3.1 The problematic legal foundations of the property rights theories of the firm

Whether explicitly or not, and regardless of the level of sophistication of the empirical analysis performed, most works in the “bank ownership and performance” literature rely on very tenuous theoretical foundations – noteworthy is, in particular, the paucity of theoretical references and developments used in many empirical works.^[11] More importantly, perhaps, the thinness of these foundations owes to the theoretical problems (relative to the existence and effects of “corporate ownership”) inherent to the property rights perspective.

Within this perspective, ownership is presented as a “bundle of rights” (Demsetz, 1967) that has two core characteristics: (i) full alienability (i. e. the ability to sell these ownership rights (Alchian, 1965); and (ii) full excludability (i. e. the ability to exclude non-owners from the use of a given asset) (Demsetz, 1967). The rights grouped together under the name of “ownership” (or “property rights”) may then be broken down by property rights theorists – but the latter are keen on emphasizing the interrelationships or unity between those rights. As Alchian and Demsetz put it, “it is this entire bundle of rights: 1) to be a residual claimant; 2) to observe input behaviour; 3) to be the central party common to all contracts with inputs; 4) to alter the membership of the team; and 5) to sell these rights, that defines the ownership (or the employer) of the classical (capitalist, free-enterprise) firm.” (Alchian & Demsetz, 1972, p. 783)

A key implication of such a view is that equity owners are seen as endowed with certain rights that establish the basis for their legitimate control of the corporation. Even works that disagree with certain tenets of Alchian and Demsetz’s original framework share this view. For instance, Katz, who rejects the bundle of rights view, and proposes to conceive instead property rights as the simple right to exclude, writes that “what we mean when we say that ownership is exclusive is that owners have a right to exclude and that the right to exclude has a certain effect: the indirect creation of the space within which the owner’s liberty to pursue projects of her choosing is preserved” (Katz, 2008, p. 281. Emphasis added).

As mentioned in the introduction above, legal scholars have already shown how this theory of corporate ownership lacks a solid legal foundation. In particular, as Robé has convincingly argued, equity owners have, by law, no direct access to the corporation’s assets (points (2) and (4) of Alchian and Demsetz’ definition above); and cannot contract with the corporation’s suppliers and clients (point (3); see Robé, 2012). The corporation has its own legal personhood; thus it cannot be owned by anyone. In addition, the alienability and excludability of equity shares do not imply a similar alienability or excludability of the corporation itself. Legally, equity shares are claims on a firm’s profit: they do not imply ownership of the firm itself (Ireland, 1999). Contrary to what Katz argues, the law actually intervenes to limit “the owner’s liberty to pursue projects of her choosing”. In particular, as shown in Table 1 at the bottom of the present section, US corporate law significantly circumscribes shareholders’ rights with regard to the control of management, claims over a company’s profits, and even the extent to which shares can be bought and sold on equity markets.

This rebuttal has led some property rights theorists to suggest that the property rights perspective does not need a solid legal basis. In a response to Geoff Hodgson’s criticism of the economic approach to property rights, for instance, Allen has argued that economic and legal property rights should be carefully distinguished, and that the existence of distinct economic property rights is not only legitimate but lies at the basis of the property rights literature in economics (Allen, 2015). There is no room here for a more detailed analysis of Allen’s arguments, but one could simply point out that (i) Allen’s own definition of economic property rights (as the “ability to freely exercise a choice”) is much wider and looser than any definition actually used in most theoretical or empirical works in the property rights literature in economics, and thus easily avoids all the pitfalls associated with such narrower definitions; (ii) one of the key problems with economic approaches of property rights, as identified by Hodgson, and emphasized in the present study, is precisely the assumed constant effectiveness of property rights, the law notwithstanding; whereas we argue here, following authors such as Ireland and Hodgson, that property rights are always mediated or created by law. Since ownership is a right, it is contingent for both its extent and implementation on laws, legal interpretations and, more generally, the legal system. But this is exactly where the great weaknesses of property rights theory lie: its misconceptions or ignorance of law and the legal system (Hodgson, 2015).^[12]

