaign, What Is Microfinance, http://www.microcreditsummit.org/what-is-microfinance2.html.

    Ministry of Economy and Finances (2014), Decreto 17 ottobre 2014, n. 176. Disciplina del microcredito, in attuazione dell'articolo 111, comma 5, del decreto legislativo 1° settembre 1993, n. 385.


    National Agency for Microcredit, Lavoro: ENM, Da Microcredito oltre 20mila Posti tra 2011-2013, http://microcreditoitalia.org/images/pdf/lavoro.pdf

    Orsini R. (2014), “Una Valutazione Etica del Microcredito”, in L. Brunori, La Complessa Identità del Microcredito, Bologna, Il Mulino.

    Patti Chiari, About Credit Guarantee Consortiums, http://www.pattichiari.it/home/saperne-di-piu/risorse/tutti-gli-argomenti/speciale-migranti/english/enterprise/enterprise7.dot.

    United Nations (UN) (2003), Implementation of the First United Nations Decade for the Eradication of Poverty (1997-2006). Report of the Second Committee, 17.12.2003, A/58/448, New York (USA).

    United Nations (UN) (2004), Programme of Action for the International Year of Microcredit, 2005. Resolution Adopted by the General Assembly [on the Report of the Second Committee (A/58/488)], 19.02.2004, A/RES/58/221, New York (USA).

    United Nations (UN), Millenium Development Goals, http://www.un.org/millenniumgoals/.

    Editor: Davide D’ANGELO, 2015

    [i] A “Confidi” is a consortium that provides mutual guarantees. For other information, surf the following website: Patti Chiari, About Credit Guarantee Consortiums, http://www.pattichiari.it/home/saperne-di-piu/risorse/tutti-gli-argomenti/speciale-migranti/english/enterprise/enterprise7.dot.

    [ii]Regarding the MDGs, surf the following website: United Nations (UN), Millenium Development Goals, http://www.un.org/millenniumgoals/.

    [iii]The “società a responsabilità limitata semplificata” (SRLS) is a corporation regulated by article 2463-bis of italian Civil Code but it can access to microcredit.

    [iv]The “Mutua Società per l’Autogestione” (MAGs) are mutual company under workers management with the form of cooperatives. Respecting solid ethic principles [link to “Sustainable Finance” voice of Bankpedia], the MAGs provide different services and one of these concerns the supply of loans to their associates. A possible link to deepen this topic is the following (available only in italian): MAG4. Strumenti di finanza etica e di Economia solidale, Chi Siamo, http://www.mag4.it/chisiamo/le-mag.html.

    [v] A full financial sustainability for a Mc provider is a situation where the interests on loans can cover both all operating costs, and the cost of financial resources that the provider collect sin the market to be able to supply microcredit.

  • MICROFINANCE (Encyclopedia)

    Microfinance refers to the provision of financial products and services provided by banking firms to low-income clients not fully integrated in the ordinary financial system. Microfinance customers consist of small and domestic enterprises without any kind of guarantee and economic stability; therefore, they are refused by formal financial institutions. Thanks to microfinance, the poorest have access to credit, savings, insurance and other financial products, thus creating the basis for income increase and standard living improvement. Most poor people in the world do not have access to common financial services; this could be an opportunity for starting and improving their business. This is particularly true for people living in extreme poverty in rural areas of developing countries.
    Small producers, breeders, craftsmen and dealers devoid of means or in trouble make use of microfinance services. Borrowers, by increasing their labour income, have the chance of securing the family food supply, dealing with health costs, paying for school fees, reaching better standard of living, without being forced to emigrate or being exploited. A minimum amount of resources can be crucial for people living precariously. Traditional financial institutions do not grant loans to those households because of low income, absence of collaterals and limited number of transactions even in the case they have some guarantees; microfinance can be seen as a tool against poverty, by ensuring credit, saving, insurance and other basic financial services.
    Microfinance institutions such as credit unions and no-profit organisations …an example is given by banks for the poor … enable to get a loan, to receive remittance transfers, to cover savings. These banking firms, working in developing countries, offer their help to poor people living under the subsistence level … small craftsmen, dealers and farmers … who, in the lack of a formal financial system, would be forced to address the black credit market.

    1. Differences between microfinance and microcredit

    Microfinance gives women and men in rural areas of the world the great opportunity to improve their standard of living through the access to credit, saving, insurance, housing loans, remittance transfers and other financial services. In particular, microcredit refers specifically to loans and the credit needs of clients, while microfinance covers a broader range of financial services that create a wider range of opportunities for success.
    Microfinance associations’ goals have been achieved with great success, therefore the United Nations proclaimed the year 2005 as the International Year of Microcredit. It calls for building inclusive financial sectors and strengthening the powerful, but often untapped, entrepreneurial spirit existing in communities around the world.
    In this framework, poverty refers to the powerlessness of fulfilling primary needs such as nutrition, clothing, transportation and housing, and microcredit is recognized as the main tool for poor people to reach a minimum level of income. Furthermore, referring to the period 1990-2015, halving the number of people living on only a dollar a day is one of the microcredit objectives.

    2. Beneficiaries of Microfinance

    People ruled out of the traditional financial system, both in developed and developing countries, because of the impossibility of providing collaterals, paying high financial transaction costs and in the absence of available borrower information, end up referring to informal finance, and in the worst case scenario, are victims of usury. In order to create a wider range of possible financial services and ad hoc products to offer to excluded people, microfinance uses instruments and techniques from formal and informal sectors. Microfinance does not follow the traditional caring logic, and the poor are seen as the engine of the economic and social development of their communities.
    The evidence shows that microfinance clients are excellent credit risks with a repayment rate higher than the repayment rate of conventional loans. For instance, the repayment rate is around 97 percent in Bangladesh, Benin and Dominica.
    Banks for the poor provide loans and manage savings, reaching people excluded from financial services because of the absence of elements such as bureaucracy and other administrative costs. Clients make weekly loan payments, so possible financial difficulties can be promptly solved. Sometimes loans are distributed to small groups of people in order to solve business and personal problems that prevent repayments.

    3. Development of microfinance projects

    Microfinance constists in making small loans. A 50 or 100-dollar loan allows an inhabitant of a small village in India to start a self-supporting business and to improve his/her living conditions.
    Microfinance developed its activities throughout the last thirty years; its origins date back to the first years of the 1950s during which projects in the agricultural sector have been carried out by using microcredit. Most of these credit programmes aimed to increase productivity in marginal areas and revealed themselves a total failure; in many cases, loans were not repaid by clients or the poorest farmers did not received all the money which was managed by the richest ones, thus declining the level of the microfinance institutions’ capital.
    During the 1970s, more sustainable programmes have been implemented; they referred to loans repayment and correct interest rates to cover costs. The Bangladeshi economist and banker, Nobel Peace Prize in 2006, known as the "banker of the poor", conceived and developed the microcredit system. He is also the founder of the Grameen Bank, the first that provided credit to the poor, based on confidence rather than on clients’ solvency. Since the beginning of its activity, the bank had loaned over USD 5 billion to over 5 million poor; the borrowers are usually featured by "support groups", small informal groups, whom members support each other and share the loan repayment.
    Over the years, the Grameen Bank expanded its activity, now it offers a wide range of financial services in addition to traditional microcredit loans; the Bank’s products include home loans, tools needed to build irrigation and fishing systems as well as risk capital management consulting. Its success has inspired similar projects in more than 20 developing countries.
    In the Philippines, for instance, the International Fund for Agricultural Development (IFAD) and the Asian Development Bank (AsDB) funded a national project based on the distribution of loans … weekly repaid … to small groups rather than to individual borrowers and with no collateral required. Recent statistics have shown that 98% of the loans go to women because they are more likely to reinvest their earnings in the business in order to improve their families’ living conditions. A great number of poor women living in rural areas of Indonesia came out of a heavy financial crisis thanks to a IFAD project called P4K; all these women borrowing small loans started their self-sustaining businesses without getting into other kinds of debt.
    Microfinance is a concrete tool to fight poverty and hunger, especially in rural areas where credit access weakness is one of the main components of the unsuccessful economic and social development. In this way, poorest societies become independent by using the resources at their disposal, respecting human dignity and improving local contexts’ potentialities.
    Becchetti L., La Felicità Sostenibile. Economia della Responsabilità Sociale, Saggine, 2005.
    Becchetti L., Paganetto L., Finanza Etica. Commercio Equo e Solidale, Saggine, 2003.
    Morduch J., The Microfinance Promise, Journal of Economic Literature, Vol. 37, No. 4 (Dec., 1999), pp. 1569-1614
    Editor: Federica ALFANI
    © 2009 ASSONEBB


    The MicroFinance Network is an international association of the leading microfinance institutions. Its membership consists of 34 commercial banks and non-governmental organisations representing 31 countries worldwide. The MFN aims to be a model of best practices for all initiatives looking to balance financial practices and social responsibility, through the facilitation of information channels and experience exchange among its members. The Network also promotes the use of the double bottom line1 approach in performance rating within the finance and microfinance world community. The MFN was founded in April 1993 by the participants in a conference on the development of micro-firms near the headquarters of BancoSol in Bolivia. Today, the MFN’s headquarters are in Washington. Among the main activities of the Network is the organisation of an annual conference, an opportunity for the leading operators in the sector to come together, learn and debate.
    1An expression used in business to indicate an alternative way of measuring business performance based on social impact instead of merely fiscal results.

    MicroFinance Network (1995), Key Issues in Microfinance: Supervision and Regulation, Financing Sources, Expansion of Microfinance Institutions, Conference Report.
    MicroFinance Network (2009), About MFN: Activities and Members, MicroFinance Network website.
    Editor: Federica ALFANI
    © 2009 ASSONEBB


    Series of targets included in the United Nations Millennium Declaration adopted in 2000. Since then the countries have been committed to cooperating globally in order to reduce extreme poverty and its strictly connected consequences. These goals are supposed to be reached by 2015: to eradicate extreme poverty and hunger, by halving the number of people whose income is less than 1 dollar a day and achieving full and productive employment and a decent work for all including women and young people; to provide universal education, making sure for all chidren to be able to complete a full course of primary school; to promote gender equality, eliminating disparity in all levels of education; to protect child health, reducing by two thrds the under-five mortality rate; to improve maternal health, decreasing by three quarters the maternal mortality ratio and obtaining universal access to reproductive health; to reverse the spread of HIV/AIDS and of the other major diseases like malaria, getting universal access to treatment for all those who need it; to ensure environmental sustainability, adapting policies and programs to the principles of sustainability and reacting to the loss of natural resources and biodiversity, halving the population without access to safe drinking water and basic sanitation, getting a significant life condition improvement for 100million people; to fotser a global partnership; thanks to cooperation the industrialized countries should develop an open, rule-based and non-discriminatory trading and financial system, address the special needs of the lest developing countries and deal with their debts reasonably. Collaborating pharmaceutical companies could help in providing access to affordable essential drugs, while the private sector could act in favor of spreading the benefits of new technologies, especially of information and communication.



    The Mini-Bond is a self-financing tool for companies not listed on the stock exchange. With Mini-bond companies can obtain funds from investors providing negotiable documents. This form of self-financing allows companies, in particular small and medium-sized enterprises (SMEs), to diversify the funding sources and reduces the dependence from the banking system (see also Credit Crunch). The regulation for Mini-Bond is directly applicable to SMEs as defined in the European Recommendation 2003/361/EC (companies with fewer than 250 employees and an annual turnover not exceeding EUR 50 million, or with a total budget not exceeding EUR 43 million). The application of Mini-Bond is ??possible thanks the new rules introduced by the "Decreto Sviluppo" (decr. Legge no. 83/2012) and by the "Decreto Destinazione Italia" (decr. Legge no. 145/2013). This regulatory framework has removed the constraints of fiscal legislation which limited the fund raising only to companies listed on the stock exchange.

