Can the ownership and governance structure of a central bank affect its institutional activities? Who benefits from a central bank’s assets and operating results and how does it impact its functioning?
In a recent article (‘Ownership and Governance of Central Banks: Insights from the Italian Experience’), I address these issues taking the cue from the legal framework which governs the Italian central bank (Bank of Italy), as a member of both the European System of Central Banks and of the Single Supervisory Mechanism.
Due to a radical reform enacted between the end of 2013 and the beginning of 2014, the Bank of Italy is among the niche of central banks that entails the participation of private investors to their respective “share capital” and governance system.
This raises the question of whether such an arrangement might interfere with the independence of the central bank, not least considering that, according to Italian law, only financial institutions are allowed to own Bank of Italy’s 'shares'. Most of the debate on central banking independence focuses on independence from politics. This tendency is commendable since the majority of central banks are wholly publicly owned and attempts by politicians to influence central banking frequently occur. In contrast to this debate, my article explores the other face of the medal, namely the risk of capture by the private banking and financial sector and of subsequent conflicts of interests.
After identifying the main chapters of the regulatory evolution of Bank of Italy’s ownership structure from its inception in 1893, I describe in legal terms the current status of Bank of Italy’s 'shareholders' as well as the relationships between its governing bodies. My paper examines shareholders’ economic rights and control rights separately and puts them into context within the framework of the European System of Central Banks and of the Single Supervisory Mechanism.
I then examine the structure of other central banks that involve—or are frequently deemed to involve—some kind of participation by private investors to their ownership and/or governance system (mainly, the National Bank of Belgium, the Bank of Greece and the US Federal Reserve System).
I subsequently turn to a comparison between the Italian solution and the aforementioned experiences, which highlights the peculiar characteristics of the Bank of Italy if compared to the other central banks.
The analysis continues by investigating the potential for conflicts of interests (or for an unsound regulatory framework) arising from shareholders’ control rights and economic rights, especially taking into consideration the consequences of the benefits gained by Bank of Italy’s shareholders due to the financial results of its monetary operations. Basic descriptive data on the dividends distributed to the shareholders of the Bank of Italy, the National Bank of Belgium and the Bank of Greece are provided. The data shows that the dividends distributed to private shareholders by the Bank of Italy are higher than those distributed by the Belgian and Greek central bank.
The article conceptualizes the idea—which can be used to study the ownership and governance of central banks in general—that in as much as a central bank carries out monetary operations generating seigniorage, the distribution of profits out of these earnings to private investors is a transfer of public value to the private sector. This in turn can generate incentives for the 'owners' to influence decisions about central banking and banking supervision, especially when considering the magnitude of the sums at stake(€ 340 ml p.a. in 2014-2019). The risk of a central bank being influenced in its decisions or even captured by private participants significantly increases when the central bank’s shareholders are private investors which elect some of its governing bodies and receive dividends out of its earnings.
On the basis of such outcome, I conclude that the set of rules on Bank of Italy’s ownership and governance is severely at odds with the need for a balanced regulation of central banking and financial markets that fosters the independence of central banks. In addition to that, I briefly comment on some proposals of reform.
Piergiuseppe Spolaore is an assistant professor of law at the Università di Milano-Bicocca School of Law.