The key importance of law in an economic theory of property rights was actually acknowledged by the early proponents of property rights theory. According to Alchian, a ‘system of property rights’ is “a method of assigning to particular individuals the ‘authority’ to select, for specific goods, any use from a non-prohibited class of uses.” (Alchian, 1965, p. 818) Furthermore, property rights are “supported by the force of etiquette, social custom, ostracism, and formal legally enacted laws supported by the states’ power of violence or punishment.” (Alchian, 1965, p. 817) Law and the legal system thus play an important role in circumscribing the effectiveness of ownership-as-control, an aspect which later drops out of property right theories of the firm.^[13] In a similar vein, Demsetz writes that “an owner of property rights possesses the consent of fellowmen to allow him to act in particular ways.” (Demsetz, 1967, p. 347) Consent thus determines the contours of the bundle of rights which is elsewhere presented, implicitly, as an absolute.^[14] More generally, as Robé argues, law plays a vital role in “the actual structuring of the social system in general, and businesses in particular.” (Robé, 2012, p. 9. Italics in the original)

3.2 The specific problems of property rights theories in the case of banking

The property rights theories of the firm present additional problems in the case of banking firms. First, as mentioned in the first section, banks play a very particular function in the economy: that of creating money. Since modern economies are monetary in nature, banks thus ensure the proper functioning of economy – an institutional role that certainly sets banks apart from other types of firms or economic organizations.

Secondly, banks, as a consequence of their money creating role, have a peculiar business model – a model that consists in the simultaneous fulfilment of different functions: an intermediation function, which financial economists have called “qualitative asset transformation” (Bhattacharya & Thakor, 1993); and the money creation function proper, whereby banks generate new money claims on the economy (Hockett & Omarova, 2017). This specificity of banks’ business models (by contrast with, in particular, non-bank financial intermediaries) has two implications: first, while banks may own some of their assets, such as their loans to customers, the money claims they create, by contrast, generate a public good, regulated as such by banking law (Hockett & Omarova, 2017; Ricks, 2012b); secondly, shareholders do not have the monopoly of provision of finance capital to banking entities.^[15] As a result, there is no clear residual claimant. An immediate rebuttal of this argument may bring up regulation as a source of control rights (Fama, 1980b). But if regulation establishes who has legitimate claims on residual cash flows, then part of the property rights theory collapses – precisely, the part which assumes the endogeneity of ownership rights. As a recent review of the literature on banks’ corporate governance shows, the effects of ownership in banking are always mediated by regulation (De Haan & Vlahu, 2016).

Thirdly, in banking, the thesis that ownership rights may be attributed to residual risk bearers does not work. Indeed, if residual risk is defined as the “differences between stochastic inflows and payments” (Fama & Jensen, 1983), risk in banking is not residual at all: it is, rather, at the centre of daily banking business.

Fourth, and finally, deposit-taking banks cannot be just conceptualized as stand-alone firms: dealing with money, aka legal tender, they stand as interdependent entities within an institutional system (Butzbach & Mettenheim, 2014). Their institutional nature shields banks, to a great extent (an extent shaped by law, as will be seen below), from equity owners’ (assumed) pretence of exerting the kind of ownership rights conceptualized within property rights theory (rights seen as fully alienable and exclusive).

As a consequence of these theoretical weaknesses, the empirical findings of works falling within the “ownership and performance” tradition may be reinterpreted to give more weight to other explanatory variables. In other words, as shown in several recent studies, the differences in behaviour between public and private banks may have much less to do with equity ownership and much more to do with banks’ objectives (Brei & Schclarek, 2015)^[16]; the existence of a well-functioning capital market (Sarkar, Sarkar & Bhaumik, 1998); or the general rules applying to banks’ operations and management (Milhaupt & Zheng, 2014).^[17]

3.3 From ownership as control to control as ownership

While critical scholarship has convincingly established the complete lack of a legal foundation for the most basic claim at the heart of property rights theories of the firm (the claim that equity owners own the corporation), it cannot defeat on its own the normative claims made by property rights theorists. All property rights theories draw, more or less explicitly, on the notion that different types of ownership generate different levels of efficiency through different sets of incentives. Private ownership is deemed to be the most efficient form of ownership because it leads agents to internalize costs and therefore, generate the most efficient “cost-reward system” (Alchian, 1965). In contrast, Shleifer and Vishny dismiss government ownership as inherently inefficient because of the use of “government-owned firms” for political motivations (Shleifer & Vishny, 1994). A discussion of these arguments has no room in the present study.^[18] Even such normative arguments have to build, however, on positive statements to have any validity. The incentives associated with private equity owners, for instance, relate the firm’s management or business behaviour to the assumption that equity owners are able and willing to exert influence on the firm’s management and business behaviour. From a view of ownership as control, conceptualized by Alchian and Demsetz in the early 1970s, these theorists shift to a theory of control as ownership. The problems raised by these theories are similar, however, to the ones highlighted above.