    Editor: Giovanni AVERSA



    At the end of 2012 Italy has intervened to facilitate the debt instruments’ issuance for Small and Medium Enterprises-SMEs (Mini-bonds, commercial papers, project bonds). In fact, with the "Decreto Sviluppo" (decr. Legge no. 83/2012) and "Decreto Destinazione Italia" (decr. Legge no. 145/2013), it has been eliminated fiscal constraints that hindered the debt capital issuance by companies not listed on a stock exchange. The lawmaker's goal was to diversify the sources of financing for SMEs in order to reduce the credit crunch and their financial dependence from the banking system. These laws have removed the unequal treatment present in the Italian market, between listed and not listed companies on the stock exchange. Thanks to the new legislation is allowed for SMEs, but not for “micro-companies”, to issue debt instruments with short-term (Commercial paper), medium and long-term (Mini-Bond and Project bond).

    Banking Loans and Credit Crunch. Access to Credit Before and During the Crisis

    In Italy, banks are the main contact for companies looking for capital to finance their projects. This function has allowed banks to play a dominant role in the domestic economic system. According to the Centrale dei Rischi data, in 2010 about 78% of micro-companies and 32% of small and medium-sized enterprises had relationships with at least three banks. Currently, however, the recent decrease in banking loans has been evident for all companies, but especially for SMEs. This trend reflects the decrease in productivity of enterprises and the more restrictive criteria for the granting of banks credit. Therefore, the current economic system has changed the role of banks. In fact, since the beginning of the financial crisis in 2007, the demand for business loans has clashed with the unwillingness of bank lending. The decrease in Italian business loans reflects the European trend as shown in Table 1:

    In a situation of strong credit rationing, the creation of new tools such as mini-bonds, Commercial papers, Project bond is closely linked to the need of new channels of financing, alternatives to traditional banking credit. These tools, however, are complementary to the banking system. In fact, for example, for the creation of mini-bonds are needed financial operators, so-called sponsors, including banks.

    Bonds Regulations Before the New Guidelines

    The Italian legislation, following the Decreto Legge n. 6 of 17 January 2003, allowed for the use of debt instruments by listed enterprises, thus limiting their effective use and expansion. The "Decreto Sviluppo" and the "Decreto Destinazione Italia", then does not introduce "new" kinds of financing but, actually, they change the legal status and fiscal treatment of those instruments already in force. These reform measures have modified the previous rules and in particular:

    - Articolo 32 del Decreto Legge 22 giugno 2012, n. 83 (“Decreto Sviluppo”), subsequently amended in (Legge 7 agosto 2012, n. 134)

    - Articolo 36, comma 3, del Decreto Legge 18 ottobre 2012, n. 179 (“Decreto Sviluppo Bis” with “Decreto Sviluppo” the “Decreti Sviluppo”), subsequently amended in (Legge 17 dicembre 2012, n. 221)

    - Articolo 12 del Decreto Legge 23 dicembre 2013, n. 145 (“Decreto Destinazione Italia”), which amended Legge 30 aprile 1999, n. 130, articolo 46 del Testo Unico Bancario (T.U.B.) and articolo 32 del Decreto Sviluppo Bis.

    Before these laws, the bonds issuance by not listed companies on the stock exchange, clashed with art. 2412 of the Civil Code, which granted to corporations to issue bonds according to some requirements:

    - The total amount of the loans can not be more than twice of share capital, legal reserve and reserves resulting from the approved budget;

    - Without this limit, thanks the condition that the excess amount was allocated to institutional investors and that, in case of following transfer of the bonds, the last transferor would guarantee following purchasers (non-professional investors) of the issuer creditworthiness.

    Instead, according to the new rules of the "Decreto Sviluppo" and "Decreto Destinazione Italia", the bonds issuance may exceed the above limits if:

    - The bonds are intended to be listed on regulated markets or Multilateral Trading Facility (MTFs), or give the right to acquire or subscribe new shares.

    If in the previous regulatory system the companies met many procedural difficulties in gaining access to the bond market, with the new provisions such difficulties are smaller. Therefore, the reference to listed or not listed companies on the stock exchange disappeared, and it has been replaced by the condition that the bond is listed on a regulated market, or an MTF.

    New Legislation. Decr. Legge n. 83/2012 (Decreto Sviluppo) and Decr. Legge n. 145/2013 (Destinazione Italia)

    In general, the main changes introduced by the new regulatory framework include:

    - The change and exceeding Article 2412 (Restriction of the issue) of the Civil Code which sets the quantitative limits to the bonds issuance;

    - Deleting the different fiscal treatment of bonds issued by listed companies and not listed companies and the elimination of punitive treatment in terms of deductibility of interest expense;

    - The change in the duration of Commercial paper, which will have a time not less than one month and not more than 36 months;

    - The chance to de-materialize these bonds, promoting their circulation on the market;

    - Extension to Commercial paper of more favorable fiscal regime applicable to the bonds.

    In addition, the recent regulations require new funding sources available to SMEs and specifically, three different instruments:

    1) Mini-Bond;

    2) Commercial paper;

    3) Project bond.

    Those who can issue them are:

    - Not listed companies (corporations, cooperative companies and mutual insurance companies different from banks and micro-companies);

    - Small and Medium Enterprises SMEs. According to the European classification medium-sized companies are those that have a workforce of less than 250 employees and an annual turnover not exceeding EUR 50 million or balance sheet total not exceeding EUR 43 million. Small-sized companies, those with fewer staff to 50 employees and turnover or balance sheet total not exceeding EUR 10 million.

    - Are excluded from the application of new rules the micro-comapanies or enterprises with a workforce of less than 10 units and turnover or balance sheet total not exceeding EUR 2 million.


    The Mini-Bond is a self-financing tool for companies not listed on the stock exchange. With Mini-Bond companies can obtain funds from investors providing negotiable documents. This form of financing allows companies, in particular small and medium-sized enterprises (SMEs), to diversify the funding sources and reduces the dependence from the banking system. The regulation for Mini-Bond is directly applicable to SMEs as defined in the European Recommendation 2003/361/EC (companies with fewer than 250 employees and an annual turnover not exceeding EUR 50 million, or with a total budget not exceeding EUR 43 million)

    Mini-Bond when issued must be accepted to trading on a regulated market (in Italy is the ExtraMOT PRO). The requirements for admission to trading on ExtraMOT PRO provide that:

    - The issuer must have published balance sheets of at least two previous financial years;

    - At least the last balance sheet must have been audited;

    - The issuer must prepare and make available on its website an admission document drawn up in accordance with the guidelines set by the Borsa Italiana.

    The main steps towards the issuance of Mini-Bond:

    - Mini-Bond Issue after the fulfillment of the legal and regulatory requirements;

    - Admission of the Mini-Bonds to trading on ExtraMOT PRO;

    - Entering Mini-Bond in the Monte Titoli management system.

    The regulation provides that the issuer is assisted by his sponsor that is a financial party that supports the company in the process of issuing and placement of the bonds.

    In addition, the subscription of these bonds is reserved for institutional investors and other qualified entities, is not expected the spread for small investors. According to the CRIF Rating Agency estimates, over 10 000 companies are the potential market interested in these tools.

    Commercial Paper

    The commercial papers are debt instruments whose function is to guarantee the possibility, for companies that can not issue directly bonds, to raise funds alternative from bank credit. The commercial papers have a duration of not less than one month and not more than thirty-six months from the date of issuance. They can be issued by all corporations as well as cooperatives and mutual insurance companies (but not banks and micro-enterprises). However, companies and agencies that do not have bonds traded on regulated or unregulated market, can issue commercial papers if they fulfill a set of requirements:

    - The issue should be assisted by a sponsor, including a bank

    - The last balance sheet of the issuer (not listed on the stock exchange ) must be certified by an auditor or an auditing company.

    In addition, it is expected that the commercial paper should be issued only in favor of professional investors who are not, directly or indirectly, shareholders of the issuing company. The commercial papers may be issued in de-materialized form (securitization? Vedi se esiste voce bankpedia.org e linka).

    Project Bond

    The innovation introduced by the recent law gives the possibility for non-listed companies to issuing bonds under the clause of profits sharing, if the duration is not less than thirty-six months, similarly to ordinary bonds. The project bonds are "hybrid" instruments. The participation clause regulates the amount payable to the holder of the bond, comparing it to the performance of the enterprise issuer. The interest rate granted to the holder of bond cannot be lower than the Tasso Ufficiale di Riferimento.

    The project bonds were introduced in order to finance start-ups and technology or corporate turnarounds.


    AGENZIA DELLE ENTRATE (2013) “Regime fiscale di cambiali finanziarie e obbligazioni PMI e Project Bond”, Circolare No 4 (http://www.altalex.com/index.php?idnot=61947)

    ALBARETO G. … FINALDI RUSSO P. (2012) “Fragilità finanziaria e prospettive di crescita: il razionamento del credito alle imprese durante la crisi”, Banca d’Italia Papers, No 127, Luglio (http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/QF_127/QEF_127.pdf)

    BELLINA R. … CHIAPPA P. … D’AFFRONTO D. … GABBRIELLI M. (2014) “Dal Decreto Sviluppo al Decreto Destinazione Italia con i Minibond per il rilancio delle PMI italiane. Un’alternativa alla crisi”, Associazione Nazionale Direttori Amministrativi e Finanziari Paper (http://www.andaf.it/public/documenti/Articolo%20-%20Mini%20bond.pdf)

    CALUGI R. … PAGLIETTI G. (2013) “I Mini-bond. Istruzioni per l’uso”, Camera di Commercio di Milano Paper (http://www.consorziocamerale.eu/writable/documenti/DOC_20140305112625.pdf)

    DECRETO LEGGE 23 dicembre 2013, n. 145, “Decreto Destinazione Italia”, Gazzetta Ufficiale (http://www.gazzettaufficiale.it/eli/id/2013/12/23/13G00189/sg)

    DE MITRI S. … DE SOCIO A.- FINALDI RUSSO P.- NIGRO V. (2013) “Le microimprese in Italia: una prima analisi delle condizioni economiche e finanziarie”, Banca d’Italia Papers, No 162, Aprile (http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/qef162/QEF_162.pdf)

    PIERRI A. (2013) “Finanziamenteo delle imprese tra finanza bancaria e finanza di mercato”, Gruppo SACE Working Paper, No 16, Giugno (http://www.sace.it/GruppoSACE/export/sites/default/download/HP/Il_finanziamento_delle_imprese_tra_finanza_bancaria_e_finanza_di_mercato.pdf)

    Editor: Giovanni AVERSA

  • MINISTRY OF TREASURY (Encyclopedia)

