The euro area’s significant banks

The new framework of European banking supervision, also known as the Single Supervisory Mechanism, established the European Central Bank (ECB) as the licensing authority for all banks in the euro area as of 4 November 2014. As a result, and despite many lingering national idiosyncrasies (ECB, 2016a), the euro area can now be considered a single jurisdiction for banking sector policy.

European banking supervision distinguishes between banks labelled significant, known as ‘significant institutions’ (SIs), and all other banks in the euro area, known as ‘less significant institutions’ (LSIs). SIs include all euro area-headquartered banking groups, and euro-area branches and subsidiaries of groups headquartered elsewhere, that have at least €30 billion in total assets, and others that have specific significance in their respective member states or because of their international interconnectedness. The ECB directly supervises SIs, while LSIs are supervised by national authorities under the ECB’s ‘supervisory oversight’. The ECB regularly updates a list of all supervised entities, including SIs and LSIs. This Policy Contribution is based on the list as of 15 November 2016 (ECB, 2016c).

Table 1: Euro-area banks

Category	Number of banks	Assets
		€ billions	% of euro area total
Euro-SIs	97	22,118	79.9
G-SIBs	8	10,865	39.2
Other euro-SIs	89	11,253	40.6
Significant subsidiaries/branches	29	965	3.5
Owned by euro-SIs	4	79	0.3
Owned by third-country groups	25	886	3.2
Total SIs	122	23,004	83.0
LSIs	3,168	4,695	17.0
Total	3,290	27,699	100.0

Source: Bruegel based on ECB (2016b) and Schoenmaker and Véron (2016). Note: Assets are as of end-2015; the total for SIs is adjusted to avoid double-counting of significant subsidiaries owned by euro-SIs in Slovakia and Portugal. SIs = significant institutions; G-SIBs = global systemically important banks; LSIs = less significant institutions.

The euro area has 126 SIs (122 after eliminating double counting, see below), of which 97 are euro area-headquartered banking groups (hereafter referred to as ‘euro-SIs’) and 29 are subsidiaries of other banking groups. Among the latter, four are owned by other euro-SIs but still listed separately by the ECB1, and the other 25 are owned by groups headquartered outside the euro area2. Another distinction is between euro-SIs that the Financial Stability Board (FSB) lists as ‘global systemically important banks’ or G-SIBs, and all others. As of the latest yearly update of the FSB’s list (FSB, 2016), eight of the 97 euro-SIs are labelled G-SIBs.

Data on each SI’s assets are as of end-2015 from Schoenmaker and Véron (٢٠١٦), with three adjustments to account for recent transactions3. The total adds up to €23 trillion as shown in Table 1; the table also shows the relative importance of LSIs compared to SIs in the euro-area system4. Table 1 illustrates the dominance of SIs5 and that euro-SI assets are almost equally divided between the eight G-SIBs and the 89 other euro-SIs.

Ownership and governance patterns

Information on the ownership and governance structure of each euro-SI is publicly available. It is compulsory for listed company shareholders to report when they cross certain thresholds of ownership. Information about significant shareholdings in listed banks is therefore generally available and reliable6. For unlisted banks, relevant information is generally available from corporate sources, such as company websites and annual reports, and, if not, from press reports. Using all these sources, the largest shareholders were identified for almost all banks in the sample, except for a handful of cooperative or family-owned groups for which only the broad outlines of ownership structures could be identified.

