Innovation in Banking: The Impact of Strengthened Prudential Supervision

By Mads Andenas* and Valerio Lemma** 

ABSTRACT: This paper explores the role of strengthened prudential supervision in shaping sustainable innovation within the banking sector. By analyzing EU regulations and international standards, the paper focuses on integrating technology and managing ESG risks in banking. It also assesses the implications of emerging tools like algorithms and self-executing technologies on banking governance and stability.

It argues that regulatory interventions must align financial growth with ecological and social responsibility, ensuring long-term stability. It considers also the rise of fintech, emphasizing the need for robust regulatory oversight to balance innovation with financial stability and ecological sustainability. It highlights the challenges posed by non-traditional banking intermediaries and explores the potential impact of digital finance on financial inclusion and inequality, As globalization, digitalization, and financialization transform markets, current regulatory frameworks fall short, necessitating new approaches to safeguard individual rights and promote systemic resilience.

SUMMARY: 1. Introduction. – 2. Regulating Sustainable Banking in an Innovation-Friendly Environment. – 3. Core Elements of Sustainable Innovation in the Banking Industry. – 4. Same Activities, Same Risk, Same Rules, and Same Supervision. 5. Towards the Accountability of Innovation.

1. Financial market research needs to explore how innovation and banking can promote sustainable growth. [1]  The aim is not to refute the theses about the freedom of developing banking,[2] but to bring them back to unity in the reference to a new individual right and a new prohibition: the right to live in a healthy environment and, at the same time, the prohibition to engage in economic activities that are at odds with the ecological balance. [3]

And indeed, it seems useful to consider that the ability to innovate has a strong impact on capital markets,[4] at a time when the current regulatory framework has not come close to guaranteeing the sustainability of economic activities,[5] but tends to regulate a period of interregnum: one of those moments in history when the old ways of doing things no longer work, the rules of the past are no longer adequate to the current market structure, but rules that are more appropriate to achieve balances useful for healthy civil coexistence have not yet been thought out, written and implemented.

In fact, the stability of the system and the protection of individual rights cannot be based only on the current elements of soft law (published by international bodies), planning for future public intervention (carried out by joint regulators), and supervisory practice (of national bodies).[6]

What seems necessary is disciplinary action that can limit the private autonomy so that, in a competitive and regulated market, actions can be directed toward sustainability, risks controlled under safe assumptions and positive externalities expected in the near future. It goes without saying that this corroborates a number of convergences of the considerations made on climate, energy and finance in a way that they can consolidate the binomials ecology and product, welfare and profit, ethics and finance. [7]

2. Banking industry has extensive and outstanding evidence in the possibility of applying innovation and sustainability in connection with a very broad range of financing transactions, including acquisition and leveraged finance, structured finance, real estate finance, general corporate lending and refinancing.[8]

And this possibility leads to the alternative of enacting a preventive regulation that gives directions for increasing the common welfare.[9] In this respect, the positioning of the current analysis refers to the identification of ‘new market failures’ due to the commixture of globalization, financialization and digitalization, evaluating the forthcoming regulation on sustainability.

This is relevant with respect to the state of the art of the legal and economic studies, which converge in identifying the emersion of new needs of safety for regulating the innovation of finance.[10] It is clear that policymakers are becoming aware that new networks cross all jurisdictions, new dynamics move capital and new devices support business and affairs. Hence, new directions arise for both regulators and supervisors in order to improve market functioning, ensuring the smooth circulation of capital, the financial stability and the protection of individual rights. And this goes further beyond the mere prudential regulation of banking.[11]

It is worth recalling the pieces of soft law and proposal for a regulation that are driving the debate on the public intervention over the financial sector in order to increase its digital operational resilience (EC proposal of 24.9.2020), to create a market in crypto-assets (EC proposal of 24.9.2020), to establish a market infrastructures based on distributed ledger technology (EC proposal of 24.9.2020). These proposals are part of a package of measures to further enable and support the potential of digital finance in terms of innovation and competition while mitigating the risks, aiming at enabling EU-wide interoperable digital identities in finance, promoting business-to-business data sharing in the EU financial sector and beyond, mitigating risks of digital transformation (by strict and common rules on digital operational resilience) and implementing a clear and comprehensive EU rules for cryto-assets.[12]