In the agency theory perspective delineated (in part) by Fama, shareholders are seen not as “owners” but as “investors” - as seen above, Fama does away with the notion of “ownership of the firm”. Indeed, he argues that “ownership”, which he quickly reduces to “equity ownership”, arises mostly as a specialization in risk-bearing (Fama, 1980a). The counterpart for that specialization is the claim on residual cash flows: “The residual risk is borne by those who contract for the right to net cash flows” (Fama & Jensen, 1983, p. 302). A principal-agent relationship then ensues, acting as a disciplinary device: cash pay-outs to shareholders reduce managers’ power and increase the monitoring of the capital markets when firms seek to finance their activities (Jensen, 1986). It appears very clearly, however, that this is a very partial rebuttal of some of the tenets of the property right framework of Alchian and Demsetz: the residual claimant at the center of Fama’s (and Jensen’s) attention has similar (if not all) “rights” than those of the owner. Thus Fama’s agency theory lends itself to the same criticisms as those mentioned above. But this particular perspective raises additional problems: as Robé and Biondi, among others, have shown, a firm has legal personality, and is not a nexus of contracts (Biondi, 2013; Robé, 2012); the firm’s financial resources are a long-term commitment, and cannot be withdrawn at will by shareholders (Biondi, 2013); cash pay-outs to shareholders are not a legal obligation, and are actually quite limited, especially in banking (Biondi & Graeff, 2017). Furthermore, the law does not recognize shareholders as managers’ “principals”; the modern corporation has “multiple principals” (Weinstein, 2007).

Similar results obtain from the incomplete contracts perspective. There the basis for ownership rights differs from agency theory: when specific contracting is too costly, the efficient solution (for agents involved in the firm’s production process) is to rely on “residual contracting” (Grossman & Hart, 1986). “Ownership is the purchase of […] residual rights of control.” (Grossman & Hart, 1986, p. 692). The link to Alchian and Demsetz’s initial formulation of property rights theory is much clearer than in the case of agency theory as expounded in Fama and Jensen. In fact, residual rights of control are very similar to ownership rights; they consist in “the right to decide how these assets are to be used except to the extent that particular usages have been specified in an initial contract.” (Hart & Moore, 1990, p. 1120) Again, however, one may object that equity owners have no legal control over the assets of the corporation, as reminded in the beginning of the present section.

Both theories thus assume that, even though the equity owner might not own the corporation, the latter is controlled by the former – and that this control is legally guaranteed. The “residual contractor” and the “residual claimant” are thus not very different figures from the “owner of the corporation”. The same rebuttal as the one formulated above can therefore be extended to Fama’s agency theory and to Grossman, Hart and Moore’s incomplete contracting theory.

In addition, and more broadly, the strong links posited between equity ownership and the control of the corporation (what has been called the “shareholder primacy” view) have been shown to be actually legally tenuous. Yes, shareholders have rights; but, as Lynn Stout argues, “these rights are of remarkably little value to shareholders seeking to force directors of a public company to act as their “agents” and serve only their interests.” (Stout, 2012, p. 6) In addition, if equity ownership is always circumscribed in its effectiveness in terms of control of the firm, then it cannot be conceptualized as residual contracting or residual control rights – which are boundless by definition. Table 1 below summarizes the main rights associated with owning equity shares in a (US) corporation – and how these rights are legally warranted (or not) in the US legal system.

3.4 Governance as a conduit for property rights?

However, despite the strong case made by legal and accounting scholars against the legal pretence of shareholders to rule or control the firm, the shareholder value model is still alive – at least, it still haunts law-makers, as is shown by the orientation taken by many corporate governance reforms across countries in the past three decades (Cioffi & Höpner, 2006; Robé, 2016). In Italy, for instance, two important laws reforming corporate governance in not-for-profit financial institutions were passed recently: a 2016 law transforming large regional cooperative banks (the so-called “Popolari”) into joint-stock companies; and a 2017 law requiring reform of smaller cooperative banks (the “Banche di credito cooperative) along similar lines.^[19]

This example also sheds light on the fact that, while much is known about the way US company law actually disproves shareholder primacy claims – which, in a common law context, also consists in corporate promoters shunning shareholder primacy in corporate charters, as has been shown by Stout (2012), much less is known about the legal and jurisprudential treatment of shareholders’ rights in civil law contexts.

These two elements alone warrant a further investigation of the legal foundations of property right claims. But there is yet another justification for such empirical investigation. The ambiguities (and theoretical difficulties) of property right theories of the firm are seemingly overcome by empirical works that, while locating themselves in the tradition initiated by Alchian and Demsetz, incorporate governance problems in their models. In these works, some of which have been discussed in Section 2 above, the ownership of equity effectively leads to control of the firm as long as the governance structure is supportive. When, in other words, agency problems are solved or reduced through appropriate governance structures, the types of rights enjoyed by equity holders are identical to the rights of the “firm’s owner” as conceptualized in property rights theory. There is still (theoretical) room for ownership as control.

