«They say things are happening at the border, but nobody knows which border» (Mark Strand)
by Francesco Capriglione and Rainer Masera
Abstract: Failures of the corporate governance of banking firms were one of the major causes of the 2007-09 Great Financial Crisis. Various reforms have been enacted to ameliorate Governance standards, notably risk management and incentive systems; but the key driver remains the improvement of shareholders rights, with a view to ensuring sustainable value creation. Instead, in this paper it is argued that, to strive for a structural advance in the risk appetite framework of the banking firm, the fundamental assumption behind corporate governance – i.e. that the ultimate authority lies in shareholders (the “owners”) who detain exclusive voting rights – should be reconsidered. To start with, it is recalled that, according to the options enterprise model, the effective owners of a corporation can be identified with its debt holders. More specifically and more recently, in the case of banking firms, the bail-in/resolution mechanisms enacted create new obligations and responsibilities for holders of subordinated debt: accordingly, the traditional corporate governance framework should be modified to allow – in appropriate forms – for their voting rights and presence in the Board of Directors/Supervisory Board.
Summary: 1. Introduction: a holistic view of new banking rules in Europe – 2. The corporate governance in enterprises and in banking-firms: similarities and differences. – 3. Bank’s corporate governance: characteristics of the relevant regulatory framework – 4. … and the new European regulatory mechanisms (bail-in and state aids legislation). – 5. Corporate governance new parameters in the latest orientations of legal scholars. – 6. Continued … and case law. – 7. Conclusions.
1. This work examines the issue related to the Corporate Governance (CG) of banks with specific reference to the implications of the new regulation system and the resolution mechanism introduced by the EU,and recent experiences in Italy. The considerations-both economic and legal-have general implications which could be extended on a global scale.
The financial crisis of 2007-2009 had its beginnings in the United States and culminated in the failure of Lehman and the rescue and bail-out of big banks and insurance companies, but then it spread with disruptive and long lasting effects also into Europe. Faced with the deep crisis, in November 2008,the European Commission entrusted a mandate to a High Level group, chaired by Jacques de Larosière, to advance a proposal for the revision of the European supervisory and regulatory financial system. The Report was presented on the 25th of February 2009 (de Larosiere et al., 2009) with a series of significant reform proposals for a co-ordinated approach to regulation and financial oversight. These recommendations lie at the heart of the new system of European financial supervision. In particular, the Report has introduced new macro-prudential regulatory policies in order to prevent systemic crisis and has underlined the need to put macro-prudential objectives before the micro-prudential ones; moreover, it has suggested the creation of three separated authorities to micro-manage banks, insurance companies and markets.
Furthermore, the Report has highlighted the need to intervene in the banks’ corporate governance. The Great Financial Crisis of 2007-2009 has a large number of causes, but at its roots lie the bad practices of many firms/financial institutions which sought short-termism, non-sustainable gains that could allow their managers to profit from them and, at the same time, to eventually distribute losses from high-risky investments among taxpayers. Also the techno-financing developments, especially in the derivatives market, were implemented with disregard for the rules, with the aim of creating short-term profits which caused severe economic and social problems in the medium term, instead of being able to reduce the costs of the intermediaries, and therefore improve the efficient levels of economic production. The need to avoid that the financial crisis would result in an implosion of economic activity induced many governments to burden the taxpayers with baling out “too big to fail companies”, hence causing a social distribution of losses caused by the elusive/illegal behaviours.
The complexity of the micro and macro links are illustrated in Fig.1
Fig. 1 – A complex system (network) representation of macro prudential and other economic policies.
Source: Masera (2015)
The priority of macro-prudential issues above the micro ones is analytically clear, even if the real centres of economic, monetary and political power are actually interested in implementing the specific policies under their control. This fragmentation is particularly significant in the Eurozone, due to the absence of a fiscal and political union.
Here it is not possible to deeper analyse the processes of re-regulation in Europe and USA. However, it should be noted the slowness and problematic aspects of European re-regulation when compared to the United States’ rapid response introduced with the Dodd-Frank Act in 2010. In this respect, we are substantially making reference to the USA supports for national banks and economic markets, which – beyond bailouts – has been obtained through the introduction of Quantitative Easing (starting from 2008) on Federal securities and bonds, and the acquisition by the Fed – in accordance with the Treasury and public guarantees – of deteriorating bank credits, as well as the securitization of performing credits and the acquisitions implemented by national agencies.
The new supervisory system in the EU focuses on Banking Union (BU), which is broadly defined. As illustrated in Fig 2 with reference to the Eurozone, the BU hinges on the interaction between: the rules on capital (CRR/CRDIV-European Commission 2013a); the macro-prudential supervision entrusted to the European Systemic Risk Board; the micro-prudential oversight carried out by the ECB in the area of the Single Supervisory Mechanism (2014): the Single Resolution Mechanism, which became operative in 2016; the new accounting rules for banks IFRS 9-10-11-12-13 (2015-2017). The BU has also completed the so-called Single Rulebook, i.e. the unification and integration of legislative texts referred to each above-mentioned regulatory area. The EBA performs a key role in the co-ordination and updating of the Single Rulebook.
Fig. 2 – CRR/CRD IV, Macroprudential Supervision, Single Supervisory Mechanism, Resolution Framework, New Accounting Rules: A network representation of the EU Banking Union.
Source: Masera (2014b)
The BU can be specifically analysed in the Fig.3, which explains the relevance of the new banking resolution rules that have been introduced in EU in January 2016 (which Italy implemented with a prior experiment by the Decree of the Council of Ministers of November 25th, 2015 “for the resolution of four medium-small banks: Banca Marche, Banca dell’Etruria e del Lazio, Carichieti and Cassa di Ferrara).The analysis of the European resolution mechanism and its implications for Italian banks, especially for the smaller ones, appears complex. In particular, the rules for “bail-in” (internal rescue) are correctly aimed at protecting the taxpayers from the loss of the banks and its moral hazard implications, but they have been criticized for their very complex way of working (differently from what has taken place in the USA under the Dodd-Frank Act).
Fig. 3 – The new EU Bank Capital Regulatory Framework and the other three interactive building blocks of the “Banking Union Package”
Source: Masera 2014
The Governor of the Banca d’Italia (Visco, 2016a) indicated that the new rules may be “the source of serious risks of liquidity and financial instability”. If it were so, a cardinal rule of the macro-prudential regulation would be violated, i.e. the preservation of financial stability and preventing/ containing the systemic risks.
Fig. 4 – Banking Union: the BRRD and SRM pillar
* Directive 2014/59/EU and Council Implementing Regulation (EU) 2015/81 of 19 December 2014 specifying uniform conditions of application of Regulation (EU) No 806/2014 of the European Parliament and of the Council with regard to ex ante contributions to the Single Resolution Fund.