It comes into consideration the high-level recommendations of FSB on Regulation, Supervision and Oversight of this phenomenon and, in particular, the one on the global stable coin arrangements (13 October 2020), on the outsourcing and Third-Party Relationships (9 November 2020). In this respect, the FSB has also hold a position (12 October 2020) about the role of ‘bigtech firms’ in finance in emerging countries and developing economies, with respect to the possible market developments and financial stability implications of the new operational solutions introduced by the latest technologies. [13]

This follows both the FSB analysis (14 February 2019) on the market developments and potential financial stability implications due to fintech and market structure changes, and the FSB Global monitoring report on non-bank financial intermediation 2019 (19 January 2020) has collected information from its participating jurisdictions, identifying specific innovations that are influencing functioning of the markets for capital and financial services.[14] Indeed, the scope of certain previous researches (on the shadow banking system and the fintech) moved from the relation between deregulation and financial innovations in order to point out the financial issues of today and tomorrows, due to the radical changes in people’s habits and firms’ activities.

The outcome of these researches have highlighted extremely structured and complex financial instruments, which require new forms of regulation and supervision.[15] If, at first, all this may have fostered the development of the economy, it has also encouraged reckless behaviour, unsound management and speculation; and this comes at the risk of the reliability of trade, the stability of the entire financial sector and, as a result of the contagion, the growth of the entire economic system.

All in all, the need for controlling this risk leads to a regulation that is able to consider also the sustainability of banking and its support to the real economy, taking into account the externalities that have an impact on the environment.[16]

Therefore, this research would exploit the possibility to identify the regulatory interventions that shall arise from the directions of policymakers and from the effects of the use of technology.[17] This leads to the understanding of the foundations for improving the regulation of banking and finance. Indeed, the investigation has been twofold: on the one hand, the examination of the activities that exploit technology and, on the other hand, the management of ecological risks.

In this respect it comes into consideration the European Central Bank’s “Guide to assessments of fintech credit institution licence applications”, which follows a comprehensive approach to the business of banking (including the business model in which the production and delivery of banking products and services are based on technology-enabled innovation).[18] However, this approach does not yet include the computation of the externalities, and this limits the actual possibility to affect the ecological footprint of the fintech bank since the starting of the operations.[19]

It is worthing starting from the assumption that digitalization shall not be for banking what internet has been for information. Whether the question refers to the possible removal of a specialized intermediary, then the political doubt is whether this removal implies freeing, democratizing, equalizing. Today, the public supervision over banks refers to the policymakers’ responsibility for inclusive and welfare-oriented financial system that support the overcoming of obstacles that, de facto, prevent equality between people.

Will an acceleration towards non-banking intermediaries let every client achieve true financial freedom and inclusion or rather let everyone left alone in challenging his/her obstacles?

3. All the above served to the EU institutions to point out the core elements of fintech as a concept that refers to “new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services” (as FSB stated in 2019 in “Monitoring of FinTech”). [20]

It is worth recalling that the link between finance and technology began many years before the rise of home banking, and certain experiences have been strictly regulated already in the twentieth century (i.e. the Electronic Money Institutions).[21] However, the aforementioned institutions considered the evolution of such a link towards an individualized, privatized, uncertain, flexible reality vulnerable to risks, in which a previously unexperienced freedom let the market participants to develop for new business models able to manage an increasing and shapeless set of relationships. Thus, the results of the analysis of the FSB (and the ones of other international organizations mentioned above) represent a concrete starting point, but they require further investigations for identifying the implications of innovation for both financial stability and individual rights.[22]

Hence, the need for developing this analysis having regard to the experience gained during the crisis of 2007. Indeed, this paragraph takes into account the understanding concerning the lack of transparency and resilience, as well as the regulatory arbitrages and other degenerative elements of an advanced capitalism, while investigating its weakens. In this respect, the project will consider the empirical data on the growth of the alternatives to traditional banking in order to verify if there is any form of correlation between the changing in the prudential regulation and the development of the market structure, even considering the data concerning two kind of relationships: the bilateral one (based on the contracts between intermediaries and clients) and multilateral (based on the access to platforms).[23]

Latest innovation in banking and finance goes beyond the criterion of the maximization of the social welfare and the policy makers are looking for new principles referred to the long-term sustainability of business and affairs. In this respect, the regulation of the market shall follow a clear statement on ethics, as the general ecologist theories of the twentieth century have been consolidated into a moral imperative: reducing the increase in global warming.[24]

Thus, a new economic analysis of the rising regulation would be the foundation for operating in compliance with the new order adopted by European and domestic authorities.[25]

Concluding on this point, it should be pointed out that any wave of innovation seems to be related to both the technical developments (and their effects on the wired society) and the economic conditions of conducting business (in terms of positive and negative externalities, as well as social impact and influences).