    The Ministry of Treasury, known today as the MEF (Ministry of Economy and Finance), is the institution that, among others, safeguards national savings. National savings bonds are sold on the financial market and then all the financial institutions carry out their functions. Article 47 of the Italian Constitution states that "the Republic encourages and safeguards savings in all its forms". The MEF has a central role in the economic relationship between the State and the citizens. Indeed, the MEF carries out the public functions and duties of the State in terms of economic, financial and budget policy, public investment planning, coordination and control of public spending, and through these it verifies revenue policies and tax system, state property and patrimony, land rates and customs. Moreover, it plans, coordinates and verifies initiatives for economic, territorial and industrial development and cohesion policies. In addition, the Ministry watches over public institutions as well as oversees activities and functions carried out by control authorities as required by law (Lgls. D. 300/99, Art. 23, Par. 2).
    There have been several Italian Ministries of Economy over time that can be summarized as follows: the Ministry of Finance (1861 - 2001), the Treasury (1877-1922, 1944-1947, 1947-2001), the Ministry of Budget and Economic Planning (1947-1996) and the Ministry of State Ownership (1956-1993).
    Hence, the current MEF is the result of a long harmonisation process (both an internal one and due to circumstances beyond its control) commencing in 1947 with the creation of the Ministry of Budget, as a Ministry without portfolio, headed by Luigi Einaudi. Afterwards, it became the Ministry of Budget and Economic Planning with Law no. 48 of 27/2/1967, which operated in parallel with other two ministries: the Treasury and the Ministry of Finance.
    After the unsuccessful experience of economic planning in the 1970s and 1980s, Law no. 468 of 5/8/1978 combined economic planning with budget planning. All legislation approved from 1967 up to the 1990s did not clarify the role of the Ministry, given that the competencies had become increasingly complex.
    Therefore, by the late 1990s, as there was an urgent need to integrate economic planning with that of budget, both for national coherence and to be in line with European standards, a decision was made to set up a single economic policy body.
    With Law no. 94 of 3/4/1997, the Treasury and the Ministry of Economic Planning became one. This new layout satisfied the parameters of the Maastricht Treaty and those of public financial objectives. Furthermore, other roles were assigned to this Ministry: that of economic development, reducing unemployment, territorial re-equilibrium, increasing the capacity to be competitive, and the efficient management of public finance and public debt.
    In the context of defining a financial and economic policy common to all European countries, and from the perspective of a greater involvement of competent subjects at an industrial and territorial level, the Ministry defined the choices of economic and financial policies conjugating State budgeting and management with the objectives of financial re-equilibrium and convergence with the other European countries, for economic growth and social cohesion as defined in the Maastricht Treaty.
    Following Law no. 94, the Ministry was reorganised by following a departmental model, firstly with Law no. 430 of 5/12/1997 and then with two Presidential decrees: no. 38 of 20/2/1998 and no. 154 of 28/4/1998.
    The Ministry of Economy and Finance (MEF) as it is today was instituted with Law. No. 300/1999 issued pursuant to Law no. 57/1999 (also known as the Bassanini Law). All the functions of the Ministry of Treasure, Ministry of Budget and Economic Planning, except those conferred to regions, local and public authorities, were transferred to it.
    Two other departments were added to the General Direction of the Treasury (DT) and the General State Accounting (RGS): the Department of General Administration, Personnel and Treasury services (DAG), and the Department of Finance (DF).
    The organic and integrated use of the functional areas to which duties about homogenous subject areas and the relative instrumental duties are given - included those which deal with addressing and coordinating management units, those which deal with the management and organisation of instrumental, financial and human resources - is held by departments.
    Today, the MEF carries out a role in the following areas:
    1. Economic and financial policy, particularly with respect to the analysis of economic and monetary issues, national and international financial issues, vigilance over the financial market and the credit system, elaboration of economic and financial planning, hedging operations of financial need and management of public debt, management of stock participations of the State, including stockholder rights and alienation of government stocks.
    2. Budget policies, processes and implementation, in particular with the preparation and management of the State budget, including treasury implementation and verification of the relative trends and cash flow. In addiction, the MEF ensures the operative link with those dealing with the planning of financial requirements and the hedging operations of financial need, the auditing of burdens that derive from the measures, from the normative innovations and the monitoring of public spending. It carries out the controls scheduled from the ordinance.
    3. Economic and financial planning, coordination and auditing of the economical and territorial development, also through the chambers of commerce, with particular reference to all depressed areas, according to the role given to the Ministry by law on negotiable planning and use of European structural funds.
    4. Finance with particular reference to the functions set out in Law no. 300/1999, art. 56, regarding the analysis of the fiscal system, decisions regarding tax and treasury compliance (national, international and EEC), the coordinating activities, vigilance and control activities of the informative and fiscal systems, the function set by law about government property, land register and building register.
    5. General administration, personnel and ministerial services with respect to the promotion, coordination and development of processes and the organisation and management of resources; treasury services and general departmental services of the State; and the management of resources needed for the tax commission activities.
    Lastly, the operative functions of financial administration are assigned to four fiscal offices: the Tax Office, which deals with internal revenue; the Territorial Office, which deals with landed property and registry issues; the Government Property Office, which deals with the management and protection of government property; and the Customs Office.
    Editor: Rocco CICIRETTI
    © 2009 ASSONEBB



    MINT is the acronym to identify new emerging countries with the best growth outlooks in the future of the world economy. These countries are Mexico, Indonesia, Nigeria and Turkey. The economist, who invented this new acronym, is Jim O'Neil, ex Chief Economist of Goldman Sachs, who in 2001 also created the acronym BRICS (Brazil, Russia, India, China and South Africa). The new O'Neil idea, seems to be confirmed in the recent economic analysis of the World Economic Outlook performed by the International Monetary Fund (IMF). The document published in October 2014, which examines the global economy developments, it explains that the BRICS countries (Brazil, Russia, India and China) and MINT countries (Mexico, Indonesia, Nigeria and Turkey) have a gross domestic product (GDP) of 37.8 trillion dollars, compared with 34.5 trillion dollars of the G7 countries (Canada, France, Germany, Italy, Japan, United Kingdom and United States).

    From BRIC to MINT. All terms for emerging countries

    Originally, the first acronym refers to the emerging countries is used in 2001 by Jim O'Neill in the report of the Investment Bank Goldman Sachs entitled "Building Better Global Economics BRICs". The report described the economies of Brazil, Russia, India and China (BRIC) to which later was added the "S" of South Africa, transforming the term in BRICS.

    Jim O'Neil, however, has recently updated the classification of emerging markets with the addition of new actors for world economy. His argument is supported by some IMF data that show the growth rates of some economies, including MINT, with a growth rate of GDP similar or higher than Great Britain, Germany, France and Italy. (as shown in Table 1).

    Table 1: Rise of the MINTs

    The factors which guarantee the success and the rise of MINT countries are: availability of raw materials, including oil, natural gas, metals, ability to attract foreign investment and therefore know-how and jobs. In addition, Mexico, Indonesia, Nigeria and Turkey have a very large population that ensure sufficient workforce at low prices until 2050 and a strategic geographical position that guarantee access to relevant markets.

    More pessimistic is the point of view of Nouriel Roubini, the economist who predicted the crisis of subprime mortgages in 2007. He argues that it is difficult to imagine the MINT among the top 15 economies in the world considering their current status. The factors that have driven the BRICS growth (and that also characterize the MINT), such as the demographic situation, foreign direct investment (FDI) and the reallocation of resources from low-productivity sectors (agriculture) in the most dynamic sectors (industry and services), may not be enough. According to Roubini (see "Is the emerging market boom over?"), the recent slowdown in emerging markets, due to the decline in commodity prices, to the slowdown in the China GDP, to deficits in balance of trade, are structural issues that could be reflected also on MINT.

    Mexico: key economic indicators

    Despite the slowdown in global economic growth, Mexico has shown a rate of 3.9% in 2011 and 2012 confirming its dynamic economy. In 2013, growth was 1.2% and for end of 2014, the Mexican economy is expected to grow by 3.5%. The Mexican economy has shown strong dynamism in recent years, with a good performance in domestic consumption, investment and exports. Mexico has a strong public finances and a banking system with a good capitalization. It is a member of the G20, OECD and participates in free trade agreements with more than 40 countries, including the United States (NAFTA) and the countries of the European Union (EU-Mexico TLC). Mexico has a strategic geographical location, between North and Central America, in fact many companies choose the Mexico to enter in North American market. Strengths of the country: macroeconomic stability; wide availability of natural resources; geographic contiguity with the United States; many preferential trade agreements and work force young and qualified (46 million people). Weaknesses: unequal distribution of wealth; excessive dependence on assets linked to highly variable factors, such as oil, emigrants and tourism.

    Tab. 2: Mexico key economic indicators

    Indonesia: macroeconomic framework

    The key macroeconomic data confirm the good performance of the Indonesian economy, which since 2008 continues to guarantee strong growth rates of GDP, more than 5% per annum. From 2008 onwards, Indonesia has shown high growth rates (+ 6% in 2008, 4.6% in 2009, 6.2% in 2010, 6.5% in 2011 and 6.4% in 2012). Since 2004, Indonesia has experienced stable growth rates over 5%, among the highest in Asia. Internal growth was driven by consumption (54.6% of GDP) and investment (34.9%). This allows Indonesia to depend less by international economy, compared to other countries in the near area, thanks to its resilience from downturns in foreign demand. Furthermore, with an estimated population around 240 million people, Indonesia is the largest country in South-East Asia. It is highly integrated with the countries of the ASEAN countries (Association of South-East Asian Nations). The economic growth, combined with the country's political stability, has helped to strengthen the confidence of international markets in the sustainability of this development in the medium and long term.

    Tab. 3: Indonesia key economic indicators

    Nigeria: the best economy of West and sub-Saharan Africa

    Nigeria has a population of over 160 million people and, for GDP, is already the largest economy in West and sub-Saharan Africa, surpassing South Africa (BRICS countries). With economic growth driven to oil, the Nigerian economy is dependent on the oil sector for 95% of exports, 80% of the budget and an average of 40% to the GDP. In addition to oil, however, Nigeria is the 11th largest producer of gas. The debt / GDP ratio is 20.77%, below the 40% of sustainability threshold indicated by the IMF (also Nigeria was the first African country to pay the entire debt to the Paris Club). Inflation is under control, between 9 and 12% in the last two years. The Government is pursuing a protectionist policy for the domestic industry. Restrictions are adopted to imports or duties significant, especially on agricultural products.

    Tab. 4: Nigeria key economic indicators

    Turkey: Since 2002, high growth rates

    Since 1999, Turkey has realized the adjustment program defined with the IMF, achieving important results. The country has shown high rates of growth since 2002, with the exception of 2008 and 2009 due to the international crisis, and in 2010-2011 has experienced growth rates among the highest in the world, respectively, 9.2% and 8 5%. Characterized by steady economic growth Turkey is also ranked 13th in 2012 among the most attractive economies in the world for Foreign Direct Investment (FDI). The country is characterized by a very solid banking system, based on stringent criteria after the crisis of 2001-2002. Even Turkey, like other countries MINT, enjoys a strategic location being a "natural bridge" between Europe, Asia and the Middle East (1.5 billion people to a value of 25 trillion dollars of GDP) and, according to ISTAT data, Turkey will also have a key role in the future energy supply routes. About trade agreements, it is important to note the existence of a 'Customs Union between Turkey and the European Union, in force since 1996, which has greatly contributed to making the EU the main trading partner of the country. Furthermore, according to the analysis of the Italian Ministry of Foreign Affairs, the excellent performance of the turkish economic system, in the last decade, was due to structural reforms introduced by the EU accession process.