** The SRF forms part of the “resolution” scheme of the Banking Union and is to gradually be strengthened. It will be replenished by the national contributions of the Member States collected from the banking industry and it will be progressively mutualised, with a capital supposed to reach some 55 billion euros between 2016 and 2023.
Source: Masera (2015)
Anyway, what matters is the systemic interaction with the new, complex rules about capital, liquidity and governance laid down in CRR/CRD IV (Figure 5); however, the latter faces changes towards what de facto appears as the fourth edition of Basel standards (Masera, 2015).
The capital strengthening of banks, under a unitary regulation for all Eurozone countries, was a right target. Nevertheless, it is legitimate to ask ourselves whether the trade-off between regulation and growth has been properly treated with regard to its micro- and macro-prudential dimension. In particular, since rules have been tightened and multiplied in their number, the expansive action of monetary policy had to be increased: on the one hand, as far as the monetary base is concerned, the throttle was opened; on the other hand, with regard to the credit and money multiplier, the brakes have been applied. Vice versa, we should prevent the rules about capital, liquidity and banking resolution from neutralising the expansionary impulses of QE, whose distortive side effects might be exacerbated.
Figure 5 – CRR (Single Rule Book) / CRD IV framework
(1) The framework is completed by the EBA technical standards.
(2) If a bank breaches the capital conservation buffer requirements, automatic limitations are made to buybacks, dividends and bonus payments.
Source: Masera (2014b)
These arguments have been supported and explained by several economists and professionals in the financial field, even inside monetary authorities; in spite of this, across Europe, they have been heard little so far. The International Monetary Fund itself has largely documented, in recent Global Financial Stability Reviews, that – beyond certain limits – the attempt to pursue the objective of a banking system apparently safer, through higher and higher capital ratios, might result in smaller growth and negatively feedback on the stability of intermediaries itself.
As shown in the charts above, the set of rules involving banks in Europe is impressive. To sum up, along with capital requirements stemming from Basel, the changes related to the creation of the Banking Union have been enacted, thus implying new constraints on banks in any case. Rules about capital have been tightened much more than in the United States, following the principle of a wrong, indiscriminate application, having regard neither to size nor to business models. As indicated, no mechanisms of securitisation, provided with public guarantees, have been established, neither on problem loans nor on the ones in bonis; rules on banking resolution have added complexity and constraints to the system, to the point where, according to the Italian economic authorities, they should be revised.
Moreover, it is necessary to highlight that practically all banks have been directly or indirectly subject to a set of new provisions regarding the financial system as a whole, having an impact – in terms of compliance – on the activities of credit institutions, too, as shown in Figure 6. In particular, rules on market infrastructure (EMIR, CSDR, MiFID II, Derivatives and CC Houses) had been identified by then-Commissioner Hill (2016) as excessively burdensome.
Figure 6 – The new regulations of the EU financial system
Source: Masera (2016)
Repeated amendments to primary and secondary rules, along with their tightening and increasing number, legitimise the basic issue of the need to estimate the costs and benefits of such rules, their interaction with economic policies and, ultimately, the connection between banking regulation, growth and financial stability itself. Changes in regulation have directly affected the issue of CG (Figure 5), trying to control the excessive risk appetite shown by the shareholders, the Board of Directors and the top management of banks. At the same time, new and tighter rules have been introduced about capital, liquidity and the maturity transformation aimed at internalising possible losses suffered by the credit institution, moving from a bail-out system to a bail-in one.
It was necessary to modify a supervisory framework that enabled the moral hazard of bank managers, ending up with all burdens being borne by the taxpayer (“head, I win; tail, you lose”). However, it has not been realized that such a problem would have required a different paradigm with regard to CG, that had played a pivotal role in the excessive risk shown by several credit institutions. In particular, as argued in this work, in order to tackle the root causes of the issue, one should consider an active voting role in general meetings and a position in the Board of Directors for subordinated bondholders. As we are trying to demonstrate, such a reform would be consistent with both the new charges on a relevant segment of bondholders and – above all – the need for changing from inside the risk profile and the strategy of the banking-firms, thus helping to pursue the creation of sustainable value in the medium term.
2. Since the Eighties, characterised by banking de-regulation, the axiom that the bank is a firm has gained ground. This approach had some good points; however, it ended up with neglecting that the banking company has nevertheless some features that are special with respect to other corporations. Credit institutions represent a key element of the implementation of monetary policy, basically – but not exclusively – because deposits are an essential component of money. Upon that assumption was dependent that approach mistakenly bringing to the uncritical application to banks of Modigliani-Miller “neutrality propositions”, in a way that allowed to argue that raising capital ratios after 2008 will not have entailed “private” costs.
The relevance of financing decisions in order to determine the value of a bank arises from the specific characteristics of their assets, liabilities and associated risks. In fact, as highlighted by DeAngelo and Stulz (2013), credit institutions play a crucial role in the production of liquidity in the economic and financial system; moreover, as long as there is a risk premium (a reduction in the cost of funding) for liquid securities, then a high leverage is optimal for banks, becoming a source of value-creation itself. As highlighted by Adams and Rudolf (2010), credit institutions generate profits both on their assets (loans) and liabilities (deposits). In particular, their ability to receive deposits at lower rates than the market creates an extra-profit that grows with leverage. This means that Modigliani-Miller theorem, along with corporate finance models based upon it, should be properly modified in order to take this peculiarity into account. In the light of these specificities, too, the issue related to the need of revising the CG of enterprises – in particular, as far as the relationship between shareholders and bondholders is concerned – nowadays arises, as we shall see, especially for banking companies. However, we cannot neglect that traditional CG structures require, anyway, a general critical revisiting. The issue whether shareholders are actually the only “owners” of the firms, or not, has been faced – in an innovative and different manner – with reference to option pricing models elaborated by Black-Scholes and Merton (see Appendix). We should nevertheless underline that even such a model, assuming the validity of the abovementioned Modigliani-Miller theorem, should be properly amended or adjusted in order to consider the peculiarities of the banking company as indicated above.