What is, from this perspective, the role of law and regulation concerning governance of firms (and banks)? An accurate answer to this question may necessitate, here again, a change of perspective on governance: instead of being seen and analysed as a set of mechanisms that, by assumption, tighten the relationship between equity ownership and corporate control, governance may be more adequately understood as a set of mechanisms that enable the firm to be governed in the absence, or given the impossibility, of equity ownership as control of the firm. As a consequence, while laws and regulation governing corporate governance may be publicly and even theoretically based on the need to give shareholders the effective control of the (banking) firm, they may actually limit equity ownership in its undue pretence of controlling the (banking) firm. Our hypothesis builds here on the argument that “the institutional structure of the firm acts as a shield.” (Biondi, 2013, p. 411)

However, such arguments cannot be firmly established without an adequate understanding of what the law and the legal system actually say about the extension and limitations of equity ownership in banking. As a first step towards such understanding, the present study now turns to an analysis of the present legal and regulatory conditions characterizing equity ownership in banking in Italy.

4.1 European regulation of equity ownership in financial entities

For most of the XXth century, Italian law imposed a rigid and reciprocal “separation” between banks and non-banking firms – more precisely, since the 1929 crisis and its regulatory aftermath – and in particular the 1936 Banking law, mentioned above (Costi, 2007; p. 115; Ciocca, 1987; p. 93; Ferro-Luzzi, 1995; p. 107; Antonucci, 2009; p. 169; Giannini, 1940; p. 707; Guaccero, 1997; p. 5; Irti, 1998). Current European regulation (in particular European directive 2007/44/CE^[25]) does not leave any discretion to member-States regarding the regulation of banks’ equity ownership. However, the previous (European) regulatory regime already conceived rules on equity ownership in banking as instrumental to the fulfilment of “general interest” objectives, of the protection of banking firms’ autonomy and of depositors’ interests. Regulation was thus permeated with an interpretive technique which tended to harmonize general principles of economic governance with industry-specific rules, in a peculiar mix of private/corporate interests and general interest goals (Piovera, 1992; p. 192; Costi, 1994; p. 617; Ghezzi, 1992; p. 1003; Rotondo, 2004; Spolidoro, 1992; p. 183).

In particular, the Italian regulatory regime (embodied in the “Testo unico bancario” - Consolidated text of banking and credit laws - henceforth TUB)^[26] gives a key role to managerial autonomy (Capriglione, 1988; p. 718; Santoro, 1990; p. 261; Brescia Morra, 2000; p. 21)^[27] through the so-called “sound and prudent management” principle, together with the prevention of conflicts of interest and the conduct of a correct assessment of creditworthiness. It is important to remember that the concept of “sound and prudent management” comes directly from European law (the Second Banking Co-ordination Directive, adopted at EU level in December 1989, and transposed in Italian law by a 1992 Legislative Decree); however, in that particular context, it referred only to the qualitative assessment of banks’ shareholders. The Italian legislator, instead, has transformed it into a broad principle with a general value, making it both an objective of supervision (cfr. art. 5 TUB) and a guiding rule of action for banks.

Together, these principles create hurdles to access to equity ownership in banking, confirming the regulatory specificity of banking firms, motivated (by regulators and law-makers) by the general interest function they fulfil towards the economy.

European directive 2007/44/CE, already mentioned, defines procedures and prudential evaluation criteria that regulatory authorities have to apply in processes of acquisition and increase of controlling equity in financial entities (De Aldisio, 2008; p. 3; Troiano, 2010; p. 53). The systemic architecture delineated by these rules expresses the existence of a public interest in the assessment of the “quality” of controlling shareholders (Costi, 1995, p. 118) and confirms the overall aim of guaranteeing banks’ managerial autonomy with respect to shareholders, in line with the “sound and prudent management” principle (Brescia Morra, 2012, p. 247). The protection of banks against potential damages resulting from the behaviour of shareholders represents a cornerstone of the current Italian regulatory model (Rotondo, 2009, p. 218).

One should add that outside the banking industry, Italian law imposes constraints on and establishes controls of changes in corporate equity ownership. These constraints and controls gradually increase according to the nature and amount of the interests involved in the management of the company. These constraints go beyond the restrictions on the acquisition and sale of equity shares, already mentioned in the US case (see Table 1 above) – such restrictions (temporary bans on short selling, restrictions on foreign equity ownership, regulation of insider trading) also exist at the EU and national level.

