Milan has claimed for some time to have overtaken Paris. Their city, say the Milanese, is now the world's fashion capital. Certainly, clothes and all that goes with them have the Lombard capital in a firm grip. Shops in the area bounded by Via Manzoni, Via Montenapoleone and Via della Spiga are given over to moda: lesser known houses as well as big ones such as Gucci, Ferragamo, Valentino and Missoni.
Italians are famously fashion conscious. Style counts. That much will be obvious to any visitor taking an aperitif in Crova, the smart cafe standing at the corner of Via Montenapoleone and Via Sant'Andrea - the drinking hole of Ernest Hemingway's hero in A Farewell to Arms. Yet, less than 300 metres way is Boeucc, a plush restaurant with tables placed well apart to give diners the privacy needed for cooking up schemes and digesting deals. At lunchtime, it fills with top commercial bankers, investment bankers, industrialists and Italy's leading corporate lawyers.
Banking presence
Milan's centre is small, everything in walking distance. The fashion and financial centres live side by side. Round the corner from Boeucc, the opera house sits virtually next door to the massive head offices Banca Commerciale Italiana, formerly Italy's leading bank (now part of Intesa BCI). Tucked behind the opera house, in a narrow, gloomy corner are the offices of Mediobanca, the once-dominant investment bank.
When markets were booming, elegantly attired men and women, checking the prices of their shares on the monitor screens in the windows of bank branches dotted around the fashion district were a common sight. Milan means Italy's bourse, and it has done since the mid-1990s when local stock exchanges in nine other cities were closed.
Exchange leader
Even before dealing ceased on the floors of these local exchanges, which included Rome, Naples and Turin, Milan was by far the most important. It generated around 10 times the trading volume of all the others put together. Founded in 1808, Milan's stock exchange is approaching its bi-centenary. Before Italy's 'big bang', the Borsa Valori di Milano operated under the auspices of the city's chamber of commerce (a government body controlled by the ministry of industry), with an executive committee of brokers that oversaw activities.
The big bang not only closed the country's minor exchanges. It also brought screen-based trading. In April 1994, the last trades were done on the large trading floor in the borsa's Palazzo Mezzanotte under the open outcry system. Then, five years ago, Borsa Italiana was privatised. Freeing the stock exchange from the notoriously dead hand of Italian bureaucracy was crucial in encouraging its development.
At the end of June, the shares of 297 companies were traded on Borsa Italiana's three markets. The borsa itself, the main market, had 240 of these companies and accounted for about 98% of the total market capitalisation of E531bn. Italy's Nasdaq, the nuovo mercato, listed 45 companies and the mercato ristretto just 12. Like stock markets round the world, Italy's has suffered from the economic downturn and collapse of investor confidence. Total market capitalisation has fallen sharply and is now equal to about 40% of Italian GDP. It was E818bn at year-end 2000, when it was equal to just over 70% of GDP.
Nevertheless, the Italian stock market is still a bigger affair than it was five years ago. At the end of 1997, it had 239 listed companies, capitalised E310bn and market capitalisation was equivalent to 31% of GDP. Figures for the end of May show that Borsa Italiana was close behind the Swiss exchange in terms of market capitalisation of domestic shares. With Italy's large number of medium-sized firms, there is scope for making the market much larger. Many firms already have their cards in order for seeking listing. "Increasing the number of quoted companies is the priority," says Massimo Capuano, Borsa Italiana's managing director.
With its stock exchange, Milan is Italy's capital of capitalism. It is also the country's banking capital. Bank staff in Milan are a cut above those elsewhere in Italy and more efficient even than those in other parts of Lombardy, remarks Mario Cera, chairman of Banca Regionale Europea (BRE). But the city's position as a financial capital is held back, he complains, by a stock market that is inadequate for Italy's needs and small compared with other European markets. Mr Cera also points to another brake on Milan's ambitions as a financial centre. Institutions like the Bank of Italy, Consob (the stock market regulator), ABI (the banking association) and Asogestione (the fund managers' association) are based in Rome. "They are close to political power, but distant from reality and operational problems," says Mr Cera.
Investment efforts
Indeed, flights between Milan and Rome are often full, as people travel between Italy's financial and business capital and the political capital. Many of those picking up air miles are bankers, and many of those bankers are investment bankers. Unsurprisingly, Milan is Italy's capital for investment banking, as it is for retail banking.
Hard as the Italian investment banks have tried, however, during the past decade the market in major deals, and increasingly in smaller ones, has swung heavily in favour of the big US and Swiss houses. The privatisations made by the government in Rome opened the door. Goldman Sachs kicked off Italy's public-sector asset sales by managing an offering of shares in Credito Italiano in 1993. All of the large international investment banks won privatisation mandates, earning far more business than their small Italian competitors. When Italy started to privatise, many people thought that Mediobanca would thrash the competition. But what seemed the bank's strengths of close connections with Milan's salotto buono (good drawing room) of top business people turned out to be a handicap. The governments in office at the time wanted to avoid any accusations of favouring Mediobanca and allowing them to profit at the expense of the state.
All the big international investment banks are now well-established in Milan and winning local business. Morgan Stanley and UBS Warburg worked for different parties in the tie-up between BRE and another bank in 1999. CSFB is active in Italian derivatives. Lazard Italia's chairman, Gerardo Braggiotti, was a well-connected head of investment banking at Mediobanca before joining Lazard. The bank was top in Italian M&A last year. JP Morgan was second in M&A and a leader in fixed income. Goldman Sachs and Morgan Stanley are important players in real estate. Many of the Italian bankers with these international banks, perhaps now working out of London, first made their mark with Italian institutions in Milan.
