30 May 2017

Bruegel: The governance and ownership of significant euro-area banks

The bulk of these significant banks are government-owned or cooperatives, or uniquely influenced by one or several large shareholders, or otherwise prone to direct political influence.

The banking crisis in the euro area, which started in mid-2007 and has yet to be fully resolved, has sparked considerable debate and reform, most notably the initiation of banking union starting in mid-2012.

But one issue that has been largely overlooked in the debate is the peculiar ownership and governance structures of euro-area banks.

European policymakers and analysts often appear to assume that most banks are publicly listed companies with ownership scattered among many institutional investors (‘dispersed ownership’), a structure in which no single shareholder has a controlling influence and that allows for considerable flexibility to raise capital when needed (‘capital flexibility’). Such an ownership structure is indeed prevalent among banks in countries such as Australia, Canada, the United Kingdom and the United States.

As a result, the public transparency of many banks is low, with correspondingly low market discipline; they have weak incentives to prioritise profitability; their ability to shore up their balance sheets through either retained earnings or external capital raising is limited, resulting in insufficient capital flexibility; they tend to take unnecessary risks because of political interference; and their links with governments perpetuate the vicious circle between banks and sovereigns, which has been a key driver of the euro-area crisis.

Policy contribution

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