In Milan, some bank employees are assigned to care for the collateral. Rather than examine credit spreads and market indicators, however, they are focused on temperatures in a warehouse and the centuries of tradition that have come to define making Parmesan cheese.

Some banks are allowing manufacturers to use their product as collateral -- but not in the traditional sense. The notion of using underlying goods to secure a loan isn't new. But, in this uniquely Milanese transaction, 85-pound wheels of Parmesan cheese are put up as collateral during their aging periods. Parmesan has to sit in a climate-controlled vault for up to two years, and the producers have found a way to make there inventory productive when it normally would only take up space.

Though highlighted by the current worldwide financial crisis, this "cheese swap" transaction dates back to the post-World War II days, an obviously tough time for the Italian economy. Today, this seven-decade tradition has kept cash flowing, even when traditional financial vehicles have been unavailable.

The process is straightforward. The Parmesan manufacturer takes a portion of what it has produced to a bank warehouse. The warehouse provides the manufacturer with a certificate to support the deposit of cheese. The certificate can be taken to a bank and used to get a loan. And, in another old world spin on a new world financial transaction, the Parmesan maker usually sells the title to the cheese to a distributor during the aging process (i.e., in a forward/futures transaction). This brings cash in before the product is ready for sale, which alleviates the credit burden.

Up to 30 percent of a Parmesan manufacturer's inventory could be put up as collateral, and for this, it would receive a loan for 60 percent to 70 percent of the value of the full production run.

Due to economic factors, Parmesan deposits are up 10 percent – at Credito Emiliano, a bank that deals in Parmesan transactions. If the bank were to reach full capacity, it would have between €120 million to €130 million in cheese.

An active Parmesan credit business still doesn't make a major difference in Italy's banking industry, where for some banks it accounts for a mere 1 percent of annual revenue. Nonetheless, it's an important service to a Parmesan industry that needs access to credit to overcome long lead times for aging -- and it's a great image management tool in a Parmesan-savvy part of the world.

The world may be sour on financial innovation right now, but I think we can all make room for this flavor of it.


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