In the case of banks, Italian law establishes a series of additional restrictions with respect to board members and “relevant” shareholders, i. e. those with the potential to interfere with the bank’s management. There is no room in the present study for a full-fledged discussion of the legal treatment of corporate ownership in Italian non-banking firms. We may simply point out that, regarding the so-called “closed” (i. e. private) firms, changes in ownership are subject to the discipline of the Italian Civil Code, and specifically the rules about the circulation of securities (Book IV, Title V; and art. 2355 of the Italian Civil Code), as well as the rules on the assignment of contracts (Articles 1406–1410 of the civil code), where applicable.

Regarding “open” (i. e. public) firms,^[28] the discipline mentioned above applies (unless exceptions specified by the law itself), in addition to numerous other special provisions, contained in prevalence in the “Consolidated Law on Finance” (“Testo unico della finanza”, henceforth TUF),^[29] and in the “Regolamento emittenti” (Rules for Issuers) produced by the Consob (“Commissione Nazionale per le società e la borsa”, National Commission for Listed Companies and stock exchange),^[30] in addition to controls by the Consob itself, whose activity is mainly intended to ensure transparency.

Finally, on top of the provisions of the TUF and general regulations concerning listed companies or companies with securities owned by the public, Italian law contains additional, specific provisions for those (listed and not listed) companies that operate in areas deemed “of general interest” and whose activity is therefore subject to public control. In this context, the case of banks’ equity ownership is particularly significant (Articles 19–24 of the TUB).

4.2 Authorizing the acquisition of equity

Within Italian law, the acquisition of any share of equity leading to “significant influence” (influenza notevole) over management, or to a controlling stake over a bank or the parent company in a bank holding firm, has to be previously authorized whenever it rises above a determined threshold (art. 19 TUB) (Enriques, 2005; p. 166; Antonucci, 2009; p. 172). The notion of “significant influence” is aimed at including, within the range of application of the rule, cases where a subject acquires equity shares below the 10 % threshold but is factually able to condition a bank’s managerial and financial decisions.

This form of “preventive control” on bank’s equity ownership is so important that it affects equity ownership in non-financial firms that own equity in banks (Costi, 2007, p. 327). The ultimate goal of such regulation is to avoid that “external” subjects (external to the banking industry, both in terms of interests and of personal characteristics) acquire a position of power that leads to an excessive influence over the management of a bank, especially when there are conflicts of interest.

The specificity of banking is also confirmed by the possibility, for regulatory authorities, to cancel the authorization of equity ownership, with a legal duty to sell the equity shares in question, and automatic “freezing” of rights attached to equity ownership. This rule clearly represents an external, authoritative intervention on whomever holds equity in banks. This intervention contributes to greatly diminishing the contestability of the transfer of equity ownership in banking, and then the so-called market for corporate control. This type of regulation clearly curbs equity shareholders’ rights, beyond the restrictions existing in the US legal system, mentioned in Section 3 of the present paper. It further undermines the assumption of full alienability of (bank) equity shares envisioned by property right theorists, notably Alchian and Demsetz (1973) and Fama (1980a). Similarly, another aspect of regulation that makes it difficult to access banking equity is the possibility of an assessment of equity share acquisitions according to “proportionality”.^[31] This means that the regulatory authority, through secondary regulation (i. e. administrative decisions and bylaws), should take into consideration the type of regulated entities and the specific characteristics of the activity conducted, differentiating if necessary between banks and other financial intermediaries or controlled societies. Confirming the hypothesis formulated in the present study, one should underline the fact that the detailed assessment required by the European directive applies to bank ownership only, while it is possible to not apply these stringent rules to other financial entities.

4.3 Information and communication duties

The Italian regulatory regime also includes a series of rules aimed at enforcing the “transparency” of banks’ shareholdings (Campobasso, 1994, p. 285) and of controlling subjects (art. 20 ss. TUB) (Marchetti, 2000, p. 158). The obligation to communicate “relevant shareholdings” allows banks to know - more effectively than would be possible under common regulation - their own shareholdings, and enables regulatory authorities to identify the holders of significant equity shareholdings. This helps the authorities to establish an adequate “map” of bank shareholdings and, more importantly, to grasp the effective distribution of power within equity holdings (Costi, 2007: 535). The identification of “relevant” shareholders is conceived as a means both to avoid the excessive influence (over banking operations) of subjects that are external to the banking industry and to guarantee an adequate flow of information to the regulatory authority, so that it may exert its functions in a satisfying manner.