    Tab. 5: Turkey key economic indicators


    AMBASCIATA DEL MESSICO IN ITALIA (2014) (http://embamex.sre.gob.mx/italia/images/pdf/ficha%20mexico%20italiano%202%20abril%202014.pdf)

    BBC (2014) The MINT Countries: Next economic giants?, BBC News Magazine, January (http://www.bbc.com/news/magazine-25548060)

    DA ROLD V. (2014) Dopo i BRICS arrivano i MINT: emergenti pronti alla ripartenza nonostante la recente frenata, Il Sole 24 ore, Aprile (http://www.ilsole24ore.com/art/notizie/2014-04-07/-brics-arrivano-mint-emergenti-pronti-ripartenza-nonostante-recente-frenata--135648.shtml?uuid=ABPY008)

    INFOMERCATIESTERI WEBSITE, (http://www.infomercatiesteri.it/)

    INTERNATIONAL MONETARY FUND (2014) World Economic Outlook, World Economic and Financial Surveys, April (http://www.imf.org/external/pubs/ft/weo/2014/01/pdf/text.pdf)

    O’NEILL J. (2013) From BRIC to MINT, Business standard, November (http://www.business-standard.com/article/opinion/jim-o-neill-from-bric-to-mint-113111301201_1.html)


    ROUBINI N. (2013) Is the emerging market boom over?, the Guardian, July (http://www.theguardian.com/business/2013/jul/23/emerging-market-boom-over-nouriel-roubini)

    Editor: Giovanni AVERSA


    All the actions and means that are able to reduce greenhouse gases (GHG) emissions in the atmosphere and to shrink the extent of global warming. Despite the modest Global Warming Potential (GWP), Carbon Dioxide, for example, is one of the most important GHG due to the level that it has currently been injecting into the atmosphere and the quantity already in it. Humans are able to influence its atmospheric concentration by modifying the use of fossil fuel and by implementing afforestation and reforestation activities. Mitigation strategies may consists in either a reduction in the GHG emissions (as carbon) or in an enhancement of their capture and storage (of carbon). Several ways can be identified for mitigating climate, such as developing new technologies and sciences, reducing demand for emissions-intensive goods and services and enhancing the use of low-carbon technologies, by increasing energy efficiency, switching to cleaner energy sources, and diminishing non-fossil fuel emissions. The mitigation policy of the European Union sets a target on European emissions to maintain the mean world temperature rise within the 2°C with respect to preindustrial levels. This target is normally associated with a concentration of carbon dioxide of 400-500 ppm by volume.
    Editor: Melania MICHETTI
    © 2009 ASSONEBB


    The Modigliani Index is part of a group of indicators called "risk-adjusted performance". As opposed to The Sharpe Index (please see explanation), this index aims to measure and compare the performances of two or more funds with a similar benchmark and therefore the same level of risk. In effect, the volatility of the funds being compared is modified (it is normally aligned to its benchmark’s volatility) and then the generated return is recalculated for the period of observation. The aim is to highlight which fund had better results under the same level of risk.
    The Modigliani Index is defined as:

    : average return of the fund during the period of observation;
    : average return of a risk-free operation;
    : standard deviation (risk) of the benchmark;
    : standard deviation of the fund.
    The greater the value (expressed as a percentage) of the index, the better the fund will perform in comparison to others using the same benchmark.
    Editor: Mirko IORI
    © 2009 ASSONEBB


    Monetary targeting (MT) is a simple rule for monetary policy according to which the central bank manages monetary aggregates as operating and/or intermediate target to influence the ultimate objective, price stability. Under MT, the inflation target is not announced and the central bank intervention is concentrated only on the money market. Typically, the central bank sets the interest rates to control monetary aggregates, which are considered the main determinants of inflation in the long run. Thus, controlling monetary aggregates would be equivalent to stabilising the inflation rate around the target value.
    The rationale of the MT lies in the Quantity Theory of Money described by the famous equation:
    - Mt is the nominal money supply;
    - Vt is the velocity of circulation of the money;
    - Pt is the price level;
    - Yt is the aggregate output.
    Taking the logs and differentiating w.r.t. the time yields:
    - is the money growth target;
    - is the target in terms of inflation rate;
    - is the potential output growth rate;
    - is the percent change in the velocity of money;
    Equation (2) identifies the money growth target (intermediate target) compatible with the goal target (). Hence, the central bank manages the interest rate in order to keep the actual money supply in line with the target according to the following equation:
    Editor: Lorenzo CARBONARI
    © 2009 ASSONEBB

  • MONEY ILLUSION (Encyclopedia)

    The tendency to think in terms of nominal value of money, without taking adequate account of changes in its actual value is the basis of the phenomenon known as Money Illusion (MI). The concept of MI was analysed in detail for the first time by I. Fisher (1927)1 in "Money illusion". In particular, some definitions are proposed in relation to the phenomenon of MI in literature; the field of psychology and its relationship with economics has been investigated, and the empirical evidence of the effects of this phenomenon in various markets, such as the stock and the real estate ones, has been summarised. The definition given by Fisher (1928) of the MI phenomenon refers to the currency as unit of measure: "money illusion or inflation illusion as the failure to perceive that the dollar, or any other unit of money, expands or shrinks in value"2 . Patinkin (1965)3 defines, in general, MI as "any deviation from decision making in purely real terms."
    In a perfect world, the currency plays the role of a "veil", as in decision-making contexts "rational" has meaning only with relative values. If, for example, prices and wages double, in the perfect world, the agents' rational decisions are the same, because the real value of the currency is unchanged. However, many psychological biases may undermine a perfect vision through this "veil".
    In this context, the studies undertaken by the Keynesian economists who include the MI phenomenon among the causes of non-neutrality of money4 are to be considered. To observe neutrality of money in the long term, MI must be absent. MI was seen as an irrational and "costly" components by economic agents, and therefore, not plausible.
    Recently, following the boom in property values, which occurred in a context of relatively low inflation, and the subsequent increase in inflation rates across the euro area from 2007 to present days - which has coincided with a "deflate" of the real estate bubble - a growing interest in the study of empirical and theoretical implications of the phenomenon of MI has been experienced.
    Among the empirical studies, it is worth referring to the survey conducted by Shafir, Diamond and Tverky (1997)5 and the experiment of Fehr and Tyran (2001, 2007)6; while in relation to the theoretical approaches, the works of Brunnermeier and Julliard (2007)7, Genesove and Mayer (2001)8, Piazzesi and Schneider (2007)9 relating to the property market, and the work of Campbell and Vuolteenaho (2004)10, Cohen, Polk and Vuolteenaho (2005)11 for the stock market are of particular relevance.
    In particular, the work of Shafir, Diamond and Tverky (1997) shows how the preferences of agents depend in large measure on how the problem is proposed: in real terms or in nominal terms. For example, if the problem is placed in nominal terms, it has been noted that agents prefer the "nominally" less risky than the alternative which is the least risky in real terms. In general, officers are more averse to the nominal risk rather than to the real one. This also shows how the degree of MI is unexpectedly high in the analysed sample and this may be the consequence of the greater salience of nominal than real, which leads to greater consideration in decision-making processes of these instead of actual variables. The result drawn from the submission of a large number of surveys from categories of people different one from the other (students, vendors, passengers on aircraft, undergone in different contexts) has demonstrated strong evidence of the existence of this phenomenon. The conclusion of the authors was to define the phenomenon of MI as a widespread and persistent phenomenon among economic and non-economic agents.
    There are many possible psychological biases that have the effect of confusing economic agents in their decisions, when taken by looking through the veil of money. The framing effect is one of the most important biases. Alternative representations of the same problem (framing) can result in substantially different decisions by the same agents (Tversky and Kahneman (1981)12. A special form of framing effect, significant in the context of the real estate market, is the so-called "anchoring effect". Specifically, it refers to a particular form of framing effect, showing how, in many situations, people make estimates on the value of an asset from a given initial value. The initial value, or starting point, may be suggested by the formulation of the problem or may be the result of a calculation. Genesove and Mayer (2001) have documented how investors are reluctant to realise nominal losses, particularly with regard to the context of the real estate market, as people are reluctant to sell a house at a price lower than that paid for buying.
    By investigating the labour market, Shiller (1997)13 documents - in this case through a survey - how interviewed people consider that nominal wages and inflation have the same behaviour in the long run, by saying that fewer than one third of people who have undergone the survey consider that the nominal wages have a positive process when the rate of inflation increases over the years. Moreover, statistics show a positive correlation in the long term between inflation and wages, and therefore the impact of inflation on wages is considered an indirect effect.
    This inattention to indirect effects may be related to a particular form of psychological judgment bias: mental accounting14. The so-called "Mental accounting" - as defined by Thaler (1980)15 - is "a close cousin of narrow framing and refers to the phenomenon that people keep track of gains and losses in different mental accounts."
    Fehr and Tyran (2001) have studied the implication of MI in relation to the stickiness of prices, by conducting multiple experiments from a price-setting game in order to isolate the effects of other potential determinants of price stickiness. From the analysis of these experiments it is shown as negative changes in money are the cause of considerable reductions in the output, when the payoffs are denominated in nominal rather than in real terms. As the authors conclude, the economic agents "act as if other price setters suffered from money illusion, making them, in turn, reluctant to cut prices", and the reaction of prices to changes in money supply leads to the formation of expectations concerning "the response of other price setters to the same shock." The results of the experiments of Fehr and Tyran (2001) show that the indirect effect of money illusion is of absolute importance in a strategic context. It also shows that the aggregate effect can be substantial, although only a minority of economic agents suffer from money illusion.
    In recent years, there has been a growing interest in studying this context. In the paper "Money illusion and housing frenzies", economists Brunnermeier and Julliard studied the relationship between real estate values and inflation, by composing the price-rent ratio and by identifying a suitable proxy for the mispricing in the real estate market. Using data from the British housing market, they show that market trends are largely explained by variations in the inflation. In particular, a reduction in inflation may generate the effect of an increase in the price of real estate in an environment where economic agents are prone to money illusion.
    Numerous studies have documented a negative correlation between nominal yields and inflation [Fama and Schwert (1977); Gültekin (1983)]. As stated by Modigliani and Cohn (1979), the assessment made by money-illusioned economic agents of different assets is inversely proportional to the level of inflation in the economy. In particular, Modigliani and Cohn (1979) assumes that the valuations of the assets differ from their fundamental values because of two inflation-induced errors in judgment: the tendency to capitalise equity earnings at the nominal rate instead of at the real rate, and the inability to understand that, over time, the debts will devalue in real terms. In practice, stock prices are undervalued (overvalued) during periods of high (low) inflation. Recently, some studies have provided empirical support to the so-called Modigliani-Cohn hypothesis, including Campbell and Vuolteenaho (2004).
    While it is not possible to give an answer to the existence or not of MI and the definition of the rate of diffusion in a given economic context, the impact on the economy arising from the effects of money illusion are indisputable, as clearly as many relevant decisions taken by economic agents strongly depend on the capacity / ability to distinguish between nominal and real values. Although many of the works carried out to date have been proposed by theoretical models of the phenomenon with respect to the evaluations of various assets, the effects of MI on the investor welfare were never considered. An attempt is reflected in the study conducted by Miaoy Jianjun and Danyang Xiez (2007)16 where the authors have shown that MI has the effect of reducing economic growth in the country and that consequently leads to a welfare cost17 through the influence of the phenomenon on the choices of consumption and savings. They suggest that an ex-ante definition of the rate of growth in money supply can be effective to eliminate the cost determined by the money illusion phenomenon. Ultimately, although in general, monetary policy has the objective to maximize the utility of individuals. The two scientists conclude their work with a call on the authorities of monetary policy to consider a utility function that takes into account the degree of MI in a given economy.
    1Fisher I. (1927) "Money illusion" Adelphi, New York.
    2Numerous scholars use the expressions money illusion and inflation illusion as synonyms
    3Patinkin D. (1965) "Money, interest and prices", Harper and Row, New York.
    4According to
    the theories of Keynesian economists ((Keynes (1936), Leontief (1936)), workers suffer from money illusion. The labour supply is a function of nominal wages and labour demand is a function of real wages. Such a difference is the effect of dependency on the part of workers on money illusion, while employers are believed to be exempt from such bias (also an increase in wages resulting from renewals of agreements with trade unions are perceived by employees as a premium for their skills and/or as a reduction in the percentage of profits taken from employers and a corresponding increase in the percentage in their favor; this type of thinking is behind the bias that underlies the function of labour demand arising from failure to consider the role of inflation in the economic process).
    5Shafir E., Diamond P., Tversky A. (1997) "Money illusion" Quarterly Journal of Economics.
    6Fehr E., Tyran J. R. (2001) "Does money illusion matter?" American Economic Review
    7Brunnermeier M. K., Juillard C. (2007) "Money illusion and Housing Frenzies". Review of Financial Studies.
    8Genesove D., Mayer C. (2001) "Loss aversion and seller behavior: evidence from the housing market". Quarterly Journal of Economics.
    9Piazzesi M., Schneider M. (2007) "Inflation illusion, credit and asset prices". Asset Prices and Monetary Policy.
    10Campbell J., Vuolteenaho T. (2004) "Inflation illusion and Stock Prices". American Economic Review Papers and Proceedings.
    11Cohen R., Polk C., Vuolteenaho T. (2005) "Money illusion n the stock market: the Modigliani-Cohn hypothesis". Quarterly Journal of Economics.
    12Tversky A., Kahneman D. (1981) "The framing of decisions and the Psychology of choice" Science.
    13Shiller R. J. (1997) "Public resistance to indexation: a Puzzle" Brooking Papers on Economic Activity.
    14Mental accounting refers in general to the trend experienced by people to mentally distinguish money into "separate" accounts based on a variety of subjective criteria, such as the source of money and the associated objectives.
    15Thaler J. (1972) "Toward a positive theory of consumer choice", Journal of Economic Behavior and Organization.
    16"Monetary Policy and Economic Growth under Money Illusion". Working Paper Boston University & Hong Kong University.
    17The welfare cost is defined as: ? (?, ?), hence resulting into a function of the money illusion coefficient and of the expected inflation rate.
    Fisher I. (1927) "Money illusion", Adelphi, New York.
    Patinkin D. (1965) "Money, interest and prices", Harper and Row, New York.
    Shafir E., Diamond P., Tversky A. (1997) "Money illusion", Quarterly Journal of Economics.
    Fehr E., Tyran J. R. (2001) "Does money illusion matter?", American Economic Review.
    Brunnermeier M. K., Juillard C. (2007) "Money illusion and Housing Frenzies", Review of Financial Studies.
    Genesove D., Mayer C. (2001) "Loss aversion and seller behavior: evidence from the housing market", Quarterly Journal of Economics.
    Piazzesi M., Schneider M. (2007) "Inflation illusion, credit and asset prices", Asset Prices and Monetary Policy.
    Campbell J., Vuolteenaho T. (2004) "Inflation illusion and Stock Prices", American Economic Review Papers and Proceedings.
    Cohen R., Polk C., Vuolteenaho T. (2005) "Money illusion in the stock market: the Modigliani-Cohn hypothesis", Quarterly Journal of Economics.
    Tversky A., Kahneman D. (1981) "The framing of decisions and the Psychology of choice", Science.
    Shiller R. J. (1997) "Public resistance to indexation: a Puzzle", Brooking Papers on Economic Activity.
    Thaler J. (1972) "Toward a positive theory of consumer choice", Journal of Economic Behavior and Organization.
    Jianjun Miaoy and Danyang Xiez (2007) "Monetary Policy and Economic Growth under Money Illusion", Working Paper Boston University & Hong Kong University.
    Editor: Alberto Maria SORRENTINO
    © 2009 ASSONEBB