4. All in all, it is clear the need for verifying the concrete application of the general principle “same activities, same risk, same rules and same supervision” and how this application may influence the banking industry.[26]

According to the above, the analysis of the regulation will include the legal and economic analysis of the costs for protection, moving from the evidence of previous research that had explained the limited scope of supervision on traditional banking and finance. However, it does refer to any justification for the lack of transparency, the information asymmetries and – more generally – the absence of a system of data management or sup-tech (i.e. self-executing tools for controlling the information and communication system of the supervised firms). On the contrary, considering the recent turbulences, the effects of the anti-crisis measure, and the proposal of regulation of international authorities, it refers to the understanding whether and how the algorithms and other self-executing tools provided by unsupervised third parties can be regulated in order to satisfy with respect to their transparency and surety.

Whether interim conclusions warn that the EU has separated the power (i.e. the ability to act) from the politics (i.e. the ability to decide how and when to act), the following research shall aim at looking for solving the doubts concerning what ‘to do’ are those concerning the identification of the subjects responsible for the decision, the regulation and the supervision. Hence, the two terms of the regulatory problem are freedom and sustainability, both functional to integration and well-being. These terms appear more than a dichotomy, a couple linked to the idea that the limitation of freedom to ensure social welfare is not an opponent, but an effect of the same freedom: the democratic character of the growth to ensure an inclusive effect (FSB, 2019).

Now, we aim to explore what might unfold if rule-makers sought to discover new ways of collaborating. If the rejection of this possibility remains the primary obstacle to the success of regulators and policymakers, the identification of new regulatory solutions does not necessarily imply their automatic adoption (FSB, 2020). Indeed, this discovery marks not the conclusion, but the beginning of public intervention. Technological developments have made it clear that there are now two distinct approaches to regulating the use of technology in financial markets: one that embraces innovation and sustainability, and one that remains neutral. Taking a neutral stance between technology and the market is a futile attempt to overlook the programmers’ preference for having an impact on human actions, whether individual or collective, a stance that only serves to abdicate the responsibility of choice that every other supervised entity faces daily.[27]

It is worth ultimately assessing whether regulatory interventions can address the growing demand for transparency and protection in the face of tech-driven innovations, while simultaneously fostering the development of finance and promoting sustainability.[28] It is essential to prevent malicious actions without stifling progress. As already anticipated, the European Union’s current initiatives reflect this approach by regulating traditional banking, with evidence demonstrating an enhanced commitment to establishing a new oversight system designed to prevent crises before they can disrupt the markets in which financial institutions operate, as well as to promote long-term sustainability and resilience within the financial system.

5. In assessing the sustainability of the technological development that is affecting banking, it is worth focusing on its governance, as the management is looking for an adequate organizational formula of the credit activity, as the current structural design is based on a top management made up of corporate bodies with tasks of strategic direction, management and control, followed by a clear separation between executive and audit functions.[29]

And, sharing this starting point, one can address the development of corporate banking governance in the ‘Age of Algorithms’ as the recipient of technological grafts that can produce radical transformations in the way an enterprise that collects savings, disburses credit and carries out the other activities reserved for it under the control of prudential supervision is administered and controlled.[30] It is not yet the time to draw conclusive considerations; however, the analysis converges on the need to govern the innovation process and considering its positive and negative externalities. And this is possible if the people responsible for the production of inventions are subject to the directives of top management in order to imbue software, algorithms and programming with the ‘culture of rules’ proper to organizations subject to prudential supervision controls.[31]

In this context, the rules of corporate governance and the typology of public controls referable to banks had been adopted under the assumption of a dialectic between shareholders and corporate officers. Alongside this dialectic there was always, then, an interpersonal dynamic that transcended resolutions and reporting, giving the bank an ability to adapt the corporate organization to the environment in which it was operating, so as to correspond to the sudden accelerations that characterize the dynamics of the financial market.[32]