According to ‘conventional wisdom’, the shareholders of a company are identified as its proprietors. They hold equity capital and receive rights, on the income and the assets of the firm, that are subordinated with respect to creditors (the latter holding claims on debt capital). Shareholders are in a riskier position and are compensated through dividends (if the company can afford them) and capital gains, that do not have any predetermined bounds. Debtholders of a firm, as a priority with respect to any payment to shareholders, receive the interest due; in the event of the liquidation of the company, all debts must be satisfied before any distribution to shareholders. As long as the firm does not go bankrupt, stocks are ‘perpetual’, whereas debt has generally an expiry date. It is important to notice that, under a fiscal standpoint, both dividends and interest are subject to levies on the income of recipients; however, for a corporation, interest is fiscally deductible, whereas dividends contribute to taxable income. Hence, for the company, this gives rise to an evident advantage to finance itself through debt rather than equity. Ceteris paribus, this is increasing the potential instability of the economic and financial system. In particular, as far as banks are concerned, a paradoxical condition arises: debt (including deposits) has a fiscal advantage vis-à-vis equity, whereas regulatory constraints – based upon Basel standards – push for risk capital. Furthermore, shareholders have an additional incentive to increase the leverage and the risks faced by the banking firm, to the extent that – as argued before – a higher leverage brings to the creation of value that ends up with them being the main beneficiaries.
Both shareholders and bondholders have a common interest in preserving and increasing the value of the company they invested in. However, the different types of claims they have upon the firm’s cash flows and capital gains may lead to potential but relevant conflicts. Shareholders are remunerated only after bondholders are paid off. It is then reasonable to assume that bondholders want to avoid excessively risky projects, while stockholders prefer a higher risk/reward ratio considering the fact that there is no cap to their potential return.
Bondholders are the firm’s creditors, while shareholders are those who legally own shares of stock in the corporation. As a consequence, only shareholders have voting rights at general meetings as well as the chance to directly or indirectly appoint the top management of the firm. The principles of corporate governance, recently developed for both industrial (OECD) and financial companies (BCBS), are mainly designed to protect and facilitate the exercise of the shareholders’ rights.
Shareholders and bondholders are characterized by partially different objective functions. Shareholders, given their power to appoint board members and managers, have different control tools which make their objective functions even more complex and exacerbate agency problems.
In sum, according to the traditional approach above mentioned, the enterprise value (V) can be calculated as the sum of claims from both equity-holders (E) and debt-holders (B):
Figure A.1. in the Appendix synthetises the implications stemming from equation  (which adopts value-based measures instead of accounting ones, with the assumption of a tax rate equal to zero). A crucial difference between shareholders and bondholders, from the risk/profit point of view, is that the former can loose their entire investment before the interests of debenture-holders’ are damaged. Conversely, shareholders can collect potentially unlimited returns while creditors have just the chance to get their investment back. Moreover, the overall scenario is even more complex for banks given the fact that their enterprise value increases with leverage. Formally:
The economic and legal innovation at the basis of the capitalist economies, according to which companies are mainly limited liability, that entails shareholders are responsible only for the invested capital, is an ideal scenario for an analysis of the company through the options theory, assuming therefore that in the event of default the shareholders “pass” the company (assets and liabilities) to the creditors. From an analytic point of view, shareholders therefore have a “call option” on company assets. Vice versa, creditors sold to the shareholders a “put option” on the invested capital: from this point of view, they are the real owners of the company.
This approach in itself suggests to reconsider the traditional point of view, according to which, maximising the value of the shareholders is considered to be the concrete solution to CG problems; according to this scheme, the administrators and top management, chosen by the BoD/assembly, have the prime responsibility to maximize the value for the shareholders. This, even though we must recognize that the interests of the shareholders can impose costs on other stakeholders and, in particular, on creditors and ultimately on the company itself because of the existence of conflicts of interests. Literature has highlighted the specifically relevant debt-equity conflicts, in particular those of the debt overhang (Myers,1977) and those of risk shifting (Jensen and Meckling,1976). The assumption of relevant risks can represent a benefit in the short term for the share value, at the expense of the sustainable value of the debt of the same company. These conflicts are, as matter of principle, exalted by the deposits insurance mechanisms and by the “too- big-to-fall” model (Miller,1991 and Masera and Mazzoni,2016).
All this has important implications for the CG: mechanisms and incentives must be created aiming at making sure that BoD and the company’s management pursue risk/return objectives for the creation of sustainable value (Masera and Mazzoni,2006). Compliance and risk management represent essential components to foster a good CG and, namely they have to concur in controlling and avoiding conflicts of interest, particularly between shareholders and creditors.
In conclusion, the conventional wisdom, according to which bondholders are only creditors instead shareholders are the sole owners of the company, must be re-discussed. The company’s cash flows are a primary interest for both: the CG should facilitate the creation of sustainable value and the reconciliation of the potential conflicts of interest between creditors and shareholders within the company itself. These considerations become particularly relevant and mandatory in the current context of bank resolution mechanisms (Figure 4), aiming at favouring the bail-in to overcome the schemes that resorted to the taxpayer in case of default of a large bank.
3. The aforementioned considerations are significant in order to understand the essential purposes and the security system behind the interplay operating between risk and debt capital. An analysis of the regulatory framework – with particular reference to the developments occurring after the 2007/2009 crisis and their inner rationale – provides a clear indication on the reasons why nowadays the traditional legal conception of banking governance standards has been profoundly reshaped.
Before going into the details of the convoluted structure that the EU legislator adopted in recent years, it is though necessary to briefly explore one of the main rationale behind the peculiar essence of the banking governance phenomenon, which is the regulation of financial intermediaries. Financial intermediaries accomplish a peculiar task within the market, and they deeply influence its development through their actions (Visco, 2016c): such a circumstance lays the ground for the banking governance regulation. As a consequence, it is pivotal to investigate the different technical organizations of these entities: law must, in fact, establish a dedicated regulatory framework able to conjugate the “management” and “control” aspects of the financial risk, in order to guarantee a proper organizational framing and to accomplish the stability of financial intermediaries.
Economic literature has widely shown how the interplay between savings and investments, and incomes, rests on the brokerage activity in order to reallocate resources from those entities focused on the accumulation of savings; this activity affects the efficiency of the market, and has been the basis of the constant relationship between productivity and economic growth experienced since the English industrial revolution (Abel and Bernanke, 2005; Sylos Labini, 2005; Ehnts, 2012). Banks are able to influence the market even beyond their entrepreneurial interests – and even beyond the interests of depositors and shareholders – through credit assessment activities and by monitoring firms (Lemma 2013): hence comes the awareness that banks’ activity can impact on the prospects for economic growth of a Country, and the negative interactions stemming from an inadequate activity (Visco, 2016b).
The impact of banks – in accordance with instructions coming from European Union institutions – on markets is the ultimate reason for which public supervisory authorities are appointed to monitor their risk activity in order to guarantee their solvency. The most relevant regulatory acts in this field are the Directive 89/299/EEC, the Directive 89/647/EEC (which has absorbed the contents of 1988 Basel Accord I) and the Directive 89/646/EEC – so called “Second Banking Directive” (that marks the abandonment of the substantive intervention policy of EU institutions on structural bases). Following these regulations, the supervision of the credit system refers to an entrepreneurial benchmark characterized by a prudential corporate governance (Minto, 2012; Ferro-Luzzi, 2004).
