Leading light

A change in leadership at Banca d’Italia has seen a much-needed change in the Italian banking market. By Gianluca Belotti

The past two years have been busy and fruitful for Italian banking. Following hot on the heels of the appointment of Mario Draghi as governor of Banca d’Italia in early 2006, came the groundbreaking merger between Banca Intesa and San Paolo IMI, and Uni- Credit’s acquisition of Capitalia. Foreign banks were also allowed a look-in, with the takeovers of Antonveneta and Banca Nazionale del Lavoro (BNL) by ABN Amro and BNP Paribas, respectively.

The mergers underlined the much-vaunted change of climate brought about by Draghi’s appointment, which is in marked contrast to the opacity, protectionism and sloth prevalent under his predecessor Antonio Fazio. The former governor’s protectionist opposition towards the proposed takeovers by ABN and BBVA of two Italian banks was revealed in mid-2005, setting in motion a chain of events which was to culminate in his resignation.

A breath of fresh air

As a result of Fazio’s downfall, as well as EU pressure to bring banking regulations in Italy into line with those throughout the rest of Europe, sweeping changes were made in a late December 2005 parliamentary bill both to the organisation and the powers of Banca d’Italia. Crucially, the make-up of the body was shifted away from members of the banks themselves to a, hopefully, more impartial panel, while the choice of director was taken over by the government rather than resting, as before, with the members of the bank.

While within the bank decision-making was organised along more collegial lines, some of its powers in connection with antitrust investigations and mergers in the banking sector were put into the hands of the Autorità Garante della Concorrenza e del Mercato (AGCM), the impartial Italian Antitrust Authority, which enjoys a good reputation in Italy as well as at the European Commission headquarters in Brussels. Curiously, the AGCM had previously had jurisdiction over all other areas except banking.

In part, this redistribution of power was in response to worries that a disproportionately large number of bank boardrooms were controlled by virtually the same set of people, some of whom made up Banca d’Italia’s governing body.

To prove its strong commitment to bringing more competition into the sector, last June the AGCM launched a fact-finding investigation into corporate governance on alleged structural links existing in Italy between bank and insurance companies in the light of new rules to be introduced in the financial markets.

The scope of the investigation is clearly to better define the relationships between competition and corporate governance by updating how corporate structures in the CORBIS banking and insurance industries function.

AGCM’s fears are that banks and insurance companies are less inclined to compete with each other than companies in other industries because of the ownership structures, as well as a web of cross-shareholding and longstanding personal links.

Moderate approach

While these eminently salutary measures were being taken by the Italian government with regard to the central bank, Draghi, too, made his mark by radically cutting down on previous draconian levels of regulation for all mergers and takeovers under which any bank or organisation wishing to acquire a substantial share in an Italian bank had first to ask permission in two separate stages for the deal from the central bank itself.

Expansion was also made easier, for foreign and domestic banks, with some previous regulatory obstacles to opening new branches being revised so as to make the process smoother.

Also to be welcomed is, undoubtedly, the greater level of transparency and rigour that the competition authorities have shown in assessing mergers in the banking sector; the recent Intesa- San Paolo merger only went ahead on the grounds that 748 branches be sold in areas where the merger could threaten competition.

Merger opportunities

In clearing what many people had thought of as an almost insuperable blockage in the Italian banking system, these measures seem also to have opened the way for more overseas acquisitions by Italian banks and smaller-scale mergers between various Italian banche popolari.

Although hardly on the same scale as the deals that have seen Intesa San Paolo bumped up to a market share of 18 per cent and UniCredit of 16 per cent, mergers such as those between Banca Popolare Italiana and Banca Popolare di Verona e Novara have significant impacts on the competitiveness and quality of domestic markets.

However, a long-term problem that began to stir once again shortly after these important changes were made by the government and the new governor of Banca d’Italia was the peculiar nature of internal organisation and accountability requirements to shareholders of some of these publicly listed banche popolari.

Unlike banche popolari not listed on the stock exchange, the formal status as cooperative of the publicly listed banche popolari appears an anomaly. The most striking peculiarity of their governance structures lies in the fact that shareholders themselves are not necessarily directly represented on the board, may have little knowledge of its doings and might not even have any influence over them at all.

Instead, the charmed realm of the boardroom is inhabited by individuals who have not been selected by all shareholders, but rather only by the existing body of soci (partners) in the bank, a process known as the clausola di gradimento.

Moreover, these soci must also submit to the voto capitario rule: the extent of control that a socio can exercise over the workings of the bank is fixed at one vote, irrespective of the proportion of shares he may hold.

Both these arcane rules seem quite clearly to be similar to and in violation of the ‘golden shares’ principle – expressly condemned by both the European Commission and the EU Court of Justice in several other cases – which prohibits any individual or group of individuals from holding voting rights that are disproportionate to his share in a company.

An additional final oddity of the constitutions of the publicly listed banche popolari is the 0.5 per cent rule: despite being publicly quoted companies, no individual can hold more than 0.5 per cent of the shares in the bank. Given these peculiarities, the cooperative status accorded to the publicly listed banche popolari is certainly surprising, not least because the soci do not have any of the usual privileges (besides the unfairly distributed voting rights) that are associated with members of a cooperative.

Italease case

Most recently, some of these problems were indirectly brought back out into the Italian sunshine by the case of Italease, which was forced to dismiss some of its top management following an overexposure to interest-rate derivatives which it had failed to warn its investors about.

In many ways, this was an unfortunate outcome after a general movement to allow more ease in opening branches and also self-regulation to banche popolari. Such a situation constitutes a clear obstacle not only to the free movement of capital within the EU, as far as investments in listed banche popolari are concerned, but also worrying deterrents for foreign investment in funds managed by the banche popolari or in the banks themselves.

So far at least, the responses of Draghi and other government figures and bodies, including the AGCM, have been restricted to criticisms directed against these arrangements inside the banche popolari, as well as promises to change the rules regulating them – promises which many see as being blocked by the political influence enjoyed by the banks themselves both at national and at EU level.

In a recent exchange with the European Commission, Associazione Nazionale di Azionisti Banche Popolari, a banche popolari shareholders association, contested the cooperative status enjoyed by the publicly listed banche popolari on the grounds mentioned above. Unexpectedly, after more than two years of investigations, the Commission’s conclusions, subject to review after a further investigation, were that despite the peculiarity of the case, publicly listed banche popolari do still have the right to cooperative status and moreover that the ‘golden share’ principle was not operative in these cases.

Unlike the EU Commission’s offices, AGCM took the view that there is a reduced propensity to compete in case of cooperative credit institutions, given the above mentioned specific set of rules set for their governance. This may indicate that action in the near future can be expected on this from AGCM.

Gianluca Belotti is a partner at Lovells