    Money laundering refers to a complex process of concealing or disguising illicit property or income. Various laundering techniques are used worldwide to hide either the source or the destination of "dirty money". The basic stages of the process are placement, layering and integration. Placement involves physically introducing the illicit funds into the financial system. Layering implies transferring of the funds in order to disguise the origins or destination of "dirty" money. Finally, integration means "recycling" the money available via legal financial circuits. The dimension of the process is global, as it involves the exploitation of weak jurisdictions or the disparities between national laws. As a consequence, the international community has made efforts to strengthen the cooperation and coordination in anti-money laundering (AML) strategies. The Financial Action Task Force on Money Laundering (FATF) is the most important AML inter-governmental body, in charge of developing international standards and monitoring their implementation at national levels. The FATF Forty Recommendations define the scope of the criminal offence of money laundering, the measures to be taken by financial institutions and non-financial businesses and professions, the competent Authorities, their powers and resources, and finally, the scope of AML international cooperation.
    Editor: Bianca GIANNINI
    © 2010 ASSONEBB


    MWRR is the most common method used to calculate the performance of an investment fund. As opposed to TWRR, the client’s interest is in evaluating the effective return of a fund and therefore taking into account not only how good a fund manager is, but also how many transactions he/she makes in the period under observation.
    If "F" represents the net cash transactions recorded during the related time period (t0, T); V (t0) the initial value of the fund; V (T) the value of the fund at the end of the period of observation; the average capital the client has invested, then MWRR is equal to:

    Editor: Mirko IORI
    © 2009 ASSONEBB


    Monopolistic competition was firstly introduced by the American economist Edward Hastings Chamberlin (1933) in his Theory of monopolistic competition (1933) and by the British economist Joan Robinson (1933) in her Economics of Imperfect Competition (1933) to formalise an industry configuration that differs from the extreme situations of perfect competition and monopoly. The monopolistic competition model assumes the presence of (i) a high number of firms, (ii) complete and perfect information,(iii) symmetric technology,(iv) free entry/exit from the market. Even if there are similar hypotheses, this market structure differs from the perfect competition because of an additional requirement: product differentiation (or similar conditions such as market fragmentation). Under this particular hypothesis, firms have a certain degree of market power. For this reason, firms are not price takers, as it would be under PC, but price makers, and they can charge a higher price to consumers. Besides, by removing the perfect substitutability assumption between products, in this case each firm faces a downward-sloping demand. Conversely, the benchmark case of PC is characterised by a perfectly elastic demand curve. Another property distinguishes monopolistic competition from the oligopolistic competition with free entry; that is, in monopolistic competition a price change by one firm has only a negligible effect on the demand of any other firm. In equilibrium, the solution to the profit maximization problem of the firm guarantees, as in the monopolistic market, the equality between marginal cost and marginal revenue with an extra-profit for the firm which is exactly equal to the difference between the selling price and the average cost.

    Editor: Bianca GIANNINI
    © 2011 ASSONEB

  • Monte Carlo Simulation

    It's a non-parametric statistical method for simulation of random type. It's based on the possibility to assign extracted values to the variables of the simulation: X1, X2, ..., Xn, ..., given the probability distribution of them F(X), generated in an iterative and random way, thus leading to a sample which, although generated by simulation and therefore not real, it can comply with statistical properties of the investigated variables. Of course, the uncertainty of latter will be lower, the bigger will be the number of iterations

    Editor: Giuliano DI TOMMASO


    It is the name by which Banca Monte dei Paschi di Siena S.p.A. (acronym: BMPS) is currently known. It was established in 1995, by means of a decree by the Minister of the Treasury dated 8 August 1995, to accept the banking institution Monte dei Paschi di Siena (acronym: MPS), one of the six public credit institutions according to the budget law of 1936. Monte dei Paschi di Siena then transformed itself on 28 August 1995 into Fondazione Monte dei Paschi di Siena, thus remaining a public institution (but not a credit one anymore). Through the ratification of the new statute, on 8 may 2001, the Foundation assumed a non-profit private legal status, whose mission is pursuing assistance and charity, besides social utility in the fields of scientific research, education, art and health, especially with reference to the town and province of Siena. The bank Banca Monte dei Paschi di Siena, instead, continues with the typical credit, financial and insurance operations as a universal bank, by operating also through the controlled banks. Monte dei Paschi di Siena seems to be the oldest bank in the world that is still operational. Indeed, its origin dates back to the Monte pio di Siena, constituted by the Magistrates of the Republic of Siena in 1472 to carry out the foreclosure in favour of the population’s most disadvantaged classes in a particularly difficult moment for the local economy. Monte pio was funded by permanent loans and free grant contributions by the State of Siena, brotherhoods and other charity bodies of the city. A first reform in 1568 extended the financing to town institutions (e.g. the University) and to farmers of the Maremma area, and it gave Monte pio penal jurisdiction. In 1580, the collectorship service was assigned to Monte pio. Between 1619 and 1624, Gran Duke Ferdinando II of Tuscany constituted Monte non vacabile de’ paschi della Città e dello Stato di Siena by giving it tasks of a real bank in order to re-launch the stagnant economy of the town and its territories. The Gran Duke’s warranty was granted to the collection by binding to this aim the state-owned revenues of the Maremma (the so called “Paschi” the bank was named after). Monte pio and Monte de’ paschi merged in 1783 into one institution called Monti riuniti, to which a section of Cassa di Risparmio (savings bank) was added in 1834. After the unification of Italy, the operational area and the activity fields of Monte became wider and wider. The current name of Monte dei Paschi di Siena was attributed in 1872 by the ratification decree of the new statute.
    After WW1, Monte dei Paschi di Siena started a phase of remarkable expansion, by opening about a hundred branches, by taking on many collectorship services, and by taking over some local banks in trouble. From the merger of two of these banks, Credito Toscano and Banca di Firenze, Banca Toscana was created, which became soon controlled by Monte. The growth continued with a faster pace after WW2, through the opening of new branches and the takeover of banks. The most relevant takeovers were those of Credito Lombardo from Compagnia di assicurazioni di Milano (Milan Insurance Company) in 1976 (and sold out to Banca Antoniana … Popolare veneta in 1995), that of Credito commerciale from Italmobiliare in 1979 (then sold out to Cassa di Risparmio di Parma e Piacenza in 1994), that of the Italian international bank in London (whose activities flew together in the London’s branch of Monte), of the Istituto nazionale di credito per il lavoro italiano all’estero … ICLE (incorporated by Mediocredito toscano … another bank controlled by Monte … in 1992) from Banca Nazionale del Lavoro (BNL). In 1992, Monte bought out Cassa di Risparmio di Prato-Cariprato, Banque Atlantis in Geneva, and Mediocredito toscano. The latter, transformed into a limited company in 1992, was re-named MPS Merchant S.p.A. in 2001. In 1997, Monte bought a share in San Paolo IMI, reaching 5%, and between the end of 1997 and the beginning of 1998, it made a takeover bid for Banca Agricola mantovana … BAM, by buying 70% of it, and by putting back 19% of it on the market later on.
    Afterwards, in 2000, Monte bought, partly through a takeover bid, almost 94% of Banca del Salento …Credito popolare salentino, and, in 2001, 4.75% of Banca Nazionale del Lavoro (BNL). A fundamental step for the entire group Monte dei Paschi di Siena was the listing of the group leader Banca Monte dei Paschi di Siena on the Milan Stock Exchange, on 25 June 1999. Indeed, following the listing on the stock exchange, an intense phase of territorial and operational expansion started. This was characterised not only by the acquisition of shares of regional banks with deep roots in the territory, but also by the enhancement of production structures in strategic segments of the market, through the development of spinoff companies (Consum.it in the area of consumer credit, MPS Leasing & Factory in the activities allied to banking, MPS Finance in the field of investment banking, MP Asset Management SGR in the asset management, MPS Banca Personale (Personal Banking) in financial promotion). The activities in the specialised sector of enterprises and corporate finance services credit were gathered in MPS Banca per l’Impresa (MPS Banking for the Enterprise), and an increase in commercial productivity through models of specialised service according to client segment was remarked. Moreover, the Group focused its attention on some strategic areas in particular, like private banking and the social security savings market.

    In 2007, the process of expansion started again. Indeed, 55% of Biverbanca- Cassa di risparmio di Biella e Vercelli in 2007, and Banca Antonveneta in 2008 were bought. the Bank in 2017 has 2100 branches.

    The bank went into a severe crisis in 2011, and even failed the stress tests implemented by the European Central Bank - ECB in October 2014. After being suspended on the Milan stock exchange, ithe Bank obtained €5.4trillion of State Aid by the Italian government in July 2017. The Minister of Economics is the first share holder of the bank.