Regulating the banking governance shall – in order to properly accomplish an unavoidable supervision activity – shape the banking activity to sound and prudential rules, so as to guarantee the general stability, the efficiency and the competitiveness of the financial system (Mottura, 2009). Financial intermediaries are therefore compelled to comply with those standards that supervisory authorities appoint through their analysis (Goodhart, 2000). Such standards steadily tended to be evaluated through cost-benefit analysis and quantitative impact assessments: these tools are essential to fully evaluate intermediaries’ actual situations and conducts (OECD 2005). These monitoring techniques have been supported – following the recent financial crisis – by macroprudential regulation interventions, regarded «as a new approach… for adopting the more transformative remains open» (Andenas and H-Y Chiu, 2014).
The necessity to implement “optimizing spaces” for the credit system – after being long suggested by economists (Ciocca, 1982, p. 21) – was addressed by the Italian 1995 Consolidate Banking Regulation (Testo Unico Bancario, legislative decree No. 385/1995 as subsequently amended). Art. 5 of the Consolidate Banking Regulation poses the principle of the “sound and prudent management” of financial entities: this principle marks the strict correlation between the patrimonial consistency of banks’ operations and the arrangement of internal governance procedures adequate in order to carry out new financial activities significantly more complex than in the past. The principle of sound and prudent managements preserves a general (we might say, macroeconomic) objective of banking regulation, which is nonetheless addressed by regulating individual entities through an individual (we might say, microeconomic) approach towards a specific market condition. It must be further considered that a strict connection exists between substantive goals and regulatory powers that must be assigned to supervisory authorities: in order to properly accomplish their tasks, authorities must consider the specific characteristics of each entity operating in the banking sector, and evaluate their capacity of implementing sound and prudent management on the basis of the concrete situation addressed.
Therefore, banking activity encompasses both an entrepreneurial attitude – and its inner neutrality towards the market – and the pursuit of public interests; as a consequence, the governance approach to credit institutions should be considered a specific “subsection” within the general enterprise regulation. The overlaps between banking regulation and general enterprise governance are mostly related to their conducts, rather than to their substance (Masera, 2006). This major difference explains the disparity between credit institutions and “traditional” enterprises in terms of applicability of general rules and statutory autonomy, even if both these entities find a common ground in the relationship between the two elements of autonomy and business organization: this two aspects, though, significantly differ in their concrete development in the market, both in terms of organizational decisions and supervisory requirements that must be fulfilled in order to safeguard the public interests behind the financial sector.
On the basis of this consideration, it is clear how the corporate governance of banks is a pivotal requirement to ensure the stability of financial entities, since the criteria that regulate the management and control of credit institutions are strictly connected with the functioning of the credit organizational system, and with the equilibrium of the financial sector as a whole. Such an aim is pursued through the provision of corporate rules aiming at implementing risk-control systems against those conducts that might compromise the objectivity and the impartiality of strategic decisions operated by banks (i.e. which transactions should be operated, how resources should be allocated, which funding should be granted, etc.) as well as endanger the fair evolution of the financial system.
All these aspects lead to one, first, conclusion: the architecture of corporate governance in the credit sector is instrumental to the proper development of banking activity. Such architecture has a deep impact on bank’s business plans and goals (shaping the choices regarding their internal organization) and on the management of current account transactions. The capacity of bank’s administrative and supervision organisms to execute properly the various assignments that the sector regulation identifies as mandatory is essential to create profits and realize the core business of banking firms. As a consequence, the proper management of a bank is the core factor to assess its compliance with the “sound and prudent management” principle, and the benchmark to be verified in order to evaluate its very own reliability and its inclination to continue in the business.
The responsibility of corporate bodies should assure a well-balanced exercise of their duties and powers: their choices must reconcile the profit-seeking purposes with a responsible assumption of the risks implied, and this equilibrium is programmed by way of given management choices (rectius, operational structures). If corporate bodies can accomplish these tasks with success, the banking company will satisfy both private and public interests that constitutes the basis of its real essence.
It is clear that regulating the knowledge of those who are part of banks’ bodies, controlling the information flows and imposing transparency towards stakeholders represent fundamental aspects of the banking sector regulation: the independency of representatives as individuals, and of the bank as institution, is necessary to avoid (sometimes even unaware) conditioning in its operations. Rules must promote a management structure able to guarantee the adequacy of decision-making processes and to avoid a laissez fair approaches. Such a mechanism is necessary considering that the market is not always able to properly use the freedom granted by laws and regulators.
The “sound and prudent management” that characterized the banking sector supervision has been roughly tested by the arising of the 2007 financial crisis: by undermining the general stability of the financial system, the crisis forced the introduction of a regulation able overcome its effects and avoid them to become irreversible (ex multis Venuti, 2009; Montedoro, 2009, and Masera, 2009). As a consequence, European Union institutions promoted the adoption of “high quality” management architectures in order to grant the corporate governance system with a central role, to properly enact the instruments, methods and organizational assets that financial intermediaries must adopt in order to reach an adequate entrepreneurial performance.
4. The normative framework arranged at EU level moves from the abovementioned bedrock in order deal with the criticalities in the banking European system caused by the 2007 crisis and by its development. The provisions gathered in the CRR/CRD IV corpus (Directive 36/2013/UE and Regulation 575/2013/UE) provide – in a strict connection with the creation of the Banking Union that we already investigated in the previous paragraphs – an important insight on the peculiarity of the credit system, while simultaneously strengthening the public control over intermediaries. The CRD/CRD IV highlights how the aim of the European legislator is improving the management of information within corporate bodies in order to determine policies that, on one side, combine profitability and “sound and prudent management” (Capriglione, 2015a) whereas, on the other side, can shape remuneration policies in accordance with risk management strategy and the bank’s long-term development (Venturi, 2010). Also, this intervention should be read in accordance with the law regulating the sanctions system and the administrative procedure regarding their application, which is pivotal in order to overcome the uncertainties related to the efficacy and the dissuasive attitude of the intervention (Council of the European Union, 2010).
Despite fostering the transition towards new “high quality” organizational forms, the overall structure of the new legislation seems to be still tied to the traditional view of corporate governance as a mechanism to primary safeguard the position (rectius: the interest) of shareholders. The main consequence of this approach is that EU interventions do not take into account their impact on the shareholding structures as they currently are in the financial structure of banks.
A significant aspect is also the fact that the introduction of crisis management mechanisms for banks involves – in terms of corporate liability – subjects other than the shareholders, traditional owners of the capital risk.