This is the background of both the Capital Requirements Directive and Regulation (CRD and CRR), to be considered as the essential instruments for the achievement of the internal market (from the point of view of both the freedom of establishment and the freedom to provide financial services in the field of credit institutions, as per Recital no. 5 of Directive 2013/36/EU) and for strengthening the provisions related to ESG risks, on a number of aspects such as the sustainability commitments that banks undertake under the Corporate Sustainability Reporting Directive (CSRD), the handling of ESG risks in the context of the annual supervisory examination review (SREP), the ESG reporting and disclosure requirements (considering a that banks can enjoy a favorable risk weight treatment only where they finance an infrastructure project that have a positive or neutral environmental impact assessment).[33] At the present time, however, a bank’s organization is being enriched by a rapidly evolving set of technologies that can bring a wide range of alternative or competing solutions to the effort usually required of human intelligence. [34] Indeed, the evolutionary path aims to ensure improved performance, through the optimization of lending and delivery of banking services, while also ensuring socially and economically beneficial results. However, there is widespread concern that widespread application of such IT systems may likewise entail new risks, which are difficult to predict today given the speed of technological change. Hence, it comes into consideration a new kind of difficulty in the governance of a bank, whose sound and prudent management may also depend on the functionality of systems implemented by directors pursuing technological development of the business organization.

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[1] In Clima Energia Finanza  Francesco Capriglione raises three challenges: the search for ecological balance, the solution of energy pacification and the arrival at economic-financial sustainability. Although these challenges are presented in separate chapters, they are integrated in a logical-systematic sequence, transversally marked by the sadness of war events and the hope that public intervention can address and overcome these three challenges; see Lemma, Verso la regolamentazione dell’innovability. Riflessioni a margine del volume clima energia finanza del prof. Francesco Capriglione, to be published in Rivista Trimestrale di Diritto dell’Economia, 2024, p. 20 ff. – This article is the outcome of the research collaboration between the authors under the guidance of Professor Capriglione, which has also established a series of Italian-Norwegian conferences with the first to be held in Oslo in July 2024, the second in Rome in January 2025, and the third will take place in Oslo in June 2025.

[2] It refers to the possibility of a business model in which the production and delivery of banking products and services are based on technology-enabled innovation; see Lemma, The regulation of fintech banks: questions and perspectives, in Open Review of Management, Banking and Finance, 2019 about the possibility that the software of fintech banks will unbundle banking into its core functions of settling payments, performing maturity transformation, sharing risk and allocating capital. Hence, we will consider both the benefit of machine-learning techniques in respect of credit scoring, and the risk of using self-executing software that may affect the supply and demand. – See also about the role of the decentred regulatory space in financial sector governance, the essential partnership of public and private-led governance and technology-enabled innovation in Andenas and Chiu The Foundations and Future of Financial Regulation: Governance for Responsibility, 2013.

[3] See VISCO, Un futuro per l’Europa: demografia, tecnologia, mercato, Institutional Conference at the Accademia Nazionale dei Lincei, Rome, Dec. 15, 2023

[4] See SCIARRONE ALIBRANDI – RABITTI – SCHNEIDER, The European AI Act’s Impact on Financial Markets: From Governance to Co-Regulation, in European Banking Institute Working Paper Series no. 138, 2023, regarding the regulatory challenges arising from the need to mediate between a horizontal approach AI regulation and the sectoral dimensions of financial markets, with reference to the traditional objectives of special regulation

[5] Cf. PANETTA, Il futuro dell’economia europea tra rischi geopolitici e frammentazione globale, Lectio magistralis on the occasion of the conferment of the honorary degree in legal sciences banking and finance at the University of Roma Tre, April 23, 2024, where he concludes with an indication of a solution that can strengthen the European economy, rebalancing its growth model and enhancing the single market

[6] See P. SAVONA, Purpose of the Initiative, in AA.VV., Monetary Policy Normalization. One Hundred Years After Keynes’ Tract on Monetary Reform, Switzerland, 2023, p. 1 ff.

[7] See CAPRIGLIONE, Competition and stability in the digital paradigm, in Law and economics yearly review, 2023, p. 3 ff. who examines the implications of the digital process in the banking sector along with the innovations introduced by automated operations within internal management schemes. It also considers the challenges posed by the dynamics of artificial intelligence which faces evident limitations of robotics in replacing human intervention.

[8] Such evidences also covers debt restructuring transactions, with particular regard to transactions designed to preserve the going concern (i.e. consolidation agreements, restructuring agreements, distressed M&A, sale of bank credits), as well as any kind of financing to be granted to distressed companies (bridge finance, interim finance and finance granted in the framework of restructuring plans). Banking industry also assists industrial groups interested in investing in emerging business, as well as in distressed companies, providing their services during all consolidation path; see LASTRA, COMMERCIAL BANKING IN TRANSITION: A CROSS COUNTRY ANALYSIS, in Law and economics yearly review, 2023, special issue, p. 5 ff.

