Italian banks: ownership structure, corporate governance, and asset quality

Nadege Jassaud, economist at the IMF, writes an entry on Vox about Italian banks: ownership structure, corporate governance, and asset quality. Her main points:

1. The recently released ECB balance sheet assessment highlighted nine Italian banks that failed the asset quality review (AQR) and stress tests – before 2014 recapitalisation. Eight of them fall into the categories described in this article (and 14 out of the 15 Italian banks participating in the assessment).

2. In Italy, bank ownership through foundations and bank cooperatives raises specific challenges for corporate governance.

3. Italian foundations have played a critical role in the privatisation of community-owned banks.

4. Foundations still remain in control of the largest Italian banks.

5. Foundations suffer from an opaque and weak governance structure.

6. The financial position of several foundations has weakened, raising concerns about their capacity to provide further bank support.

7. Banks with foundation ownership tend to feature weaker asset quality than other Italian banks.

8. Cooperative structures are widespread in Europe and have been an important source of credit to local businesses.

9. The cooperative model raises governance issues when banks grow above a certain size.

10. Like foundation-owned banks, bank cooperatives have weaker asset quality compared to other banks and are less resilient to shocks.

This reminds of the Spanish cajas de ahorros, bank-like institutions with no shareholders and effectively under the control of local governments. The cajas were poorly managed, and highly vulnerable to the real estate crash. Regulators forced them to merge, and restructure into proper banks, after the financial crisis.