In particular, this happens in those crisis management procedures where the aim of preventing hazardous conducts by banking authorities (as well as the concern to protect taxpayers from the economic burdens arising from these operations) led the legislator to increase capital ratios and implement bail-in rules in order to include bonds and other credits – except for deposits within a determined amount, that are granted with specific guarantees – in the resolution procedure.
In this context, the State aid regulation also plays a significant role: since economic aids coming from Member States are held adequate to distort competition in the unique-market (Gebsky, 2009; Tesauro, 2012; Argentati, 2015), in the past the European Commission forbid any kind of aids for banking institutions «even without excluding, as a matter of principle, a specific derogation…in the case of a systemic crisis» of the credit sector (Liberati, 2014).
More in particular it has to be underlined that such a choice was consistent with the idea that every reallocation of resources amongst sectors and enterprises should be considered as a potential alteration of market equilibrium, therefore conflicting with the rules stated by Treaties of the European Union.
It must be observed, in particular, that the introduction of a general bail in principle for bonds – without distinguishing on the base of the size of the issuing bank, or by the characteristics of the financing scheme – has a significant impact on the general criteria of Italian corporate law, that recognises a significant role of the shareholders in the definition of banking’s strategies as well as in the identification of those who must be held responsible for the corporate management.
The relation between shareholders’ equity and their role in the banking governance seems to be ultimately overturned: the new EU regulation for the banks’ crisis resolution affects credit institutions in which a part of the members is responsible for the management of the entity besides the board of directors. These members have a significant interest in assessing the profits arising from a proper balance between risks and returns: therefore, assigning them the accomplishment of this activity – that was traditionally conducted by shareholders – seems to guarantee a consistent awareness to company risk.
The roots on which bank governance is built up need to be re-shaped in order to enhance the aspect of the congruence between risk and liability, which characterizes the essence of such roots. The recent Italian experience recognizes to this law & economics background by means of the introduction of the bail in mechanism, that modified the way to cope with banks’ crisis and enlarged the number of subjects that should take responsibility in the occurrence of such events. Going more in details, the implementation of the so-called MREL (Minimum Requirement for Own Funds and Eligible Liabilities) provided by Art. 45 of the Directive 59/2014/EU and Art. 12 of Regulation 806/2014/EU – which was adopted in Italy through Art. 50, par. 1, of legislative decree No. 180/2015 – by imposing to the banks to maintain «on individual and consolidated base, a minimum amount of liabilities that can be susceptible to bail in», subsequently reduces the application of the bail-in mechanism to credit (included within the 8% general range of liabilities) whose characteristics are specified by the Bank of Italy, as provided by the Art. 50, par. 6 of the legislative decree No. 180. Such a choice allows the Bank of Italy to delineate an ex ante “bail-in zone” from which bank deposits will be excluded, while non-guaranteed bonds will certainly not.
This stems from the obligation to respect – in the application of the bail-in – the principle of proportionality as a fundamental parameter in the regulation of the European financial sector. The principle of proportionality, in fact, operates not only as a guide-rule for the general process of normative harmonization, but also as a mandatory rule imposing that any law should be applied «following process that, one hand, minimize the costs related to the compliance to EU law and, on the other hand, can orientate the financial intermediaries’ activity towards the aims of the related normative» (Troiano, 2015). As a consequence, this principle must be further specified into the constant pursuit of a behavioural conformity amongst market operators, that stands as the basis for a fair competition amongst peers in a market free from disparities (Montedoro, 2015). Therefore, the bail-in’s effect (to convert credits in liabilities) could be rationalized only moving from the fact that any intervention from the public administration using its discretional powers should be limited to cases of strict necessity (as it is clearly stated at point 102 of the European Court judgment of July 19th, 2016, that we will examine hereafter), that is in proportion to the banks’ losses. In other words, it must be ascertained that – in any hypothesis of bail-in – the result achieved would be the same that would have been reached through liquidation procedures: the bail-in must be, though, a neutral intervention.
The very same logic behind the bail-in procedures can be found in the EU law on State aids: within this regulatory framework, of particular interest is the analysis of the provisions on the so-called burden sharing, which is a rule of solidarity between shareholders and other subordinated creditors. In fact, these rules impose that shareholders, “hybrid capital security” holders and bondholders to «contribute in reducing the lack of capital al much as possible» (European Commission, 2013 b) in order to justify interventions in support of subjects (i.e. banks) in need for capital. Even if this “sharing obligations” criterion is definitely compliant to EU law – also considering the fact that it aims at hindering conducts based on moral hazard that could have a significant impact on the community – it is clear that such a provision has the concrete effect of assimilating bank’s creditors with risk capital owners.
The European Commission, in the above mentioned Communication dated August 1st, 2013, identified the equalization as one of the different financial instruments that concur to the formation of banks’ capital; this consideration supported the choice of associating – in terms of effect of the “sharing” – shareholders and others subordinated creditors in case of interventions based on banks’ financial difficulties. On this aspect it must be observed that shares should definitely be considered primary in terms of exigency of capital replenishment, whereas the same conclusion cannot be applied to “subordinated loan”, even if the regulation of the banking sector classifies them as those patrimonial elements that should be required to assess the capital adequacy in compliance with the provisions of Basel III (and, then, to the technical standards it fosters).
On the other hand, subordinated loans – despite being part of an innovative view of financial techniques, that refuse their traditional interpretation as values tied to business risk – must be kept separated from those assets that are qualified as “share capital”. Those who own subordinated loans are not able, in fact, to exert an influence on the banks’ choices and operations: as a consequence, their participation should be considered in the calculation of the credit entity’s asset only partially, as it similarly happens to hybrid financial instruments (which cannot be qualified as share capital) on the basis of different reimbursement order of funding sources (Capriglione 2007).
Finally, in the above mentioned context, furthers element to be kept into consideration throughout this analysis come from the innovations brought into the Italian system by the creation of the Banking Union and, in particular, by the “Single Supervisory Mechanism” implemented at the end of 2013. This new regulatory framework seems to be less appropriate to the utilization of informal moral suasion techniques, since its major “distance” from the supervised entities makes the resort to these instruments more difficult than before (Capriglione, 2015b). Moral suasion approaches are inefficient because, in the context of the new multilevel architecture of the banking sector, the participation of many different actors in the regulation – apart from requiring a significant effort in the development of instrument to coordinate these entities – is a considerable hinder to their provisions’ authority and persuasiveness.
