Italian Bank Takes Cheese as Collateral for Loans

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We all know of the gold standard, but have you heard of the cheese standard?

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Credito Emiliano bank, in the Emilia Romagna region of northern Italy, has been accepting giant wheels of Parmigiano-Reggiano cheese as collateral for small-business loans since 1953.

The unusual banking method is now the subject of a new Harvard Business School case study titled “Credem: Banking in Cheese".  It notes that not only does the bank help local dairy farmers keep their businesses afloat, the bank actually ages the cheese for farmers, which cuts down on their storage costs, reports Forbes.

“In my research I look at how operations affect financing and vice versa, and this was a prime example of how to tailor a financing infrastructure to the operating characteristics of a supply chain,” wrote Nikolaos Trichakis, an assistant professor in the Technology and Operations Management unit at Harvard Business School, one of the case authors.

Magazziini Generali delle Tagliate, a Credem subsidiary, keeps the cheese wheels in two bank-owned, state-of-the-art warehouses monitored by trained inspectors with a storage capacity for 440,000 80-pound wheels of cheese. The cheese can be aged for 18, 24, 30 or 36 months, and like an interest-earning savings account, generally becomes more valuable the longer it sits there.  

The bank values the wheels at the current market price for mature cheese and the loan-to-value ratio is 70 to 80 percent to cushion against market fluctuations and protect the bank’s investment.

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According to the case, just one percent of the cheese stored in MGT warehouse suffers degradation compared to the industry wide average of 10 percent.  If producers default on their loans, the bank sells the cheese when the loan matures.

Parmigiano-Reggiano, known as the “The King of Cheeses”,  is expensive to produce and many farmers outsource the maturation process to warehouses anyway.  Bubbles, cracks, or other deformities can appear, marring the wheel and making it impossible to sell.

Many producers are small, family-owned operations and are subject to market risks,  including the wild price fluctuation of Parmigiano-Reggiano and market demand. According to the Harvard case study, a one-percent difference in demand can equal up to a 10-percent change in price. And when economies are in a downturn, expensive cheese is generally considered a luxury item and not purchased.

In comparison, the cheese vault accounts for just one percent of Credem’s overall business, but Trichakis argues that the goodwill it creates between small farming operations and bigger banks is worth a lot more.

“It allows Credem to be perceived as a bank that cares about the community, cares for the region, and cares for the producers,” he says.

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