    Links: www.mps.it


    Monte Titoli is a company that offers post-trading and centralised administration of financial instruments. Monte Titoli S.p.A. was founded in 1978, and in December 2002, it became part of Borsa Italiana Group, which raised its shareholding of Monte Titoli’s capital to 98.77%. Since 1986, Monte Titoli has been the Italian Central Securities Depository for all Italian financial instruments, including Italian government bonds since 2002; currently, they are centralised at the company almost exclusively in a dematerialised form.
    Since 1989, Monte Titoli has also undertaken the role of settlement system for the final settlement of securities balances calculated by the multilateral net clearing system managed by the Bank of Italy.
    In November 2000, Monte Titoli launched Express (the delivery versus payment real-time gross settlement service), while in December 2003 it launched Express II, the clearing and settlement platform which integrates the current gross functionalities with multilateral netting functionalities in a single environment.
    This was made possible because, in October 2000, Banca d’Italia and Consob
    authorised Monte Titoli to manage the clearing and settlement services for non-derivative financial instrument transactions. At present, Monte Titoli is one of the most efficient, cost-effective securities settlement systems in Europe with a wide range of services by means of a high degree of straight-through-processing that allows the management of growing volumes of business with significant economies of scale.
    Monte Titoli’s services are available through different communication channels: RNI (the domestic interbank network), SWIFT and MT-X … Monte Titoli Internet Communication System.
    Ciciretti, R., Trenta, U., 2006, La Borsa Europea. Una Visione d’Insieme, in Rapporto sul Sistema Finanziario Italiano 2006, ARACNE, Roma.
    Editor: Rocco CICIRETTI
    © 2009 ASSONEBB


    Previously known as Tremonti Bond, after the name of the Treasury Minister, Monti Bonds are bonds subscribed by the Italian Treasury with private banks, that yield relevant interests payments (around 9% yearly). Such bonds are issued to help troubled banks that cannot raise sufficient resources in the interbank market and from the ECB. The resources to finance such bonds are taken form taxpayers, similarly to other countries.
    In 2009 Tremonti bonds have been asked by some Italian private banks for a total amount 4 trillion euro; banks were Banco Popolare, Banca Popolare di Milano, Credito Valtellinese and Monte dei Paschi di Siena.
    In 2012-13 the Monte Dei Paschi di Siena, a private bank headquartered in Siena (Tuscany), asked for 3,9 trillion Monti bonds.

  • MORAL HAZARD (Encyclopedia)

    The role of banking intermediaries is to "intermediate" between players who are in financial deficit and those experiencing a surplus in order to resolve their need to invest available financial resources. People who are in financial deficit seek monetary resources by placing "liabilities" on the market and by offering them to those in surplus. The problem is therefore to reconcile the preferences expressed by buyers as compared with those made by the issuers of liabilities in terms of maturity, yield, value fluctuation, etc.
    Subjects in surplus have difficulties in identifying and evaluating the quality of those in deficit, they must take into account the uncertainty associated with future events, their degree of risk aversion and the preference of short-term assets. On the other hand, those in deficit prefer to issue long term liabilities, not to disclose their quality of credit and, once obtained the funds, they prefer to opt for more profitable but risky projects.
    As a matter of fact, it is rather rare to have a direct transfer of resources from subjects in surplus to subjects in deficit.
    This raises the foundation for the presence of a third party that is able to meet the different needs and to interact by transferring and finally reallocating financial resources within the economic system. Financial intermediaries realise the channelling of savings into investments.
    The existence and role of financial intermediaries is explained by the traditional theory that has developed a number of reasons to justify the development of this phenomenon. Among these, we can find the function of evaluating and selecting business projects within the theoretical paradigm of incomplete markets and imperfect information. This theory puts emphasis on the activities of banks by recognising them as critical due to their ability to solve problems of asymmetric information that are relevant to an imperfect market - adverse selection and moral hazard. Thanks to the role played by financial intermediaries, such problems may be partly solved or at least transferred to the same financial intermediaries that have the means to bear any adverse effects, thus avoiding their transfer onto a single or a small number of savers.
    Moral hazard is a risk that can occur in a situation ex-post to the provision of funding and which stems from the misconduct of a company to use loans for riskier assets than those declared. This phenomenon is experienced when a company, once obtained a loan for a specific project with a relative degree of specific risk, is encouraged to use the same resources for riskier targets although with a a higher expected return. As to the techniques applicable for the resolution of this problem, we can mention the monitoring activities that the bank uses daily with professional and qualified methods. While a bank, which has acquired all the instruments and the professionalism (goods with a high fixed cost) to conduct a monitoring activity, allocates and redistributes such costs on all projects that are monitored, single economic agents are not in the position of supporting this activity due to the high costs that they should face, such that they would not be able to lend anybody their excess financial resources. From a theoretical point of view, a model was developed by Diamond (1984) who, in the presence of moral hazard, has demonstrated the optimal approach to follow; that is to say, financing investment projects through the activities of an intermediary rather than directly on the market.

    1. Moral Hazard: the case of insurance intermediaries

    In the case of insurance intermediaries, adverse selection and moral hazard occur in different situations. The first phenomenon is usually experienced prior to the signing of the insurance contract, in case the insurer does not have sufficient information to classify its clients into homogeneous classes of risk, namely in classes that are characterized by the same probability of suffering damage that would lead to establish an equal premium for all those insured against the same risk. In such cases, the premium would result in being too high for low-risk individuals and too cheap for those expected as the riskiest, thus generating an accumulation of bad risks and the consequent default of the insurance company. The second phenomenon occurs after the signing of the contract and characterises the actions taken by the insured that lead to change the likelihood of the risk originally estimated by the insurance company or the amount of the reimbursement … such a case is encountered when, being covered by the insurance contract, the insured agents reduce the caution that they would have applied if they had not been secured, thus making the insured event more likely and its reimbursement higher.
    To counter these problems, the insurance companies may seek to acquire more detailed information on the conduct of the insured agents and to employ measures to discourage and combat these phenomena, by:
    a) segmenting customers into homogeneous risk classes;
    b) requiring the signature of insurance for all persons exposed to certain types of risks;
    c) involving insured agents in sharing the risk;
    d) tying the premium to the history of the person to be secured;
    e) reducing the premium if the insured implements special precautions to reduce the probability that the risk occurs.
    The first two types of measures tend to contain the phenomenon of adverse selection, whereas the last three types are most commonly used to limit moral hazard by making observing virtuous behaviours cost-effective for the insured.
    Information is therefore essential and the basis of every decision linked to the activities of financial intermediaries. A proper information system is key to the solution/minimization of problems arising from asymmetric information.

    2. Moral Hazard: the Principal-agent Case

    In addition, asymmetric information problems (adverse selection and moral hazard) are of particular relevance to the financial intermediaries’ world in the areas of contractual relationships, such as in the definition of optimal contracts between the main player (principal), identifiable for example with a company shareholders' meeting, and the agent (agent), identifiable with the company's CEO. The principal is the one who offers a contract and who is not familiar with the capabilities of the agent to whom the contract is offered. In the case of adverse selection, it is the agent who knows his/her true professional skills, while the principal can only guess them and learn them over time, but only after having signed the contract. The case of moral hazard arises when the agent's actions are not fully verifiable by the principal, something that is justified by the fact that if every action of the agent were to be checked and approved by his/her principal, then his/her role would be unnecessary and represent only an additional cost for the company.

    3. Moral Hazard: the case of Akerlof’s lemons

    When dealing with problems of adverse selection and moral hazard, the example most frequently cited and studied in economics is the one developed by George Akerlof in relation to the used car market, which distinguishes cars classified as good from those defined as lemons. Briefly, in this market, only sellers know the quality of the car on sale while buyers ignore their characteristics. If the buyers were aware of which car were good, they would pay the price they would feel reasonable for a good car; but since there are also "lemons", they will pay a price that, based on the probability that the car on sale is a lemon, averages between the price reasonable for a bad car and the one judged as appropriate for a good car. Considering the price lower than the correct one, good car sellers would not be inclined to sell, while sales of lemons would be promoted at a higher price than their value. Considering the trend in sales of lemons, buyers would no longer be inclined to pay the requested price, thereby generating a negative trend in sales, to the point that transactions would decline to zero. This situation generates the need for a third party who acts as an intermediary and has the tools and skills to discharge that function.
    Cucinotta G., Nieri L. (2005) "Le assicurazioni, la gestione del rischio in una economia moderna", Il Mulino editore.
    Desiderio Luigi, Molle Giacomo. (2005) "Manuale di diritto bancario e dell'intermediazione finanziaria", Giuffrè editore.
    Di Giorgio G. (2004) "Lezioni di economia monetaria", Cedam editore.
    Guida Roberto. (2004) "La Bancassicurazione: modelli e tendenze del rapporto tra banche e assicurazioni", Cedam editore.
    Locatelli Rossella, Morpurgo Cristina, Zanette Alfeo. (2002) "L'integrazione tra banche e compagnie di assicurazione e il modello dei conglomerati finanziari in Europa", Enaudi editore.
    Patroni Griffi and Ricolfi. (1997) "La distribuzione bancaria di prodotti assicurativi in banche ed assicurazioni fra cooperazione e concorrenza", Giuffrè editore.
    Quagliariello Mario. (2001) "I rapporti tra banche e assicurazioni in Italia e in Europa: aspetti empirici e problemi di regolamentazione", Luiss University Press.
    Quagliariello Mario. (2003) "La bancassicurazione: profili operativi e scelte regolamentari", Luiss University Press.
    Ruozi Roberto. (2004) "Economia e gestione della banca", Egea editrice.
    Editor: Alberto Maria SORRENTINO
    © 2009 ASSONEBB


    Persuasion through influence rather than coercion, said of the efforts of the Federal Reserve board to achieve member bank compliance with its general policy. The Fed can use moral suasion to expand or restrain credit.


    A mortgage is a pledge of property to secure the payment of a debt. The borrower, who owns the property, is called mortgagor and the lender, who provides the money, is called mortgagee. The properties that can be mortgaged are typically real estate and the loan payment can be paid off by instalments over a fixed period. Most mortgage loans are originated with a 30-year original term, although different maturities can be offered, and the repayment includes both capital and interests (repayment mortgage). The repayment can also be the interest rate only, while the principal repayment can be paid by means of a separate arrangement (i.e. an endowment assurance policy). The typical mortgage provides that the mortgagee may take possession of the property and the mortgagor is allowed to redeem the property before the end of the mortgage period. There are several types of mortgages according to their specific features (interest rate, repayment method, insurance...) and the legislations in force (i.e. in the UK, under the Law of Property Act (1925), there are two categories of mortgages, legal and equitable). In case of default, the mortgagee may initiate a legal procedure to obtain the judicial sale of the property secured (foreclosure).
    Fabozzi Frank J., Jones Frank J., Modigliani F. (2010), Foundations of Financial Markets and Institutions (Fourth Edition), Pearson Education, Inc.
    Editor: Bianca GIANNINI
    © 2010 ASSONEBB


    Bond issue secured by a mortgage on the issuer's property, the lien on which is conveyed to the bondholders by a deed of trust. A mortgage bond can be designed as senior, underlying, first, prior, onerlying, junior, second, third and so forth depending on the priority of the lien. Most of mortgage bonds issued by corporations are first mortgage bonds secured by specific real property and also representing unsecured claims on firms' assets.

    Source: Dictionary of Finance and Investment Terms, 1998.



    It is a process in function of time, and expressible through the summation of the linear combination of independent identically distributed, with zero mean and variance ?2 random variables

    In a first-order moving-average process written as MA(1), the current value of the random variable rt is determined with the following relationship:

    where ? is the weight coefficient of the previous value ?. In this process we know the mean, variance and auto-covariance, in fact, respectively, we find:

    Note that the last except at s=1, is always zero, because the ? are independent identically distributed with zero mean and variance ?2 random variables. So in a MA(1) we find:

    and consequently the autocorrelation function for a MA(1):

    Therefore MA(1) process, but also generic process MA(q), have not time-dependent variance and auto covariance. This aspect implies that the process is stationary, regardless of the value of ?.