[9] See LEMMA, Fintech and the impact on the corporate governance of commercial banks, in Law and economics yearly review, 2023, special issue, p. 12 ff on the influence of technological innovations on the corporate governance of commercial banks. The paper explores the effects on the organizational structure of banks and the accountability of directors and auditors. Considering the innovations resulting from the use of machine learning, big data computation, artificial intelligence, innovative products, and cryptocurrencies, the analysis assesses the adequacy of the current public intervention in ensuring the sound and safe management of banks. The main findings point to the need for a restatement of the current regulation by considering that new commercial banking will rely on a permeating information system that goes beyond the sphere of influence of the directors and the auditors’ control capabilities. In addition, the same findings suggest that policymakers should take note of the perspectives of commercial banking, considering whether the success of open banking and the possibilities of a digital reform of the monetary policy could lead to a rethinking of the banks’ business model.

[10] See CONTI BROWN – VANATTA, Private Finance – Public Power A History of Bank Supervision in America, Princeton (N.J. – USA), in press.

[11] See CASSESE, Il diritto globale, Torino, 2009, according to which, along with the economy, states have bypassed their own borders, whose essential functions take place beyond state territory.

[12] See Lemma, The public intervention on cryptocurrencies between innovation and regulation”, in Open Review of management banking and finance, 2022

[13] See PANETTA, Il futuro dell’economia europea tra rischi geopolitici e frammentazione globale, Lectio magistralis at the Università degli Studi di Roma Tre, 23 April 2024, where he concludes with an indication of a solution that could strengthen the European economy, rebalancing its growth model and enhancing the single market.

[14] See MASERA, Banks and shadow banks, reform of the EU crisis management framework, money and the digital euro: an overview of perspectives and challenges, in in Law and economics yearly review, 2023, p. 32 ff. who deals with the issues of financial stability and the complex institutional/operational design to manage banking crises. Specific reference is made to the EU proposed reform of the CMDI. Suggestions are offered to overhaul the framework, also with a view to preserving the viability of small and medium-sized banks, whose demise characterized the Euro area in the past ten years. Attention is focused on the IPS, currently under threat. More generally, attention is drawn to the vulnerabilities and risks of the rapid growth of the shadow banking system, which accounts now for 50 per cent of global financial assets, as against 25 per cent ten years ago. The potential for peril arises from many concurrent factors, notably contagion risks. The intertwining and amplification of economic and financial stress are also the reflection of the rapid pace of technological and digital innovation.

According to the A., the new system will be characterized by the presence of CBDCs, in particular the digital Euro. The perspective changes in the institutional architecture represent a crucial facet of the complex transfer process under way of real, monetary, and financial activities to the infosphere.

[15] Let us simply refer to Lemma, the shadow banking system, London, 2016, and Id., Fintech Regulation, London, 2020

[16] See BRITTON-PURDY – GREWAL – KAPCZYNSKI – RAHMAN, Building a Law-and-Political Economy Framework: Beyond the Twentieth-Century Synthesis, in Yale Law Journal, 2020, where it moves from the most recent crises of economic inequality and the erosion of democracy to propose solutions that go beyond the legal orientations that favour efficiency, neutrality and apolitical governance, suggesting solutions that instead highlight the realities of power, aspire to equality and strive for democracy

[17] It refers to the conclusion of SARTORI, Il diritto dell’economia nell’epoca neoliberale tra scienza e metodo, in Rivista di diritto bancario, 2022, p. 309 ff. where the issue of the functionalisation of the contract to general interest objectives is

addressed, where the latter is understood as an instrument of intervention in the market that is capable of conveying systemic preferences.

[18] See Guide to assessments of fintech credit institution licence applications 2017 p. 4 ff.; See also ECB. 2018. “Guide to assessments of licence applications. Licence applications in general” that expressly clarifies that “Licensing of credit institutions is essential for the public regulation and supervision of the European financial system. Confidence in the financial system requires public awareness that banks can only be operated by entities that are licensed to do so. … At the same time, licensing should not hinder competition, financial innovation or technological progress. … This Guide applies to all licence applications to become a credit institution within the meaning of the Capital Requirements Regulation (CRR), including, but not limited to, initial authorisations for credit institutions, applications from fintech companies, authorisations in the context of mergers or acquisitions, bridge bank applications and licence extensions.”