To summarise the results, euro-area banks fall into six broad governance arrangements7:

• ‘Dispersed’ governance: groups whose parent entities are publicly listed and in which no individual shareholder holds sufficient influence to unilaterally alter the bank’s direction and strategy8.
• ‘Minority influence’: groups in which no single shareholder has majority control but one or several minority shareholders have significant leverage over the bank’s direction and strategy. This category covers a variety of situations and includes both publicly listed groups and unlisted groups whose ownership is shared among several minority shareholders. Depending on the case, the influential minority shareholder(s) is from the private sector, the public sector or a not-for-profit entity.
• ‘Private control’: groups in which one private-sector shareholder owns more than 50 percent of the shares and thus has dominant control over the bank’s direction and strategy. The identity of the controlling shareholder varies between cases, which include individuals, families, foundations, investment funds and insurance or industrial groups.
• ‘Cooperative’ governance: banks whose shareholder capital (or a majority thereof) is technically owned by their customers, or by a subset thereof. This category in turn covers diverse arrangements, with various patterns of centralisation and intermediate structures between the customers and the group-level entity. Unlike in the United States, where credit unions tend to be small, cooperative banks in the euro area can be very large (two of the eight euro area G-SIBs are cooperatives)9.
• ‘Public sector’ governance: banks created by (local or national) governments and/or that fulfill a public interest, non-commercial objective. These include national policy banks in some member states, dedicated to funding local government activities (eg Finland’s Kuntarahoitus, France’s SFIL or the Netherlands’ BNG Bank), international development (France’s AFD), or small businesses and innovation (bpiFrance), as well as Germany’s elaborate network of local savings banks (Sparkassen) and regional banks (Landesbanken) and other public banks such as La Banque Postale in France or Caixa Geral de Depósitos in Portugal.
• ‘Nationalised’ governance: banks that are currently under government control after being rescued during the financial crisis. In most cases, and unlike public-sector banks, governments plan to privatise them or (in the case of Dexia) wind them up, sometimes under explicit conditions imposed by the European Commission’s Directorate-General for Competition for banks that received state aid.

These six categories allow for a more refined understanding of banking structures than the familiar distinction between listed and unlisted banks. Several categories straddle the listed/unlisted divide. Specifically, all public-sector and privately controlled banks are unlisted, and by definition all ‘dispersed’ banks are listed; but the other categories include listed and unlisted groups. For example, Crédit Agricole has a cooperative governance structure based on 39 regional cooperative banks, but the parent entity, Crédit Agricole SA, is a listed company, whose dominant shareholder (with a 75 percent stake) is a corporate entity jointly owned by the 39 regional banks. Similarly, some nationalised banks are fully owned by their respective national governments, eg Belgium’s Belfius or Portugal’s Novo Banco10, but others are publicly listed with the government as a majority shareholder, eg the Netherlands’ ABN AMRO or Spain’s Bankia.

The allocation of each bank to one of these categories is fairly unambiguous, except at the margin between the ‘dispersed’ and ‘minority influence’ categories, where no obvious threshold exists. As a rule of thumb, banks where no single entity holds more than 10 percent of shares have been labelled ‘dispersed’, except in cases where several significant shareholders (including at least one with shares above 8 percent) are likely to act in concert11. Conversely, BNP Paribas has been classified as ‘dispersed’ even though the Belgian government holds 10.2 percent of the shares, because of the latter’s commitment to act as an arm’s-length shareholder.

Banks in the ‘dispersed’ category might also be subject to more subtle forms of control. A growing literature suggests that passive index funds12 that hold significant ownership stakes in several listed companies in the same sector might reduce competition among those companies (eg Levine 2015; Anton et al, 2016; Azar, Schmalz and Tecu, 2017; Gramlich and Grundl, 2017; Novick, 2017; Posner, Scott Morton and Weyl, 2017; Rock and Rubinfeld, 2017). Investors such as BlackRock, Capital Group, Norges Bank Investment Management (NBIM), State Street global Advisers (SSgA) and Vanguard have stakes of a few percent each in many listed banks with dispersed ownership in both the euro area and the United States, as partly documented in appendices A and B. The debate about the possible impact of such ownership patterns on company behaviour is ongoing and might be relevant for banks in the ‘dispersed’ category, even though the analysis presented here is agnostic about it.