These rules can thus be interpreted as complementing, or compounding, the legal and regulatory dispositions restricting access to equity ownership or providing for the suspension of ownership rights, discussed in the previous sub-sections. In particular, communication is mandatory in the following cases: following operations subject to authorization, or in case of a waiver of authorized operations; when a determined threshold (for equity ownership) is crossed; when shareholdings are reduced below the pre-set threshold. Within the same regulatory category, there are communication obligations concerning the “shareholder agreements” (patti parasociali) over voting rights, that is, all the agreements between shareholders that generate (effectively or potentially) effects coinciding with those deriving from one shareholding. The duty to communicate any agreement leading to concerted voting in a bank or a bank-controlling firm lasts the whole duration of the banking firm (Marchetti, 2000, p. 159).

The regulation of communication obligation should shed light on any conditioning of managerial powers, and allow management to take the decisions most adequate to the bank’s interest, thus avoiding conflicts of interest. Thus, when a shareholders’ agreement may cause prejudice to the bank’s “sound and prudent management”, the Bank of Italy (Italian banks’ main regulatory authority) has the right to suspend the voting rights of participants to the agreement in question. As a consequence, these rules complement the regulation of access to ownership, discussed in the previous sub-section.

Still within the realm of information duties, the regulatory authority may request information from “interested” subjects, so as to reach a full transparency of shareholdings of banks and bank-controlling entities (art. 20 TUB). In particular, the regulatory authority may request from banks or controlling entities the names of shareholders, along with the characteristics of trustees who hold the equity shares. This rule aims to include in the range of its application those subjects who intervene in the conclusion or the implementation of shareholders’ agreements. It thus represents a very peculiar extension of the authority’s powers in terms of information beyond the range of controlled subjects (Siclari, 2012: 262).

Within the same regulatory area, the Italian regulatory authority may request from subjects holding shares in banks’ equity the names of shareholders and controlling subjects (art. 21 t.u.b.), since it is possible to acquire, while not being part of a shareholders’ agreement, a position of influence on the bank’s management, which does not result from the agreement or from shareholdings. Such a request goes far beyond the range of controlling subjects, since it concerns entities of any nature that hold equity shares in banks. It is a form of control over all the shareholders in a position of exerting influence over banks’ management – control that should consent to reach any situation of de facto (or indirect) exercise of shareholder’s power, situation that does not come under the main communication duties mentioned above.

4.4 Sanctions. suspension of voting rights (and other rights)

The non-observation of rules governing equity holdings in banks is punishable through civil (art. 24 TUB), administrative and criminal sanctions. The TUB creates a system that “freezes” the voting rights attached to non-authorized shareholdings (when such authorization is suspended or cancelled) or to shareholdings not in compliance with communication duties (art. 24 T.U.B.) (Brescia Morra, 2000, p. 40)^[32]; while there is an obligation to alienate shares when these shares correspond to unauthorized or forbidden shareholdings (art.24 T.U.B., comma 3).

In Italian securities law, “relevant” shareholdings are subject to transparency duties, and to an extensive control. This aspect reveals the need, embedded in the regulatory regime, to guarantee not only the general interest, so important for administrative law (and its mission to enforce trust in banking entities and protect systemic stability), but also private interests, common to all shareholders, among which the stability and capital adequacy of the particular banking firm (Santoni, 2012; p. 299; Vella, 2011).

Whenever the prohibition of voting is not respected, the decisions made with the contribution of those voting rights that should have been suspended may be legally challenged (Costi, 2007; p. 539; Santoni, 2012; p. 199; Benocci, 2007; p. 243). The specificity of such rule consists in the fact that the legal challenge may be raised by, in addition to the subjects usually legitimized by law, the regulatory authority itself (Antonucci, 2009; p. 192; Santoni, 2012; p. 196), when it holds that the violation of the law damages the public interest, which is indirectly protected through the identification of shareholders (Santoni, 2012, p. 200).

Law attributes to the Bank of Italy a power that does not concern the protection of legality, or of a social interest in a strict sense, but corresponds to the specific regulatory objectives pursued by the regulatory authority itself – power that is exercised with discretion in its regular operations. This power is clearly not in line with the “shareholder primacy” view discussed in Section 3 above. More importantly, it participates in the circumscription of shareholders’ rights as theorized in the property rights theory; and further establishes the validity of a view of banking as a “public-private partnership” (Ricks, 2012a), or as a public-private franchise (Hockett & Omarova, 2017). Finally, the TUB includes the obligation to alienate “all” the shareholdings for which no authorization has been received, or authorization has been cancelled.