    Editor: Giuliano DI TOMMASO


    A Multifunctional farm business consists in a factory farm that uses factors of production to carry out joined activities linked to agricultural functions that are not production-related. Supply and demand of functions are united, because on the one hand the agent (farm factory, local production system, sector, rural area) produces different outputs, and on the other hand, society acknowledges that an agent may meet different needs felt by society itself.
    Agriculture is multifunctional by nature, since it is socially acknowledged that agriculture may carry out other functions apart from the production of agricultural goods for the market. It is typical of the factory farm to produce different outputs, some of which are commodities, and others are non-commodities. Some non-commodities are linked to public goods, they produce positive externalities and reduce the negative ones; therefore, they are not marketable (non-commodity and non-market outputs).
    The activities of a multifunctional farm other than production can be divided into private, public and social activities. The first ones are touristic/recreational and commercial activities, that is to say, direct sales. The public role of agriculture instead refers to environmental and landscape functions, that is to say, the supply of services destined for the community, such as reforestion of an agricultural area, realisation of elements with a landscaping value, reclamation/conservation of natural habitats, promotion of animal and vegetal biodiversity, prevention of erosion, etc. Finally, the social function of agriculture is the ability to supply services destined to the whole society, such as the supply of educational, cultural, occupational (disadvantaged workers), and therapeutic-rehabilitative services.
    Editor: Barbara PANCINO
    © 2009 ASSONEBB


    The mission of Multilateral Investment Guarantee Agency (MIGA) is to promote foreign direct investment (FDI) into developing countries to help support economic growth, reduce poverty, and improve people's lives. On April 12, 1988 an international convention established MIGA as the newest member of the World Bank Group. The agency opened for business as a legally separate and financially independent entity. The Compliance Advisor Ombudsman (CAO) is the independent recourse mechanism for MIGA, that responds to complaints from project-affected communities with the goal of enhancing social and environmental outcomes on the ground. MIGA was created to complement public and private sources of investment insurance against non-commercial risks in developing countries. MIGA’s multilateral character and joint sponsorship by developed and developing countries were seen as significantly enhancing confidence among cross-border investors.

    The idea for a multilateral political risk insurance provider was floated long before MIGA’s establishment, in fact as far back as 1948. But it was not until September 1985 that this idea started to become a reality. At that time the World Bank’s Board of Governors began the process of creating a new investment insurance affiliate by endorsing the MIGA convention that defined its core mission: "to enhance the flow to developing countries of capital and technology for productive purposes under conditions consistent with their developmental needs, policies and objectives, on the basis of fair and stable standards to the treatment of foreign investment."

    Today, MIGA’s mission is straightforward: To promote foreign direct investment into developing countries to support economic growth, reduce poverty and improve people’s lives.

    Editor: Giovanni AVERSA


    It is a multilateral facility operated and/or managed by an investment firm or market operator “ [...] which brings together multiple third-party buying and selling interests in financial instruments [...] in a way that results in a contract in accordance with the provisions of Title II [of Directive 2004/39/EC-MiFID, Ed.]”. In the same way, the Italian Consolidated Law (TUF) defines “management of multilateral trading facilities” as the “ […] management of multilateral facilities that allows, in the system and in accordance with non-discretionary rules, the meeting of multiple third-party buying and selling interests in financial instruments, so as to generate contracts (article 1, paragraph 5-octies)”.
    Editor: Maria Giovanna CERINI
    © 2010 ASSONEBB

  • MUNDELL-FLEMING MODEL (Encyclopedia)

    The Mundell-Fleming Model (MFM) describes the workings of a small economy open to international trade in goods and financial assets, and provides a framework for monetary and fiscal policy analysis.The basic framework is a static, non-microfounded model extending the Keynesian IS-LM model. Indeed, the MFM shares with the IS-LM model the philosophical and methodological approach, and the basic features: the model is linear and the main assumption is that consumer prices are fixed. As a matter of fact, the MFM nests the IS-LM model as a special case, for a particular parameterisation.
    The starting point of the IS-LM model, which describes a closed economy, is the income identity, which requires the equality between the overall output of the economy and the sum of absorption channels: private consumption (C), private investment (I) and public spending (G):

    Rather than being just an identity, the above equation has also an alternative interpretation, since it defines the composition of aggregate demand and the clearing condition for the goods market. Each of the components above, indeed, describes the behaviour of one particular kind of agent that populates the economy. The first component (C) describes the behaviour of the household, and can be cast in the form of the following linear relation:
    Private consumption, therefore, is an increasing function of personal income Y, net of taxes paid to the fiscal authority T: higher income levels make the budget constraint looser and support higher levels of spending. Parameter c defines the income elasticity of private consumption, also known as the "marginal propensity to consume", while C° captures an exogenous component to private consumption. The second component (I) describes the behaviour of firms, and can be cast in the form
    according to which the demand for private investment is decreasing in the interest rate (higher interest rates reduce the number of investment projects that are profitable enough to be preferred to bonds, which in turn pay the interest rate), with elasticity a.1The third component, finally, describes the behaviour of the fiscal authority, controlling the amount of public spending (G = G°), and taxes collected according to the linear rule
    which implies that taxes consist of a lump-sum component (T°) and a component proportional to income, with t being the marginal tax rate.
    The MFM, therefore, extends such framework to an open economy. For the goods market, this implies some additional components of aggregate demand. In particular, in an open economy, both consumption and investment goods produced domestically may be demanded and purchased by foreign agents. In this case, we talk about "exports" (X). Similarly, domestic consumers and firms may demand and purchase consumption and investment goods produced abroad. In this case, we talk about "imports" (M). The difference between these components measures the "Net Exports" (NX=X-M). The income identity for the case of an open economy accounts for such an additional component:
    In this case, indeed, C and I capture the total demand of domestic agents for consumption and investment goods, including both domestic and foreign goods. On the other hand, Y measures domestic production of goods, regardless of the fact that the final use of these goods takes place domestically or abroad. The term NX accounts for this discrepancy, by subtracting the part of the domestic demand that involves foreign goods (M) and adding the part of domestically produced goods directed to the foreign market (X).To fully understand this additional component and how it is related to the rest of the macroeconomy, it is necessary at this point to introduce an additional macroeconomic variable, which the IS-LM model lacks, as it is peculiar of a system open to international relations: the exchange rate. The nominal exchange rate (e) defines the price of domestic currency in units of foreign currency.2Given this definition, an increase in e implies an appreciation of the domestic currency (you need more dollars to buy one euro), while on the contrary a reduction in e implies a depreciation of the domestic currency. This additional variable is key to understand the behaviour of the agents that interact in the international markets, because a domestic consumer purchasing a foreign good has to pay a price denominated in a foreign currency. To evaluate how convenient that good is, in relation to a substitute good produced at home, the consumer has to compare the respective prices, and in order to do that he/she has to convert them in a common currency. To this end, he/she is going to use precisely the exchange rate. Moreover, with respect to this additional variable, we also define the monetary regime: in particular, the Central Bank can leave the exchange rate free to fluctuate in response to the varying international economic conditions, or else it can commit to the target of a given value (or interval) for the domestic currency. In the first case we talk about a regime of flexible exchange rates; while in the second case, we talk about fixed exchange rates. As the exchange rate appreciates, exports fall (since domestic goods are more expensive to foreign consumers) and imports increase (since foreign goods are cheaper to domestic agents). Accordingly, given the definition of the exchange rate specified above, we can represent the net exports as a decreasing function of the exchange rate:
    in which b and q capture the output and exchange-rate elasticity of net exports, respectively, and NX° measures the exogenous component (depending e. g. upon the level of foreign output).
    Using the equilibrium condition (5), and the behavioural equations describing the several components, we can write the open-economy version of the IS schedule as:
    The open-economy IS curve is therefore a decreasing function of both the interest rate (as in the closed-economy framework) and the exchange rate:

    Figure 1. The open-economy IS curve, as a function of the interest rate (sx) and exchange rate (dx).
    Changes in the exchange rate induce changes in aggregate demand and imply movements along the IS schedule, if the latter is drawn in the plane (Y, e), while they imply parallel shifts of the whole schedule, if it is drawn in the plane (Y, i).
    The money market is described by the same equations as in the closed-economy framework. The money demand reflects the three Keynesian determinants and is therefore increasing in total output and decreasing in the interest rate:
    The money supply, in its baseline formulation, is instead exogenous and under the direct control of the Central Bank, and is therefore the monetary policy instrument (Ms =M°). The LM schedule, describing the clearing of the money market (Md =Ms), defines therefore a positive relation between output and interest rate, just as in the closed-economy version of the model:
    The level of money supply determines the location of the schedule in the plane (Y, i).
    In a closed economy, equilibrium in both goods and money markets is sufficient to describe the general equilibrium of the economy (equilibrium in the residual bond market is ensured by the Walras’ law). In an open economy, instead, general equilibrium requires in addition also the equilibrium in the external sector, described by the Balance of Payments, which records all international transactions. In particular, the Balance of Payments consists of the sum of the current account (the trade balance) and the capital account (the capital flow). The trade balance is measured by the net exports, and depends upon domestic output and the exchange rate, as discussed above. The capital flow (CF), instead, is increasing in the differential between domestic and foreign interest rates:
    As the domestic interest rate increases above the foreign one, financial assets denominated in the domestic currency pay relatively better than foreign assets, and the domestic country experiences a capital inflow (CF >0).3 Such inflow is the stronger the higher elasticity.
    Therefore, equilibrium in the external sector can be described by the schedule BB, defining the locus of output and interest-rate combinations which ensure:
    Such relation is positively sloped, similarly to the relation described by the LM curve. On the external sector, the MFM imposes specific assumptions. In particular, the model assumes that: 1. the economy is a small open economy; 2. domestic and foreign assets are perfect substitutes for each other; and 3. there are no restrictions of any kind on capital movements across the border. Direct implications of these assumptions are that: 1. the foreign interest rate is exogenous to the domestic conditions; 2. the capital flows depend solely on the interest-rate differential; and 3. the elasticity of capital flows with respect to the interest-rate differential is infinite. These implications are reflected in the position and slope of the BB schedule, describing the equilibrium in the external sector:

    Figure 2. The equilibrium condition in the external sector: the BB schedule.

    In particular, the BB schedule is horizontal, with intercept equal to the foreign interest rate: even an infinitesimal differential between domestic and foreign interest rates, given perfect substitutability and zero-restrictions to capital movements, would indeed induce an infinite capital flow across the border. Therefore, equilibrium in the external sector requires i = i*.
    The general equilibrium is achieved when all markets clear at the same time. In the context of the MFM, this requires a triple of output, interest and exchange rates at which all equilibrium conditions (equations 7, 9, and 11) are satisfied. From a graphical perspective, this requires the intersection of the IS, LM and BB schedules in a single point:

    Figure 3. General equilibrium in the Mundell-Fleming Model.

    From an analytical perspective, the solution to the model depends on the specific exchange-rate regime. With flexible exchange rates, the system can be solved recursively: equilibrium in the external sector determines the domestic interest rate (i =i*, and therefore the position of the BB curve), equilibrium in the money market determines the level of output Y°, given the equilibrium domestic interest rate (from the intersection of LM and BB), and finally the equilibrium in the goods market, given the levels of output and interest rate found earlier, implies the equilibrium level of the exchange rate (and therefore the position of the IS schedule that ensures a unique intersection among the BB, IS and LM curves). With fixed exchange rates, the Central Bank commits itself to support a specific level of the exchange rate (for example e°). Since the monetary policy instrument is money supply (Ms), this regime implies that the latter is determined endogenously to support the exchange rate target. In this context, the system can also be solved recursively, although following a different order: equilibrium in the external sector determines the domestic interest rate, i =i*; given such value, and the target level for the exchange rate (e°), equilibrium in the goods market determines the equilibrium level for the real output (from the intersection between BB and IS, whose position is determined by e°). Finally, the equilibrium in the money market yields the level of money supply consistent with both equilibrium output Y° and target level of the exchange rate e° (i.e. it determines the position of the LM schedule by ensuring a unique intersection with BB and IS). The specific exchange rate regime has important consequences for the analysis of the effects of monetary and fiscal policy. Specifically, with flexible exchange rates, monetary policy is most effective because it is amplified by the fluctuations of the exchange rate that it induces. On the contrary, fiscal policy has no effect at all on the real activity, because it is completely sterilised by the exchange rate reaction. Indeed, a monetary expansion shifts the LM schedule out in LM’. The excess money supply induces downward pressures on the interest rate, which in a closed economy would raise the speculative demand for money and close the excess supply. In an open economy, however, the downward pressures on the interest rate translate immediately into capital outflow and a consequent depreciation of the domestic currency (given the infinite elasticity of the capital flow to the interest-rate differential). The currency depreciation, in turn, makes domestic goods more competitive on the international markets and the foreign demand for domestic goods thereby increases: net exports rise and the IS schedule shifts out in IS’. The increase in net exports raises equilibrium output from Y° to Y’ and consequently the transactions demand for money: the money market clears even if the interest rate does not move.