Appendix A presents findings on each euro-SI. Table 2 summarises the findings in terms of governance categories. It also indicates the split between listed and unlisted groups. Fewer than half (42.3 percent) of euro-SIs are listed, and fewer than half the listed euro-SIs (15.5 percent) have dispersed ownership. Unsurprisingly, listed banks with dispersed ownership tend to be larger, but even so, they represent less than half (44 percent) of all euro-SI assets13.

Table 3 breaks down these categories by the eight G-SIBs and 89 other euro-SIs. Among other euro-SIs, the shares of each governance category in the number of banks and assets are broadly similar, implying that, once G-SIBs are excluded, the distribution between governance categories is not strongly correlated to size (except for privately controlled banks, which tend to be significantly smaller than average).

Table 2: Governance structures of euro-SIs

Governance structure	Number of banks	Percent of banks	Assets
			€ billions	% of total assets
Dispersed	15	15.5	9,723	44.0
Minority influence	22	22.7	2,988	13.5
Private control	14	14.4	572	2.6
Cooperative	15	15.5	5,351	24.2
Public sector	21	21.6	2,172	9.8
Nationalised	10	10.3	1,312	5.9
Total	97	100	22,118	100
Publicly listed	41	42.3	15,229	68.9
Unlisted	56	57.7	6,889	31.1
Total	97	100.0	22,118	100.0

Source: Bruegel based on Appendix A. Assets are as of end-2015. Note: SIs = significant institutions.

Table 3: Governance structures of euro area G-SIBs and other euro-SIs (percent)

Governance structure	Share of G-SIBs		Share of other euro-SIs
	By number of banks	By assets	By number of banks	By assets
Dispersed	75.0	73.6	10.1	15.3
Minority influence	-	-	24.7	26.6
Private control	-	-	15.7	5.1
Cooperative	25.0	26.4	14.6	22.1
Public sector	-	-	23.6	19.3
Nationalised	-	-	11.2	11.7
Total	100.0	100.0	100.0	100.0

Source: Bruegel based on Appendix A. Assets are as of end-2015. Note: SIs = significant institutions; G-SIBs = global systemically important banks.

If anything, data shown in Tables 2 and 3 underestimates the influence of governments in the euro-area banking sector. Beyond the ‘public sector’ and ‘nationalised’ categories, nine banks representing €3,055 billion in assets have a government as their single largest minority shareholder14. An additional eight banks, representing €1,597 billion in assets, have as their largest (minority or majority) shareholder a regional or national foundation, which is typically controlled or influenced by political interests (all of them are in only three countries: Austria, Italy and Spain)15. Taking into account the fact that cooperative bank governance models are also often politicised, one can reasonably presume that there is some political interference in the governance of at least 64 percent of all euro-SIs, representing €13.5 trillion or 61 percent of total assets16.

These findings focus on ownership structures and as such cover only some aspects of the euro-area banks’ governance idiosyncrasies. There are also many specific legal and practical arrangements under which, for example, board members are assessed, selected and renewed. Even among companies with dispersed ownership, in at least some countries, rules and practices can enable a small subset of shareholders, incumbent board members, employees’ unions and/or the bank’s managers to wield disproportionate influence17. ‘Shareholder democracy’ is not perfect anywhere, but just like political democracy, it is more distorted in some jurisdictions than in others. An analysis of such differences would complement the results presented in this Policy Contribution.

Unsurprisingly, these euro-area findings mask significant diversity among EU member states. While not the main focus of this Policy Contribution, Table 4 shows the governance structures of euro-SIs by country18. One must keep in mind that these findings are only a current snapshot of a constantly evolving reality. For example, some of the Italian banks now labelled ‘dispersed’ (eg UniCredit or Monte dei Paschi di Siena) would have been until recently in the ‘minority influence’ or ‘private control’ categories, but the stakes of regional foundations that dominated their governance have been diluted in successive waves of capital raising (and Monte dei Paschi is expected to be nationalised soon). Similarly, most Greek banks had been ‘nationalised’ before their capital raising of late 2015. These changes will continue. The ownership structures of 11 euro-SIs with total assets of €748 billion are expected to undergo significant changes before the end of 201719, and others might also change ownership soon. Thus, Table 4 does not display permanent structures of national banking systems, at least not for all euro-area countries.

