Sept 25, 2014/IMF-Nadège Jassaud
The recent financial crisis revealed several corporate governance failures in the banking sector, both in the United States and in Europe. The Boards of several key financial institutions were found to have been unable either to monitor risk management systems and executive salaries effectively (United States and United Kingdom), or guard against conflicts of interest (Spain, Germany).
Italy also experienced its own cases of governance shortcomings, both in large banks and in medium-sized banks.
Sound corporate governance is critical for a well-functioning banking system and for the integrity of financial markets. Corporate governance determines the systems, principles, and processes by which banks are governed and influences banks’ behavior toward their employees, clients, and shareholders.
In Italy, the ownership structure of some banks—foundations without shareholders and cooperatives— raises specific challenges for corporate governance. The foundations do not have shareholders and are subject to political influence, which in turn affects the composition of the decision-making bodies and the activities of Italian banks.
Foundations are major shareholders in 23 percent of Italian banking assets through participations in 20 percent or more of bank capital. Moreover, in several large banks, they control bank Boards with an even smaller share of ownership, often through shareholders’ agreements. In the large cooperative banks (Banca Popolare), restrictions on ownership and voting rights (one member-one vote) weaken market diligence and the bank’s capacity to raise capital from outside sources. Both large cooperatives and banks owned by foundations tend to display lower buffers and weaker asset quality metrics than the system average.
Italian banks have recently made progress in improving their corporate governance, as a result of the implementation of European Directives, specific provisions introduced by the Bank of Italy (BoI), and industry codes of conduct. However, further reforms are needed to strengthen the oversight and management of banks.
This will require: (i) applying stricter fit-and-proper rules for directors and controlling shareholders; (ii) implementing the new related party lending regulation with tightened definitions; (iii) strengthening oversight of foundations when they are the controlling shareholders in banks; and (iv) facilitating the transformation of large cooperatives into joint stock companies.
The paper is organized as follows: Section II discusses the role of foundations in governing Italian banks; Section III discusses the governance challenges raised by large cooperative banks; Section IV takes stock of the recent regulatory initiatives to enhance corporate bank governance in Italian banks; and Section V draws upon the recent Financial Sector Assessment Program (FSAP) recommendations for further strengthening corporate governance in Italy.