5. The possibility, contemplated by the European legal framework, to include the bond-holders among those who are required to make up for the losses of the businesses, through a so called mechanism of “internal” share of the losses, sparks off an innovation within the systemic set-up of the banking undertaking. This novelty, as far as the Italian scenario is concerned, encourages to mull over some aspects of a regulatory nature concerned with that legal system that may ultimately affect the consistency of the legislative amendments more recently introduced by the EU legislation. Yet, also the CG principles enunciated by the Basel Committee on Banking Supervision in as early as July 2015, highlight the priority of the protection of the debt-holders’ interests, as opposite to that of the equity-holders, particularly in respect of the retail banks, as such introducing the principle of proportionality in several occasions neglected (EBA Banking Stakeholder Group, 2014; Alessandrini et al., 2016; Montedoro, 2016; Masera, 2016). Ultimately, these principles mark a significant progress in the logic of the “inter-company relationships”.
It is clear that, while the above-mentioned legislative trend, by interacting with the traditional role played by the shareholders, gives rise to a sort of «structural misalignment…between the interest…of the shareholders…and the interest…of the depositors and of the creditors in general» (Lamandini, 2015). Thus, there is a decrease in the hiatus existing between the rights pertaining to the holders of the risk-capital (equity) and the those vested with mere claims vis-a-vis the bank (i.e. creditors); accordingly, there is a change in the traditional relationship between ownership, management and control which, as per the demarcation line originally drawn by Berle and Means (1932), has traditionally characterised the topic of the corporate control. In light of this, a revision of such principles on which the theory of the banking entity business has lain for a long time is required. This theory has been analysed as regards the aspects of the «ownership rights» on the capital, as a pre-requisite to have access to the governance; theory in which the market dynamic, the business organization and the principle of authority end up being mingled with each other according to multifarious modalities in search for an optimal structure, characterized by financial balance (Jensen and Meckling, 1976; Stiglitz, 1992) and fair connection between power and responsibility (Williamson, 2000).
Having said that, while in the past the highlight of the importance of the human capital and its access to the business reality as origin of a power and, therefore, the start of its exercise in an authoritative way had marked a notable opportunity to critically reassess the matter under discussion (Rajan e Zingales, 1998), what nowadays is at stake is the need for redefining the internal balance within the corporate governance of banks, in light of the legal changed made to the relevant regulation. In other words, it is essential to reassess the impact of the previous legislation which at the present has become inadequate if the current mechanisms of organisation and functioning of the banking business were kept unchanged. Upon a further analysis, these mechanisms have become all in a sudden obsolete, for the reason that, as a result of the new resolution plan, it is, to say the least, anachronistic the legal framework which vests exclusively the shareholders of banking institutions the exercise of the authoritative power that identifies the essence of the corporate governance. And yet, as previously underlined, nowadays among those who are deemed responsible for the negative consequences of possible crises and/or mismanagement, there are also individuals and/or bodies which are different from those who have appointed the management and the supervisory bodies of banks which have become insolvent. Therefore it can be said that there is a substantial identification between the two categories of both shareholders and debtholders. On their turn, these categories result in partaking in business activities with modalities which are not different, as promptly emphasised by the financial media who highlight: «many bank bondholders will find their investment is at substantial risk – of conversion to equity, or of a “haircut” to its value, or of having its interest coupons eliminated» (Jenkins, 2016).
Therefore, a scenario is emerging where the start of the new kind of banking institution is kicking off. Within this, the coherent application of criteria of rationality – both economic and legal – prompts the introduction of opportune changes to the traditional model of “corporate governance” hinged exclusively upon its linkage with the “capital” (that marks the lines – both legal and economic – of the business entities under discussion and, therefore, the interrelated system of rights). Hence, the need, duly put forward by scholars, of a specific legislative intervention aimed at rebalance the risk-responsibility relationship within the regulation of the banking corporate governance; unequivocal signs of this phenomenon are, on the one hand, the expected introduction in subiecta materia of the «special prerogatives… provided by Art. 2351, last paragraph of the Italian Civil Code (appointment of a member of the board of directors and a statutory auditor) in favour of creditors» and, on the other hand, the clear recognition of the role of the guarantee funds (fondi di garanzia) in view of granting the latter the right to «appoint a member of the management body and/or the supervisory one» (Lamandini, 2015).
In such a logic order that, similarly to what just highlighted, is aimed at taking into account the main role played by the bond-holders within the business organization, emphasis can be placed on recent studies, carried out in the USA, where a revision of the corporate governance model is put forward in order to recognize to this category of stakeholders an adequate and relevant position, consistent with their specific function (Schwarcz, 2016). More in detail, the analysis under discussion is based on a linkage between bond-holders and corporate governance, as regards the risk-aversion which informs their operational choices; hence, the originality of the action of such category which translated itself not only in the cost-reduction but also in the effective reduction of the systemic risk.
It is clear how such a re-cogitation of the corporate governance model is not ascribable to the motivations that have been represented above, with specific regards to the possible impact of the crisis on different categories from the shareholders; however, it cannot be denied that, as a result of such an investigation, the traditional link between ownership and power in the management of the business is certainly overcome. It is worth briefly recollecting that, as from 2014, the Bank of Italy has taken on board the market operators’ requests which claimed a stronger autonomy and independence of the management body by given the possibility to such body «for purposes of both the appointment and co-optation of directors…to previously identify its own optimal composition in connection with the identified objectives» by proposing the candidates’ professional profile; proposal that shareholders can decline only with justified reasons (Banca d’Italia, 2014). This has justified the view that there is a new set-up of the interests which lead the corporate governance of banks (Sacco Ginevri, 2016), since the breakup in the traditional vision, indeed static, of the relationship between rights and obligations, which so far has inspired the Preferred Shareholder Model.
Therefore, it can be affirmed that, for multifarious reasons – ascribable either to a more balanced interaction between risk and responsibility (as can be inferred by the EU legislation) and to the promotion of the medium-term business performance by reducing the volatility through new balances of operational forms (as the transalpine studies seems to outline) – times are ripe for the implementation of a legislative and regulatory change in the matter under discussion, in order to align the legislative framework to the facts, the law to the evolution of the history.
6. An indirect confirm of the conclusions previously reached is offered by the precise orientations rendered by the domestic and European Court of Justice’s case law, which includes evaluations that – joined with the recent special regulations – univocally converge on the idea of a substantial equivalence between the position of shareholders and subordinated bondholders.
Regarding the orientation of the domestic case law, the reflections expressed by the Court (Tribunale) of Arezzo in the decision dated February 11th, 2016 – related to a trial that followed the activation of the resolution procedure towards the «four banks» (CariFerrara, Banca Parma, Popolare dell’Etruria and CariChieti), submitted to the measures adopted by the Bank of Italy for the distressed financial situation they were facing –through which BPEL has been declared insolvent (Rossano, 2016, p. 73 et seq.).