International perspective

This section compares the euro area’s larger banks with banks of similar size in Australia, Canada, the United Kingdom and the United States, taken as representing the dispersed-ownership model. The ‘large euro-SIs’ are those with total assets above €30 billion. This subsample comprises 84 of the 97 euro-SIs as of mid-November 2016, representing 99.3 percent of aggregate euro-SI assets. A parallel sample of ‘Anglo-Sis’, comprising all banks headquartered in the four selected countries with total assets above €30 billion, is based on a reference ranking of global banks (The Banker, 2016)20. This sample consists of 53 groups, as summarised in Table 5 (coincidentally the two samples cover about the same amount of aggregate assets).

Table 5: Anglo-SIs

Country	Number of banks	Assets
		€ billions	% of total assets
Australia	7	2,541	10.1
Canada	8	3,334	13.3
United Kingdom	10	7,016	28.0
United States	28	12,175	48.6
Total Anglo-SIs	53	25,066	100.0

Source: Bruegel based on The Banker (2016) and a dollar/euro exchange rate of 1.087. Note: Assets are as of end-2015. SIs = significant institutions.

The criteria for inclusion in The Banker’s ranking are not identical to the ECB’s criteria for designation as SIs, but the differences (and corresponding selection bias) can be considered insignificant. In both cases, large nonbank public institutions are excluded, such as France’s Caisse des Dépôts et Consignations or Germany’s Kreditanstalt für Wiederaufbau in the euro area, or Canada’s Caisse de Dépôt et de Placement du Québec or Fannie Mae and Freddie Mac in the United States. Most large euro-SIs that do not appear on The Banker’s list are public financial institutions for which no equivalent appears to exist in the four ‘Anglo-Saxon’ countries21. Otherwise, only five large euro-SIs22 are missing from The Banker’s list, and they represent only 1.0 percent of aggregate euro-SI assets. Conversely, two euro-area groups23 with assets above €30 billion that appear on The Banker’s list are not classified as SIs by the ECB, presumably because both are bank-insurance conglomerates whose banking arms are small enough to be considered LSIs. In sum, applying the ECB’s SI criteria would have yielded a sample of Anglo-SIs very similar, if not identical, to that derived from The Banker’s ranking.

In terms of ownership and governance patterns, the contrast with the euro area is evident. All Australian and Canadian banks in the sample except one (Canada’s Desjardins) are listed companies with dispersed ownership. Such banks also dominate in the United Kingdom and the United States. There are no public-sector banks, none under private control, and only one nationalised bank (Royal Bank of Scotland)24. The only unlisted groups are the cooperatives (one in Canada and three in the United Kingdom), which are all comparatively small. Appendix B provides the full list, and Table 6 summarises the findings25.

Table 6: Governance structures of large euro-SIs versus Anglo-SIs

Governance structure	Number of large euro-SIs	Euro-SI assets		Number of Anglo-SIs	Anglo-SI assets
		€ billions	% of total assets		€ billions	% of total assets
Dispersed	15	9,723	44.3	43	21,874	87.3
Minority infl.	18	2,943	13.4	5	1,543	6.2
Private control	11	559	2.5	0	0	0.0
Cooperative	13	5,313	24.2	4	529	2.1
Public sector	19	2,156	9.8	0	0	0.0
Nationalised	8	1,269	5.8	1	1,120	4.5
Total	84	21,963	100.0	53	25,066	100.0
Publicly listed	37	15,160	69.0	49	24,537	97.9
Unlisted	47	6,803	31.0	4	529	2.1
Total	84	21,963	100.0	53	25,066	100.0

Source: Bruegel based on appendices A and B. Note: Assets are as of end-2015. SIs = significant institutions.