[19] Because of the above, our preliminary remark considers that, within the internal market, any entity needs a license to collect savings or grant credit,[8] so that we are going to investigate the regulatory effects of a software that creates a network of independent companies able to replicate the activity of a credit institution. See CRANSTON, “Principles of Banking Law”, Oxford, 2002

[20] See also EBA, Fintech: Regulatory Sandboxes And Innovation Hubs, JC 2018 74, p. 10 ff.

[21] It is worth recalling USHER – GUADAMUZ, Electronic Money: The European Regulatory Approach. The new legal framework for e-commerce in Europe, 2005, where the A. pointed out that electronic money has yet to become as familiar to consumers as cash, cheques and credit and debit cards, but may yet have the potential to be the greatest revolution in payment systems since the development of money itself. Financial services practices and new technology are coming together to change the way in which we conduct our everyday life.

[22] See COLEMAN – GEORGOSOULI – RICE, Measuring the implementation of the FSB key attributes of effective resolution regimes for financial institutions in the European Union. FRB International Finance Discussion Paper No. 1238, 2018, where the A. concern about the health of European banks and extensive market commentary about whether post-crisis regulatory reforms in Europe have adequately addressed these concerns.

[23] See LASTRA – SKINNER, Sustainable Central Banking, in Virginia Journal of International Law, Vol. 61, 2023, on the evidence that, in the past several years, central banks globally have begun to consider whether, and to what extent, questions of climate change and sustainability intersect with their legislative mandates. Hence, an important questions refers to the legitimacy of the central banks’ climate change and sustainability goals and a set of principles for central banks to consider when addressing these climate policy governance questions, in particular with regard to the limits and legitimacy of sustainable central banking.

[24] See BANCA D’ITALIA, Financial intermediation and new technology: theoretical and regulatory implications of digital financial markets, edited by LANOTTE e TRAPANESE, in Questioni di Economia e Finanza, aprile 2023, n. 758, Introduzione, p. 5 where it is concluded that the regulatory perimeters could be expanded to guard against the risks associated with the activities remitted to new suppliers.

[25] In this context, the environmental features seems to be related to both the economic conditions of conducting business and the effects of such business on the society (in terms of positive and negative externalities, as well as social impact and influences). However, in the last decade, the attention has been focusing on the ecological features, considered as the relationships between living humans and their physical environment. This refers to the scope of the European supervision and regulation, aimed at preserving the stability and the growth, as stated in the EU’s Stability and Growth Pact and in the Treaty on stability, coordination and governance in the Economic and Monetary Union (TSCG).

[26] See LEMMA, La regolazione del fintech tra ‘same supervision’ e ‘sandbox’, in AA.VV., Diritti e mercati nella transizione ecologica e digitale, Milano, 2022

[27] See GREENBERG, Rethinking Technology Neutrality, Minnesota Law Review, Vol. 100, p. 1495, 2016, who pointed out that technology progresses at an increasingly rapid rate; while Congressional action does not. Scholars and legislators have overwhelmingly answered that laws should anticipate unexpected technologies through ex ante statutory inclusion. “Technology neutrality,” as this principle is known, assumes that drafting a law to general characteristics, rather than specific technologies, promotes statutory longevity and equal regulation of technologies old and new.

However this A. challenges that assumption. In uncovering four problems inherent to technology neutrality, this Article recasts the drafting principle as suboptimal and often self-defeating. It does so through a case study of copyright law, which for the past four decades has been structured around technology-neutral default rules; copyright also has been plagued by countless revisions and inconsistent application to substantively equivalent technologies. This rethinking leads to a counterintuitive alternative: technological discrimination. A mixture of neutrality and specificity, technological discrimination recognizes the unappreciated benefits of specificity — e.g., better tailoring and greater certainty — while responding to the shortcomings of neutrality revealed herein. Laws, including copyright, ought to be drafted to known technologies with what I call domain-specific neutrality, and should task courts and agencies with determining whether and how the law applies to innovations. This A. concludes by showing how technological discrimination could help copyright law better respond to new technologies like cloud computing. It also considers implications for patent law.