4.5 Regulating banks’ corporate governance: further obstacles to shareholders’ potential claims to control banking entities

The regulation of banks’ corporate governance has been revised in the wake of the 2007/2008 global financial crisis, so as to guarantee (again) the “sound and prudent management”^[33] of Italian banks. However, the pre- and post-crisis regulation of banks’ corporate governance displays a strong continuity, predicated upon the conception of banking as a specific activity that, according to art. 10 of the T.U.B., is characterized by monetary intermediation and the functional linking of collecting savings and lending activities. Beyond economic activities of general interest, banks are also held to carry larger social functions, requiring stringent governance rules, which can be verified in the context of prudential regulation (Cera, 2015).

In this area of bank regulation, current Italian regulation directly reflects the efforts made at the international and European levels to address specific problems regarding banks’ governance, such as the problem of the inadequacy of previous rules and internal controls in front of excessive risk-taking. Thus international bodies (in particular the Basel Committee for Banking Supervision) have adopted a series of principles that should guide national regulations on banks’ corporate governance and internal control systems (Frigeni, 2015). These new regulations concerning banks’ risk management and corporate governance, here closely related, perfectly express the tension mentioned above between a broad tendency to favour equity shareholders and the limited liability form of banking entities, on the one hand, while circumscribing equity shareholders’ potential claims so as to maintain banks’ legal and regulatory embeddedness in a model of the banking entity as a social institution.

These principles have been made explicit at the European level by Directive 2013/36/UE (“CRD IV”). They concern the organization of internal controls and the process of risk management, given the guidelines produced by the European Banking Authority (EBA) and the Basel Committee. Subsequently (in July 2013), the Bank of Italy published chapter 7 of Title V of the Circular 263/2006(concerning internal controls) and (in May 2014), chapter 1 of Title IV of Part One of the Circular 285/2013(concerning corporate governance). Given that the CRD IV Directive only contains broad guidelines, the Bank of Italy could implement those guidelines through much more detailed rules adapted to the national banking system.

The last (fourteenth) Bank of Italy regulatory update as of 2016, is a regulation dating November 24th, 2015, which aims to implement EC Delegated Regulations 61 and 62 of 2015. They concern liquidity and leverage and modify and complement the regulations contained in CRD IV and in EU Regulation n. 575/2013 (“CRR”). These (National) regulations innovate in that they clarify specific aspects regarding the newly-introduced (at international level) Liquidity Coverage Ratio and Leverage Ratio. Such modifications indicate the modalities through which discretionary rules can be applied, according to the aforementioned Regulations issued by the European Commission.^[34]

Altogether, these regulatory measures^[35] are articulated in general principles and specific rules. The regulations covering the role and functioning of governance bodies, and of their relationship with the corporate entity of banks, are wide-ranging. On the one hand, the rules emphasize the duties of governance bodies to guarantee adequate control of the risks undergone by the bank in its day-to-day activities, attributing to the Board of directors the duty (that cannot be delegated) to define, approve and evaluate the correct implementation of risk management schemes. On the other hand, the regulations produce a re-organization of responsibilities and competences of the supervisory body, with respect to the managerial bodies.^[36] Such regulations have direct effects on the nature and exercise of ownership rights in banking.

The classical corporate governance problem of coordinating and harmonizing diverging interests among stakeholders assumes a specific aspect in banking, thanks in large part to banks’ specific regulatory regimes. As seen in the previous sub-sections above, the regulation of equity ownership in banking creates a series of communication and information duties on the part of those subjects with shareholdings such that they may enable them to exert an influence on the bank’s management (Galanti, 2008, p. 469). In addition, these regulations impose strict limitations on the acquisition and alienation of equity shares.

Regarding corporate governance, the Italian regulatory regime has, for a long time, allowed the co-existence of multiple, variegated types of ownership and governance (Bruzzone, 1997, p. 194). As seen above, equity ownership in the banking industry is regulated by European Directive 2007/44/CE (transposed in national regulations), which defines procedural rules and assessment criteria that national regulatory authorities have to apply in procedures of acquisition and increase in “qualified” shareholdings in financial entities. In Italy, these rules are contained in a single section of the Single Banking Law, namely Chapter III of Title II (art. 19–24) of TUB and in art. 25 of the same text (“honorability” requisites).

The explicit aim of these regulations is to establish clear, precise and uniform rules for the assessment of the acquisition of equity shares for national regulatory authorities, so as to limit discretion and avoid discrimination (Bank of Italy, 2010, p. 2). In the Italian version, these rules are guided by the overarching principle of “sound and prudent management”, already mentioned, which represents a true regulatory innovation (both with respect to European legislation and to past Italian regulation).