Foreign affairs
While foreign investment banks have arrived and consolidated their presence in Milan during the past decade, the presence of foreign commercial banks in the city has diminished. "We had 55 members when I became chairman of the foreign banks' association 12 years ago. We have 35 now," notes Guido Rosa of Société Générale.
Consolidation in the banking sector is one reason for the decline in the association's membership. JP Morgan Chase probably provides the most dramatic example of the effect of mergers in reducing the total of individual institutions. Another reason is that a number of foreign banks have simply quit Milan, some because interest in the Italian market lessened, others because operations in Milan no longer made sense.
"Banking has changed enormously in recent years. A physical presence is no longer needed for some businesses. For some others, changes in markets and technologies have entailed radical shifts," says Mr Rosa.
"In the mid-1990s, all foreign banks had foreign exchange desks in Milan. Société Générale, for example, employed 25 staff in its Milan forex operations. Now European banks have concentrated their forex business in London, Paris or Frankfurt.
With the euro's arrival, foreign banks have centralised their treasury operations in one location. The function has migrated away from Milan. The same is true of derivatives, where operations have been brought under one roof. Technology has allowed this, says Mr Rosa, but risk reduction has also been a factor.
Help yourself
Mr Rosa's downbeat attitude about Milan as a financial centre is, however, not due to the reduced role of foreign banks in the city. Admittedly, Milan could do little to influence the impact of the technological progress and organisational change that led to the concentration of European finance principally in London. Even so, Italy itself has not helped to make Milan more attractive. The Italian bureaucracy is a major handicap, for example.
Italian banks themselves have also been a brake on Milan. They are deeply Italo-centric, both in operations and in their top management. "How can Milan expect to be an international financial centre if Italian banks are not truly international?" asks Mr Rosa.
Another factor that should be remembered, he says, is that small and medium-sized firms are the basis of Italy's economy. Such a client base is very hard for foreign banks to penetrate and would, in any case, be difficult for them to manage.
Yet it is that fabric of often dynamic SMEs that is attractive to venture capitalists and private equity funds. And for them, Italy means Milan. About three quarters of the members of AIFI, the Italian venture capital and private equity association, are based in Milan. One reason for being there is that the surrounding Lombardy region generates far more deals than any other Italian region. Research by the Carlo Cattaneo University, published in October, showed that over one-third of all target companies for private equity deals in 2000 and 2001 were in Lombardy.
Anna Gervasoni, AIFI's director, says that Milan offers the right combination of factors to attract venture capitalists and private equity funds. "First, there is the large number of appetising targets in Lombardy itself and in neighbouring regions. Second, Milan has a strong financial network. Fund raising in Italy really means fund raising in Milan. Third, the city has good travel connections - there is a flight every hour to London. Fourth, Milan has its own very powerful political network," she says.
Improved image
Despite Mr Rosa's gloomy observations, Milan's status as a financial centre has grown in recent years. The stock exchange no longer has the reputation of being a nest of incorrigible inside-traders, international investment banks have settled, venture capitalists look enthusiastically at the prospects and fund management is growing. Yet some dark clouds loom.
Some have been created by Silvio Berlusconi's rightwing government, seriously disappointing those who expected liberal, free-market measures. Privatisations, which are important contributors to the stock market's growth, have ground to a halt under Mr Berlusconi. The government has done nothing to encourage pension funds. Worse still, one of the first measures it enacted when it took office in 2001 was the de-penalisation of most cases of false accounting.
"Italian book-keeping was never renowned for being correct in the past. The changes encourage dishonesty. It is astonishing that the legislation arrived just a few months before scandals erupted that showed the need for tougher action on accounting crimes," said Salvatore Bragantini, a commissioner of Consob, the stock market regulator, until last year. De-penalisation of false accounting will deter Italian companies from listing and scare foreign investors away from Italy again. Many of the large number of Italians who work in London's financial firms probably agree with Mr Bragantini. Italy's reputation has not improved under Mr Berlusconi.
Other attractions
If such concerns were unimportant and costs were the main driver of location, however, every bank, brokerage and fund management company would be quitting London and heading for Milan. "London is far more expensive for rents and staff, probably with a ratio of three to one," says Paolo Basilico, managing director of Kairos, Italy's leading hedge fund manager. He should know. He set in up in London's Cornhill before opening his Italian office in an elegant palace in Milan's super-smart Via Bigli.
Rents in Milan's centre are between E335 and E490 per square metre per year, says Jones Lang LaSalle, the property company. Tight planning controls have led to a shortage of good office space in central Milan. Buildings are not demolished and rebuilt as they are in London, neither are there empty lots awaiting development.
A little out from the centre, in what is known as Anello Two (the second ring), rents fall to the E130 to E360 range. In Milan, everyone seems to be looking for the best. Jones Lang LaSalle reported that 70% of rental contracts in the first half of the year were for well-located, new or renovated modern offices. Rents continue to rise, although the rate at which they are increasing is slowing. As a place to work, Milan arouses mixed views. Cold, damp and foggy in the winter and hot and humid in the summer, the weather is no recommendation. But the Alps are close and the Mediterranean only 90 minutes away. And eating out in Milan has much in its favour. But the city maintains a rather provincial character and Milanese finance lacks the London buzz. While Milan definitely has the winning fashion buzz, Paris can rest easy for a while in finance.