Policy analysis and implications

The governance structures of significant banks in the euro area differ markedly from their equivalents in Australia, Canada, the United Kingdom and the United States, and listed banks with dispersed ownership are less prominent in the euro area than is often assumed. Exploring why euro-area banks have different governance patterns would be a highly valuable historical analysis but is not attempted in this Policy Contribution because these patterns arose under a materially different policy framework before the introduction of banking union, and their past drivers are thus only of limited relevance for present and future policy. For the same reason, this Policy Contribution also does not address the role of different governance structures in causing the euro-area banking crisis that started in 2007, and in the associated supervisory failures in most euro-area countries.

The findings that the governance structures of most euro-area banks are potentially vulnerable to some form of political interference and that only a minority are listed companies with dispersed ownership have implications for financial stability, resilience to shocks and other areas of public policy.

• First, the governance patterns make the euro-area banking system less transparent and, as a consequence, less subject to market discipline. Listed companies have to comply with much more stringent disclosure requirements than their unlisted counterparts, and among listed companies, those with dispersed ownership have more incentives to be transparent than those controlled by one shareholder or shareholding group. Many studies of the euro-area banking system (including most of its coverage by investment banks) focus on publicly listed entities, thus missing about two-fifths of the total as measured by assets (if LSIs are included). Other incentives for transparency apply to all banks, for example, the scrutiny of credit rating agencies or the disclosure requirements under the so-called third pillar of the Basel capital framework, but they are not powerful enough. Correspondingly, there is less public and market pressure on banks to respond to changes in the market environment (or market discipline) in the euro area than in other jurisdictions such as the United States, United Kingdom, Canada and Australia.
• Second, all things being equal, euro-area banks have weaker incentives to prioritise profitability among their objectives, since minority investors in a dispersed-ownership structure tend to focus most on profits and dividends. As a result, euro-area banks typically take longer to reconstitute their capital buffers after a shock, even when they are able to retain comparatively more of the profits they make. Simultaneously, the competitive pressure from banks that don’t prioritise profits might erode the profitability of even those banks that respond to capitalist incentives, a familiar complaint of commercial bankers in Germany, for example.
• Third, many of the ownership structures make it more difficult for euro-area banks to raise fresh capital externally when they need it. Controlling or influential shareholders often don’t want to have their stakes reduced and might resist calls for more capital for that reason26. In some cooperative or public-sponsored banking structures, it is difficult, in certain cases even impossible, to raise external capital in the form of common equity. For a long time this was a key challenge for many Spanish savings banks (cajas de ahorros) that contributed to their chronic undercapitalisation. In state-owned banks, their government shareholder is often constrained when they need additional capital, because of fiscal stress, the unpopularity of taxpayer-funded bailouts and/or the EU state aid control framework. Listed banks with dispersed ownership have comparatively greater capital flexibility.
• Fourth, the politicisation of management that results from many euro-area banks’ ownership and governance structures often affects their operations. It can lead banks to deviate from ‘commercially driven’ business decisions, for example, lending more to preferred borrowers or sectors or to the government itself, and/or during economic downturns (eg Sapienza, 2004; Bertay, Demirgüç-Kunt and Huizinga, 2015; Gropp and Saadi, 2015). This can in turn lead to detrimental trade-offs in terms of risk taking and profitability. More straightforwardly, bank politicisation can lead to inefficiency, for example, by driving an outsized influence of staff unions in the bank’s decisions or by tilting recruitment policies towards beneficiaries of political patronage. To be sure, incompetence and poor risk assessment are regularly observed in all kinds of banks, including the most commercially run, but they can still be expected to be somewhat correlated with political interference.
• Fifth, the structures of euro-SIs may perpetuate the vicious circle between banks and sovereigns, which is now widely identified as a key driver of the euro-area crisis, in a way that is less obvious but not necessarily less powerful than visible financial linkages such as national deposit guarantees or bank-held portfolios of home-country sovereign debt. Governments are likely to have stronger implicit guarantees for banks that they are linked to through the banks’ governance and ownership. Conversely, banks owned or otherwise directly influenced by governments tend to display higher home bias in their portfolios of sovereign debt (De Marco and Macchiavelli, 2016).