    Figure 4. The effects of a monetary expansion with flexible exchange rates

    The overall effectiveness of monetary policy is stronger than in a closed economy because the transmission mechanism only works through the exchange rate, with no variations in the interest rate: in a closed economy, instead, the interest rate falls, investment and output rise, and the excess money supply is closed by means of an increase in both transactions and speculative money demand. Fiscal policy, on the contrary, is completely ineffective with respect to equilibrium output. An increase in public spending, indeed, shifts the IS curve out into IS’, raising domestic demand. By doing so, however, it induces upward pressures on the interest rate (for a given money supply), which in turn translate into an appreciation of the domestic currency and a reduction of net exports: the fall in foreign demand is exactly the same as the increase in domestic one. Public spending, therefore, crowds out net exports completely, and the IS curve shifts back in IS’’. Interest rate and output do not change and the only effect that fiscal policy exerts is an appreciation of the exchange rate. Although ineffective with respect to output, however, it is worth noticing that fiscal policy is not ineffective altogether: indeed it induces an income redistribution between agents producing goods for the foreign markets and those producing goods for the domestic one.

    Figure 5. The effects of a fiscal expansion with flexible exchange rates.

    The policy implications are completely reversed with fixed exchange rates. Monetary policy is ineffective because money supply cannot be affected without violating the exchange rate target. A monetary expansion, indeed, by inducing downward pressures on the interest rate, would imply a depreciation of the domestic currency, in contrast with the exchange rate target. To meet the target, then, the Central Bank would have to close the excess supply of domestic currency on the international currency markets by selling foreign currency in exchange for the domestic one: money supply falls and the LM shifts back in. Equilibrium output therefore remains unaffected, just like the interest and exchange rates: the only effect of the monetary expansion would be the replacement, within the assets side of the Central Bank’s balance sheet, of foreign reserves with domestic bonds.

    Figure 6. The effects of a monetary expansion with fixed exchange rates.

    A fiscal expansion, on the contrary, is amplified by the response that the Central Bank needs to ensure to meet the exchange rate target. An increase in public spending, indeed, induces upward pressures on the interest rate and, consequently, an appreciation of the exchange rate. Such appreciation of the domestic currency makes the domestic Central Bank enter the international currency markets to close the excess demand of domestic currency, by purchasing foreign currency in exchange for the domestic one: the LM schedule shifts out, money supply increases and it accommodates the fiscal expansion. Equilibrium output increases from Y° to Y’, while neither the interest rate nor the exchange rate vary.

    Figure 7. The effects of a fiscal expansion with fixed exchange rates.

    The effectiveness on equilibrium output is stronger than in a closed economy because the exchange rate target forces the Central Bank to expand the money supply, preventing the domestic interest rate to rise and crowd out private spending, as it would instead happen in a closed economy.
    1Given the assumption of fixed prices, nominal and real interest rates are the same.
    2Also with respect to the exchange rate, there are two relevant definitions: the nominal exchange rate, as defined in the text, and the real exchange rate, which instead measures the ratio between the foreign and the domestic price indexes, in terms of a common currency. Given the assumption of fixed prices, however, the two definitions coincide, up to an appropriate normalisation (similarly to the case of the interest rate).
    3In evaluating alternative financial assets denominated in different currencies, investors in financial markets should also consider their expectations about the change in the exchange rate, between the moment in which the asset is purchased and that in which it pays off. In the present context, however, we are considering a static world, in which the expectations about the future level of the exchange rate coincide with the current level. Accordingly, the differential between interest rates is the same as the differential in ex-ante rates of return.
    Editor: Salvatore NISTICO'
    © 2010 ASSONEBB

  • MUNICIPAL SECURITY (Encyclopedia)

    Securities issued by states and local governments, such as cities and counties. Municipal securities’ investors are households (retail investors), commercial banks, property and casualty insurance companies. Municipal securities are considered attractive investments to such investors because of their tax treatment. In general, states apply tax exemption of interest from all municipal securities or alternatively exemptions may apply only for municipal securities where the issuer is in the state. Municipal securities may be used to cover temporary imbalances between outlays for expenditures and tax inflows, but the main scope is the financing of long-term projects, such as the provision of urban infrastructures. For example, a state can finance the construction of roads, schools, airports, bridges, tunnels, and sewer systems by issuing by issuing municipal securities. Municipal securities exist in two basic forms: tax- backed debt and revenue bonds.
    1.Municipal securities' structures
    Municipal securities exist in two basic forms: tax-backed debt and revenue bonds. The first category of municipal securities has the typical feature of being secured by some form of tax revenue and encompasses three different instruments: General Obligation Debt (GO), Appropriation-Backed Obligations and Debt Obligations Supported by Public Credit Enhancement Programs.
    General Obligation Debt (GO) are securities backed not only by the revenue of the project to be financed but also by the issuer's unlimited taxing power. In particular, General Obligation Debt (GO) is unlimited when the issuers dispose of unlimited forms of tax revenues (taxes on income, sales, property, etc.) to secure the debt. This specific feature is commonly referred to as full faith and credit of the issuer. Alternatively, there can be a statutory limit on the tax rates that the issuer can levy to repay the debt. When the issuer secures the debt associated to the general tax revenues and funds raised by imposing fees and special charges and grants, he/she issues bonds called double-barrelled in security. Another type of tax-backed debt is the Appropriation-Backed Obligations that are backed by a non-binding appropriation of tax revenues by the state. The actual appropriation of funds needs to obtain the approval by the state legislature. The purpose of such non-binding obligation is to enhance the creditworthiness of the issuing entity. For their specific feature, these securities are also called moral obligations. The last instruments, Debt Obligations Supported by Public Credit Enhancement Programs, are backed by forms of public credit enhancements, which are legally enforceable as an obligation of the state to withhold and use state aid to pay a municipality’s debt, in the event of a default. The typical form of public credit enhancements legally enforceable is related to the education system. The second form of municipal securities is represented by revenue bonds. Revenue bonds are issued for enterprise financings and are secured by the revenues generated by the operating projects. There are several types of revenue bonds according to the different projects finances. Among others, this securities' structure comprises health care revenue bonds, utility revenue bonds, airport revenue bonds, housing revenue bonds, higher education revenue bonds, gas tax revenue bonds, seaport revenue bonds, multifamily revenue bonds, public power revenue bonds, water revenue bonds, and student loan revenue bonds. In general terms, the project must entirely cover the payment of the debt as to prevent the issuer from making additional payments. In order to ensure that the project will be self-supporting, a pre-emptive feasibility study is performed and the same analysis on the adequacy of the expected cash flow is carried out to determine its rating and satisfy the obligation toward bondholders. There are also hybrid and special bond structures presenting some of the features characterising both tax-backed debt and revenue bonds. For instance, insured bonds also present insurance policies and the commercial insurance company assumes the obligation to pay the bondholder on a determined date in case of default. Pre-refunded bonds, also called refunded bonds, are securities escrowed or collateralized by U.S. government obligations. Practically, this type of municipal securities has the highest possible rating because if the obligation is supported by cash flows from the portfolio of securities guaranteed by the U.S. government held in an escrow fund, the risk is at a very low level. Asset-backed bonds, also called dedicated revenue bonds and structured bonds, use only "dedicated" tax revenues to repay the bondholders, such as sales taxes, tobacco settlements payments, fees, and penalty payments. Municipal notes are short-term securities used principally by states, local governments and special jurisdictions to cover temporary imbalances between outlays for expenditures and tax inflows. Municipal notes are issued for a period of at least three months but not exceeding three years. The most important municipal notes are tax anticipation notes (TANs), revenue anticipation notes (RANs), grant anticipation notes (GANs) and bond anticipation notes (BANs). In recent years, we have assisted to a proliferation of new financial techniques to secure bond issues as opposed to the traditional tax-backed debt and revenue bonds. However, due to their recent introduction, some doubts may arise on the general obligation and rights of the parties for these innovative instruments as there is no case law in the jurisdiction that firmly confirm their legal outcome in case of litigation. Another problem is the determination of the effective credit risk of municipal securities. Although municipal securities are considered one of the safest investment offered on the market, the possibility of an issuer going bankrupt cannot be excluded, as it happened on 25 February 1975, when the New York’s Urban Development Corporation defaulted on an obligation of New York City. More recently, bondholders, especially after the bankruptcy of the Orange County (California) in 1994 on the collapse of the Orange County Investment Pool, are more concerned about the management of the funds. As a result, bondholders are particularly interested in obtaining information concerning not only the issuer’s debt structure and the overall debt burden, but also to have an informed judgment on the issuer’s ability to maintain a sound budgetary policy. Basically, investors have two ways to determine the safeness of the investment: they can rely on nationally recognized rating companies, or on their own in-house municipal credit analysts. In the evaluation of general obligation bonds, other information can regard the revenue sources of local governments and its overall socioeconomic environment (employment rates, population growth rates, real estate property valuation, personal income, etc.). Finally, investors in tax exempt municipal securities are exposed to "tax risk", as an increase in the marginal tax rate produces a decrease in the price of this kind of security, or another risk is that a tax- exempt issue may be eventually declared taxable by an interpretation of the Internal Revenue Service (IRS).
    2. Yields on Municipal Bonds
    The taxable municipal bonds are an alternative for investors to corporate bonds because they offer a higher yield on tax-exempt municipal bonds. Historically, the reason why many municipalities have issued taxable bonds was the opportunity to finance a large range of public projects before 1986, when the Tax Reform Act Restriction imposed some restrictions on the type of projects that could be financed by means of such instruments. In particular, the most common types of activities financed with taxable municipal bonds are local sport facilities, investor-led housing projects, and under-funded pension plan obligations of the municipality. Another reason behind taxable bonds outstanding can also be the need of the local government or state to have access to foreign capital, thus becoming issuers active outside the United States. The yield on tax-exempt municipal bonds is usually lower than the yield paid on Treasuries characterised by the same maturity. The yield ratio, which is inversely related to the tax rate, gives a measure of the percentage of the yield on a municipal security relative to a comparable Treasury security. In general, in the municipal bond market, a positively sloped yield curve is observed.
    3. Debt Retirement Structures
    Debt obligations associated to municipal bonds can be retired in portions each year, following a serial maturity structure, or at the end of the bond’s planned life, according to a term maturity structure. Typically, the maturity is in the interval of 20 to 40 years. Clauses that allow for the early redemption of term bonds, such as sinking fund provisions and call privileges are often used.
    Fabozzi Frank J. (2002), The Handbook of Financial Instrument, John Wiley and Sons Inc.
    Fabozzi Frank J., Modigliani F., Jones F. (2010), Foundation of Financial Markets and Institutions, Pearson International Edition.

    Editor: Bianca GIANNINI
    © 2010 ASSONEBB


    Rupert Murdoch is a tycoon in the media businees. Born in 1931 in Melbourne (Australia), American citizen and married to Jerry Hall.

    He founded News Corporation Ltd., a conglomerate active in the media that controls British newspapers, like The Sun, The Times, gli American newspapers like The Post e Wall Street Journal, satelliote TV Sky in Italy and the UK, in the US Fox Television and the 20th Century Fox.

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