The Court, in analyzing the application of the resolution program – that, amongst other measures, envisaged the integral reduction of the reserves, the share capital and the subordinated bonds contained in the own funds of the relevant institutes – after having stressed the «complete harmony» between the Italian legislation (legislative decree No. 180 and No. 181 of 2015) and the European directive regarding the banking crisis (Directive 2014/59/UE), examined the positions of the different category of creditors (shareholders and subordinated bondholders), coming to conclusions extremely relevant for a precise clarification of the subject matter we are examining. Specific reference is made to the statement according to which «the position of the shareholders and the subordinated bondholders (…) appears substantially uniform, as they both participate, even if in different ways, to the risk capital»; this specification does not raise any doubt on how the legislative and regulatory innovations must be read, innovations that, in practical terms, allow to consider overcome the distinction of roles (and, thus, the differences in terms of risks’ consequences) of the participants to the (debt and equity) capital (that address towards unitary configuration).
We will not analyze herein the effectiveness of the reasons upon which the competent authority, according to its discretionary power, adopted specific measures in an economic situation clearly not appropriate to guarantee the respect of the prudential requirements mandatory for the continuity of the business activity. What has to be underlined is, instead, the recognition, by the Court, of a necessary assimilation between shareholders and debtholders in the assumption of the management risks and, therefore, in the loss sharing arising from mala gestio.
As anticipated, also the European case law takes into account the systemic change deriving from the new banking crisis regulation. Reference is made, in particular, to the decision of the European Court of Justice dated July 19th, 2016 regarding the lawfulness of the burden sharing measures. In this decision the Court, dealing with the issue of the burden sharing, accedes to an interpretation of the bail-in procedure in which, while recognizing the complete legitimacy of such procedure, regarding the issue of the State aid specifies that it is still possible to allow (even if only in specific cases) deviations from the ban imposed by the European legislation.
More in particular, is cleared that the «specific exceptional circumstances», provided for by the current legislation, have to be read in light of the well-known criteria of «equal treatment» and «protection of legitimate expectations». In this regard, points 41, 43 and 44 of the mentioned EU Commission Communication dated August 1st, 2013 are recalled, specifying that «the granting of a State aid implies, primarily, that the losses are absorbed through the share capital and then, in principle, a contribution from the subordinated creditors»; this criteria can be waived, in accordance with «point 45», if the aforementioned contribution could «damage the financial stability» of the bank or could lead to «disproportionate results». It is clear that putting into correlation the system of the aids with the aim of «fixing the financial turmoil that affects the economy of a Member State», leads to recognize to the Commission the discretional power to define the criteria according to which evaluate the compatibility, with the internal market, of the measures adopted by the Member States, limiting – with the communication of its decisions – the perimeter of the intervention faculty.
The attention dedicated by the Court to the «burden sharing measures» – from which it is possible to deduce some space for a flexible interpretation of the exceptional circumstances provided for by the relevant legal framework – takes certainly into account the substantially equal position that the new banking regulation recognizes to shareholders and to subordinated creditors of the those banking institutions interested in a waiver. In this regard, it is crucial the excerpt of the decision where it is specified that, according to the above mentioned Communication of 2013, «the principle according to which no creditor can be left disadvantaged should be respected»; thus «subordinated creditors should therefore not receive less, in economic terms, than what their instrument would have been worth if no State aid were to be granted» (point 77). This is an unequivocal reference to the well-known «no creditors worse off» principle (aimed at containing the losses of any creditor within the limits provided for by the cases of the “administrative compulsory liquidation”) from which derives the conclusion adopted by the Court, according to which «the burden-sharing measures on which the grant of State aid in favor of a bank showing a shortfall is dependent cannot cause any detriment to the right to property of subordinated creditors that those creditors would not have suffered within insolvency proceedings that followed such aid not being granted» (point 78).
There is no doubt that this conclusion, reaffirming the limits of the «burden sharing» in order not to cause any detriment to the rights of the subordinated creditors, shows an implicit acknowledgment of the modification of the legal position of such creditors. The preliminary elements of a legal framework not compliant with the “risk /responsibility” criteria can be identified, criteria that must distinguish the participation to the corporate structure. Hence, an indirect confirmation of the necessity, arisen in this work, to reconsider the special legal framework applicable to the examined matter.
Lastly, also the recent decision of the European Court of Justice dated November 8th, 2016, in which the application for annulment of an injunction of capital increase requested by the Irish Ministry of Finance has been rejected, seems to be oriented in identifying a substantial change in the traditional position of the banks’ shareholders. This decision was taken because the Court, in light of the systemic stability, choose the option of a capital increase, thus reducing the right of the shareholders to autonomously adopt management decisions. It is clear, therefore, that, at a time of emergency, an authoritative intervention reversing the traditional powers of the banks’ ownership structure can be justified. This decision is in line with the scholars’ orientation that, in the aftermath of the 2007/2009 crisis, represented the complexity – in the “banking resolution regime” – of a balance between prudential regulation and shareholders’ rights (Alexander, 2009).
7. Both creditors and shareholders benefit from the distribution of the company cash flows and from the company’s well-being. Nevertheless, as consequence of the different results’ partition, risk appetite and risk tolerance of the two groups of investors are completely different. The contrasts and the conflicts of interests are intensified during periods of financial stress. The shareholder and the manager appointed by the latter are insiders that might try to coerce the risks profile, privileging short-term returns, even if this could threaten the business continuity. On the other hand, the debtholder’s principal aim is not to undermine the company’s equity structure and not to coerce the expected returns.
The company’s optional model offers an interpretation of the shareholders and debtholders completely different from the traditional one. More in particular, it reverses the conventional wisdom that assigns to the first the role of owners and to the second the one of creditors stakeholders. In case of debt financing, the shareholders “offer the company” to the debtholders. The shares can be considered as a call option with an exercise price equal to the debt nominal value, written on the value of the company’s assets. According to this interpretation, it can be affirmed, if anything, that the debtholders are the “owners” of the company that have moreover offered to the shareholders a buy-back option. In light of these reflections, it is still appropriate to reconsider the traditional corporate governance models which assign a main role to the shareholder. OECD principles states that «the corporate governance framework should protect and facilitate the exercise of shareholders’ rights» (OECD, 1999 and 2015).
The above mentioned reflections become even more pertinent for a bank, as a consequence of its special characteristics and particularly as a result of the legislative changes – extensively analyzed in this work – designed to regulate banks’ resolutions that assign peculiar obligations and duties to the subordinated bondholders. The new recommendations on the banks’ corporate governance concerning the role of the shareholders and the creditors recently elaborated by the BCBS are more articulate and well-balanced (2015).
