Governance and Ownership of Significant Euro Area Banks

Nicolas Veron

No PB17-18, Policy Briefs from Peterson Institute for International Economics

Abstract: European policymakers and analysts often appear to assume that most euro area banks are publicly listed companies with ownership scattered among many institutional investors, a structure in which no single shareholder has controlling influence and that allows for considerable flexibility to raise capital when needed. Such an ownership structure is indeed prevalent among banks in advanced countries such as Australia, Canada, the United Kingdom, and the United States. Veron shows, however, that listed banks with dispersed ownership are the exception rather than the rule among the euro area’s significant banks, especially if one looks beyond the very largest banking groups. 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. As a result, the public transparency of many banks is low, with correspondingly low market discipline; they have weak incentives to prioritize 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 take unnecessary risks due to 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.

Date: 2017-05
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Working Paper: The governance and ownership of significant euro-area banks (2017)
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