[28] See CHEN – KIM – ZHANG – YANG, Information Transparency and Investment in Follow-on Innovation, Contemporary Accounting Research, Vol. 40, No. 2, 1176-1209, 28 Dec. 2022; Jensen – Johnson – Brunswicker, Transparency and Innovation: From Transparency of Structure Towards Transparency of Actions, 12 May 2016. However, considering that transparency reduces information asymmetries between firms and capital markets, it should also taken into account that i increases the costs associated with information leakage to competitors. However, an economy’s information environment has important but heterogeneous effects on the nature and extent of real economic activity; see See Brown – Martinsson, Does Transparency Stifle or Facilitate Innovation?, in Swedish House of Finance Research Paper No. 15-16, 20 Sept. 2014.

[29] Although there is no uniformity in the application of civil law models, credit institutions have over time designed their organizational chart by making extensive use of private autonomy, subject to meeting the obligation to arrive at an organizational structure capable of ensuring sound and prudent management, having regard also to the effectiveness of controls, as part of a corporate governance project designed to distribute the powers necessary to best direct the enterprise and, therefore, carry out banking activities in such a way as to achieve the desired results within the limits marked by the need to safeguard the savings collected; see ex multis BASKERVILLE, CAPRIGLIONE, CASALINO, Impacts, Challenges and trends of Digital Transformation in the Banking Sector, in Law and Economics Yearly Review, 2020, p. 341 ff.

[30] See AMMANNATI -CANEPA, Presentation to AA.VV., La finanza nell’età degli algoritmi, Torino, 2023, p. IX; as well as AMMANNATI – GRECO, Il credit scoring intelligente: esperienze, rischi e nuove regole, in AA.VV., La finanza nell’età degli algoritmi (Finance in the Age of Algorithms), Turin, 2023, p. 1 ff. where AA. indicate the regulatory consequences arising from technological innovations that change access modalities and possibilities due to the use of algorithms capable of processing increasing amounts of data, even so-called ‘alternative’ data compared to traditional financial data. And indeed, the assumption is made that, as a result of such innovations, the assessment of creditworthiness has surpassed some of the traditional ones through the use of increasingly sophisticated techniques for analyzing a considerable and varied amount of data.

[31] There is no doubt that, to date, the main actors in corporate governance have been the shareholders, directors, auditors and managers. These are individuals who, with different roles, have interacted within the corporate construction to ensure that the exercise of banking activities would enable the pursuit of the corporate purpose set forth in the articles of incorporation and, more generally, that the orderly composition of the relevant interests would comply with the requirements set forth in the banking regulations. At the same time, a role of secondary importance has so far been played by external consultants or other entities that related to the bank on a contractual basis, given the regulatory option that recognizes the possibility of external providers to support the exercise of banking activities, without emptying the bank of its essential contents.

[32] See BASKERVILLE – CAPRIGLIONE – CASALINO, Impacts, Challenges and trends of Digital Transformation in the Banking Sector, in Law and Economics Yearly Review, 2020, p. 341 ff.

[33] See KOK – MONGELLI – HOBELSBERGER, A Tale of Three Crises: Synergies between ECB Tasks, ECB Occasional Paper No. 2022/305, 16 Sept. 2022; SCHIMPERNA – LOIZZO, ESG Disclosure: Regulatory Framework and Challenges for Italian Banks, Bank of Italy Occasional Paper No. 744, 30 May 2023; SCHREINER – BEYER, The Impact of ECB Banking Supervision on Climate Risk and Sustainable Finance, ECB Working Paper No. 2024/2952, 23 July 2024 where the AA. agree that from 2020 onwards, the ECB has introduced various measures to enhance climate-risk-related supervisory efforts

[34] See ex multis ALPA, Artificial Intelligence. The legal context, Modena, 2021; CAPRIGLIONE, Law and economics. The Challenges of Artificial Intelligence, in Riv. Trim. dir. Econ., Supplement No. 3, 2021; PANETTA, L’innovazione digitale nell’industria finanziaria italiana, speech at the inauguration of the FinTech District, Comune di Milano – Ministero dell’Economia e delle Finanze, Milan, September 26, 2017; PELLEGRINI, Transparency and Circulation of Cryptocurrencies, in Open Review of management, banking and finance, 2021.

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Author

* Mads Andenas is Professor of Law at the University of Oslo.

** Valerio Lemma is Full Professor of Law and Economics at the Law Faculty of Università degli Studi Guglielmo Marconi in Rome

Although this paper is the result of a joint reflection of the authors, Mads Andenas wrote the paragraphs 1-2 and Valerio Lemma wrote the paragraphs 3-5