As shown above, current regulations, both at the European and national levels, establish a series of terminological distinctions that produce regulatory effects and, in particular, effectively circumscribe the governance impact of equity ownership in banking. First, the concept of “participating interest”, originally defined as the existence of a “durable link” between the shareholder and the entity in question,^[37] now extends to “the ownership, direct or indirect, of 20 % or more of the voting rights or capital of an undertaking”.^[38] The Italian Single Banking Law identifies as “participation”^[39] the following: equity shares and other financial instruments that attribute administrative rights, or rights listed in art. 2351, last comma, of the Civil Code. Secondly, European regulations identify the existence of “qualifying holding” in relation to “significant influence” exerted by shareholders above a certain threshold of equity ownership.^[40]

Similarly, the notions of “indirect participation” and “control”, in art. 22 and 23^[41] of the Single Banking Law, assume an important role, since they integrate the normative content of the complex regulation of shareholdings (Maimone, 2006, p. 106). In particular, Art. 22 fills an important regulatory gap with the introduction of the notion of “indirect participation”, which includes any form of intermediation in the acquisition of equity ownership in banking (Costa, 2013: 194), that is, the acquisition operated by controlled firms, trusts, or intermediate persons.^[42]

Another important regulatory contribution to the specific treatment of equity ownership in banks is given by the rule governing honorability requisites in subjects participating to banks’ equity (art. 25 t.u.b.). This rule actually codifies a principle that has a long and consolidated existence in Italian law, namely, the presupposition that any relevant power of influence over a bank must be exercised only by those subjects (physical or legal persons) in possession of personal honorability characteristics (Alessandra, 2010: 174).

Finally, various rules concerning information duties for banks, and subjects included in consolidated banking supervision (art. 51 ss. of T.U.B.) weigh on the relationship between ownership and governance, given that they govern intra-group relationships between banks and those subjects, financial or not, that are part of them. Article 51 of the Single Banking Law, for instance, rules that banks must send to the regulatory authority frequent information, balance sheets and any other document required. Article 66 determines the rules of consolidated information supervision in banking.

In carrying out supervisory functions, the Bank of Italy may conduct inspections and ask to be shown any documents and records it deems necessary. The Bank of Italy can inspect: banks, “authorized entities”, entities supervised on a consolidated basis, intermediaries entered into the General and Special Registers, electronic money institutions. Assessment and supervision of intermediaries^[43] are based on a consolidated approach, aimed at understanding the overall risks and safeguards of the supervised entities. Accordingly, the scope of application of the Analysis Patterns (APs) primarily includes banking groups and investment firm groups subject to consolidated supervision. The primary objective of inspections is to evaluate the regulatee and/or specific issues to be examined in compliance with the tasks set out in the Assignment Letter. This objective should be pursued bearing in mind efficiency requirements, optimizing the interaction between the quality of the product and the duration of assessments.

Compliance with the principle of efficiency is functional to both the timely completion of all the scheduled assessments and the positive outcome of the verifications. As a matter of fact, in order to ensure full effectiveness to any corrective measures to be taken, the problems found and the assessments carried out must be promptly reported to the regulatee concerned and to the Supervisory Authority respectively.

Bearing this in mind, at the beginning of the assessment, the Head of the inspection team plans the necessary activities, unless any peculiarity of the assignment prevents this from happening. To this end, after having assigned the individual duties to the team members, he/she periodically monitors compliance with the time schedule and updates it to take account of any additional necessary checks.

For the inspection to be fully effective, the flexibility criterion is particularly relevant: it is meant to confer a margin of technical discretion to the inspector so that he/she can choose, for example, the AP to follow, the appropriate sampling criteria, the documentation to be examined, the corporate officers to contact, etc. in order to better support the inspection’s objectives. Inspectors have the power to access all the information available at the regulatee’s premises, so as to get the documentation needed for the assessments. The effective functioning of on-site inspections often requires this power to be strongly exerted, analysing a considerable amount of data and information and dealing with many corporate officers. However, on-site assessments shall be carried out avoiding any unnecessary administrative burdens for the regulatees. In particular, the actions (e. g. request for documentation, meetings with officers) which entail the lowest burden for the regulatees – given the requested level of effectiveness – should be preferred.

To minimize the assessments’ impact, requests should be carefully pondered, assessing their consistency with the objectives of supervision and balancing expected benefits and related costs, also considering the intermediaries’ capacity of response. To this end, the best possible use of the information available should be pursued, limiting additional verifications to a minimum and exploiting the possibilities of electronic data processing.^[44]