As for possible macroeconomic benefits from banks owned or influenced by the state, evidence is mixed at best. Even when lending by such banks is less procyclical (or in some cases, countercyclical) – ie their lending rises during economic downswings – state banking appears to be costly and inefficient compared with other countercyclical tools (Bertay, Demirgüç-Kunt and Huizinga, 2015)27.

Shifting toward a greater share of listed banks with dispersed ownership can thus bring benefits to the euro-area banking system, particularly in terms of capital flexibility and the gradual elimination of the bank-sovereign vicious circle. In particular, this analysis suggests more reasons to privatise banks in public ownership, including those nationalised during the crisis, and to sell government-held minority stakes, beyond any obligations that member states might have under the EU state aid framework. Such sales should be made to the highest suitable bidder at any moment when market conditions are not evidently adverse, even if the sale price doesn’t allow a government to recoup all losses from past interventions.

More generally, EU policymakers should avoid creating or maintaining any distortions that undermine the dispersed-ownership model. A review of such distortions in the euro area is beyond the scope of this Policy Contribution. The ECB’s prudential supervision appears to be broadly neutral in this respect, in contrast to many past supervisory practices at the national level (Schoenmaker and Véron 2016), despite controversies about its possible preferential treatment of individual banks28. But the prudential rulebook is still far from fully harmonised (ECB 2016a), and national prudential idiosyncrasies might linger that favour specific governance structures. EU legislators should use the ongoing revision of the framework for bank capital requirements to better align with the global standards set by the Basel Committee on Banking Supervision, including stricter regulatory definitions of common equity, the elimination of capital double counting between banking and insurance activities of the same group and dismantling regulatory privileges to specific categories of borrowers (see BCBS, 2014). EU legislation should also allow supervisors sufficient discretion to impose requirements for additional capital above the regulatory minimum, known as Pillar II requirements in the Basel Committee’s jargon29. In turn, euro-area supervisors should rigorously enforce the capital requirements framework, not only the ECB on SIs but also national supervisors on LSIs.

Beyond the prudential framework, policymakers at national and European levels should identify and dismantle other aspects of policy, especially (but not limited to) tax arrangements, that may distort banking groups’ structures and be unfavourable to listed banks with dispersed ownership. Some of these distortions may be significant.

None of these recommendations go against the organising principles of the euro area’s existing banking policy framework. Public authorities will have to be persistent in implementing them, given the heavy legacy of links – not only financial but also political and social – between many of the euro-area banks and their local or national political systems. Since the initiation of euro-area banking union, many banks have gradually returned to soundness. More effort is needed, however, for the system to acquire sufficient capital and managerial flexibility, so that it can respond more nimbly to future shocks than it has in the recent past.

References

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Azar, José, Martin C. Schmalz and Isabel Tecu (2017) ‘Anti-Competitive Effects of Common Ownership’, Ross School of Business Paper 1235 (March), available at https://ssrn.com/abstract=2427345

The Banker (2016) Top 1000 World Banks 2016

Bertay, Ata Can, Asli Demirgüç-Kunt and Harry Huizinga (2015) ‘Bank ownership and credit over the business cycle: Is lending by state banks less procyclical?’ Journal of Banking and Finance 50

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Gramlich, Jacob, and Serafin Grundl (2017) ‘Testing for Competitive Effects of Common Ownership’, Finance and Economics Discussion Series 2017-029, Washington: Board of Governors of the Federal Reserve System, available at https://doi.org/10.17016/FEDS.2017.029

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