It is not easy to draw conclusions on the on-going legal and economical processes previously analyzed. It is still possible, though, to take the cue from the hypothesis here described, in light of the special legislation’s evolution and the case-law interpretation.
In the current context of structural and functional developments inspired by the recent crisis, the change deeply interested not only the organization of financial intermediaries, but also the logic behind the banking governance model. On the contrary, the new paradigm that distinguishes the latter – in conferring a peculiar importance to the identification of the criteria suitable to obtain optimal management’s results – does not take into account the substantial equalization between shareholders and subordinated debtholders, now responsible for hypotheses of mala gestio of the former without a distinction of obligations. Reasons of fairness – in addition to a necessary consistency with a proper interpretation of the power/duty relationship, which is a characteristic of the corporate relationships – impose a regulatory reinterpretation of the here examined matter, in order to create an effective balance (currently not present) between the parties of the banking system.
If the evaluations developed in this work are correct, it is necessary to carefully examine how to actually intervene in order to support a different incentive and check and balance internal system. These developments require analysis and researches that have not been herein expanded upon, but that are consistent with the principle that it is clearly establishing, according to which banks’ shareholders meeting and board of directors must promote a sustainable success that is beneficial to all the stakeholders.
Obviously, it will be necessary – also through eventual modifications of the bail-in regulation – to search for the possibility of giving room to the debtholder in managing the company; hence, the complex set of problems that will be dealt by the regulator in relation to the identification of the contents of the legislative intervention to adopt and to the choice of the technical forms suitable to accomplish the predetermined aim. This with the evident risk of creating some confusion in the roles and responsibilities (in case of a co-management between shareholders and debtholders). In this regard, it has to be considered that in Italy also the 1942 civil code envisaged an involvement of the debtholders, granting to the debtholders meeting the authority to resolve upon decisions that could affect their respective rights.
Appendix – The option theory approach for stocks’ valuation
The origins of the financial models must be found in the article by Black and Scholes (1973) on the pricing of options, as well as in two papers by Merton (1973, 1974) on option pricing and on the risk structure of the interest rates (Duffie, 1997). The novelty of the approach was described as follows by Black and Scholes:
«It is not generally realized that corporate liabilities other than warrants may be viewed as options. Consider, for example, a company that has common stock and bonds outstanding and whose only asset is shares of common stock of a second company. Suppose that the bonds are “pure discount bonds” with no coupon , giving the holder the right to a fix sum of money, if the corporation can pay it, with a maturity of 10 years. Suppose that the bonds contain no restrictions on the company except a restriction that the company cannot pay any dividends until after the bonds are paid off. Finally, suppose that the company plans to sell all the stock it holds at the end of 10 years, pay off the bond holders if possible, and pay any remaining money to the stockholders as a liquidating dividend.
Under these conditions, it is clear that the stockholders have the equivalent of an option on their company’s assets. In effect, the bond holders own the company’s assets, but they have given an option to the stockholders to buy the assets back. The value of the common stock at the end of 10 years will be the value of the company’s assets minus the face value of the bonds, or zero, whichever is greater».
In other words, the equity of a limited liability corporation is equivalent to an option on the total asset value of the firm. The enterprise value can be measured by the price at which total liabilities can be bought in the market. A simple graphic presentation is offered in Fig. a.1 below.
Fig. A.1 –Stocks and Bonds: graphic illustration
The enterprise value (VT) is given by the sum of the values of stocks (ET) and bonds (BT).
The value of a bond (BT) is equal to the difference between the values of a risk-free bond (BT*) and a put (PT).
The value of a stock (ET) is equal to the difference between the value of a forward (FT*) and a put (PT).
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 The three authorities began their activities on the 1st January 2010. They are called EBA(European Banking Authority); ESMA (European Securities and Market Authority) and EIOPA (European Insurance and Occupational Pensions Authority).
 It is worth noting that many big international banks – which are the main operators in the derivatives market and particularly in CDSs -have constantly operated to game the rules of the Basel Standards. The CDS market allows to short credit and to shift risk buckets in order to minimize the regulatory capital (see for instance Slovik, 2012).
 Hence the excesses of finance are at the roots of the great recession which began in 2008,with huge losses of growth and jobs, and with grave destruction of human capital, in particular the loss of opportunities for the youth, who risk being excluded for a long time from the world of employment. The inter-action between illicit activity and the financial crisis is illustrated in an exhaustive and coherent manner by the National Commission to examine the financial crisis in the United States (The Angelides Report). On the role of finance in determining the great crisis, see Masera (2009,2010). It is worth mentioning that the crisis of the 30’s was also caused by illicit and illegal financial activities and the big American banks. In this respect, we must refer to the work of the Pecora Commission, instituted by the American Senate, and conducted by a great italo-american, forgotten by our country, Ferdinando Pecora. See United States Committee on Banking and Currency Stock Exchange Practices (1934).
 On this point refer to Masera (2014,2013,2010) and Guida and Masera (2015).
 See, for instance, Alessandri and Panetta (2015) and Masera (2016).
 For a large review of those arguments that have been proposed in the literature up to now, allow me to relate to Masera (2012), de Larosière (2013), Bassanini (2016).
 See, for instance, Yellen (2014, 2015), Masera and Guida (2015) and Masera (2016).
 In US, firms were allowed to recognize voting rights to debt-holders too, subject to the agreement of the State the firm was incorporated in.
 Cfr. the second consultation of the Italian Banca d’Italia (2010) on “Banking risk administration and management of conflicts of interests towards related parties”, p. 6.
 Cfr. Basel Committe on Banking Supervision (2015), Introduction, §2.
 See ruling 19th July 2016, regarding the case C-526/14 Kotnik and others, viewable on http://curia.europa.eu/juris/document.
 See case C-41/15, regarding the request to the Court from the High Court (Supreme Court, Ireland), with decision of the December 2nd, 2014, of a preliminary ruling, in accordance with art. 267 TFEU.
Francesco Capriglione is Dean of the Law School, Università degli Studi Guglielmo Marconi, Roma. E-mail: email@example.com.
Rainer Masera is Dean of the Business School, Università degli Studi Guglielmo Marconi, Roma. E-mail: firstname.lastname@example.org.
The Authors are grateful to Emilio Barone, Giancarlo Mazzoni, Giancarlo Montedoro, Antonella Pisano, Marco Sepe and two referees for their insightful comments and suggestions. The arguments developed and remaining mistakes are the exclusive responsibility of the Authors.
Paragraphs 1 and 2 and Appendix 1 are written by Prof. Rainer S. Masera; paragraphs 3, 4, 5 and 6 are written by Prof. Francesco Capriglione; paragraph 7 is written jointly by the Authors.
JEL classification numbers: G01, G2, G3, G32, G39
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