- PRESIDENT: Adv. Dino Crivellari
- Our Commission will deal with banks, finance and in particular NPLs.
The profound and extensive transformation of the banking and financial system is taking place in a period of great changes, all the more complex and incisive because they concern the most interconnected sector of the world economy and the most fragile, subject as it is to disturbances and crises that sometimes have local and circumscribed origins, but which extend with a rapidity that is not always controllable by regulatory and political authorities.
Interconnection and its consequences, which cannot be eliminated, are the result not so much of the technological development of communication systems, but of the financialization of the banking system and of a large part of the world economy.
Until a few decades ago, banks operated mainly at the national level, protected, but also conditioned, by regulations aimed at defending their stability and functionality in the awareness of the their delicate infrastructural function of profitable allocation of savings. Outside the national borders, their operations were modest and essentially functional to support national companies operating in the various countries. With the liberalization of the movement of capital and privatizations, the infrastructural role has been tarnished in the logic of the company dedicated to the enhancement of its income capacity, reducing the institutional role that had been emphasized in the central part of the last century also as a response to the banking crises of the first quarter of the twentieth century. But for thirty years now we have witnessed and are witnessing a completely new phenomenon: finance has taken over, enveloping the banks within its logic of wealth production. This phenomenon became particularly evident with the crisis of 2007/2008 when it was realized that an uncontrollable short circuit had been created.
Before the Subprime crisis, for a couple of decades, the ability of investment funds to grow by intercepting a large part of the private savings, previously collected by banks, had increased, and the banking logic of “originate and distribute” had been favored, then evolved into “originate to distribute”….
In a nutshell: the banks, privatized and freed from “strings and strings”, in order to compete in terms of value for shareholders, had accepted and indeed favored their own disintermediation not only in terms of funding (by selling fund shares over the counter), but also on the lending side by securitizing their loans to the real economy for the benefit of investment funds.
This phenomenon, in terms of diversification of risks and sources of revenue, would not have been harmful if it had remained limited. It was not, and it expanded dramatically: in the US, in 2007, 80% of conforming and subprime bank loans (i.e. performing) had been securitized, with an aggravating circumstance later highlighted by subsequent studies: banks had begun to hold significant shares of investment funds in their assets and therefore indirectly of the risks that they had previously transferred with securitizations. After having abdicated the management of the risk assumed with the provision of credit by transferring it to funds, they were (and are) taking back those risks in a less conscious way because they do not have precise ideas about the quality of the funds’ assets, but relying mainly on the judgments of rating agencies, whose fallacy was approved precisely in the subprime crisis. We have seen the consequences!
Somehow, the mixed bank, which had led to the banking crisis of the 1920s, and which had been opposed by regulators and governments with the strict rules on the separation between commercial banks and special credit institutions, had returned – after privatizations and the abandonment of the mixed economy due to the liberal policies of the last twenty years of the 20th century – to create imbalances in the form of the universal bank.
The new reaction of the Regulators, both with the Basel I, II and III agreements and with the post-crisis hyper-regulation (mainly in Europe, but less so in the USA) has had the merit of leading the banking system towards a more conservative approach, avoiding the collapse that, without public intervention, could have emerged with the pandemic crisis.
But the intervention of the Regulators has had and has a limit: it does not touch Shadow banking, i.e. the world of finance which, it is estimated, has intermediation volumes three times higher than that of regulated banks.
The consequence is that banking disintermediation is not limited, but rather favored by the narrowness of credit and the draconian rules of governance that weigh on banks, which still remain universal banks, therefore exposed to the “moral hazard” and “Risk appetite” of directors and shareholders.
This is evident if we observe that savings continue to be directed by banks towards investment funds that “use” the banks themselves as commercial networks and that the banks’ production gap, the NPLs, are one of the first investment sectors of the same funds, especially in Italy.
In practice, it could be argued that investment funds have incorporated the banking system into their production process, starting from the collection of savings and – exploiting the distorted logic of “originate to distribute” adopted despite everything in commercial banks – make use of the bank providing the credit to acquire both performing and non-performing assets through securitizations.
So the funds take advantage of the complex, expensive and regulated apparatus of the banks that act as producers of the ‘raw material’, debt, on which the value creation of the funds is built. With an addition: especially thanks to securitized NPLs, the funds appropriate the banks by subscribing to the capital increases to which the banks are forced due to the losses from the massive sale of NPLs in favor of the funds themselves.
In extremely simplified terms: since the losses of the banks correspond more or less to the gains of the funds that buy at 20 what is worth 50 to the banks, with the gains thus realized the funds intervene to recapitalize the banks that have losses of 30. It is no secret that, especially in Italy, most of the large banks that have recorded losses by selling off their NPLs are now owned by funds whose representatives sit on their boards of directors.
The efforts of regulators to protect the banking system, operating mainly on the rules of their capital, do not allow this vicious circle to be broken because they cannot intervene with the same regulatory determination on Shadow banking.
This phenomenon worries scholars and regulators, but less so governments, which are subservient to the international finance that supports their public debt.
These and other issues are in the scope of our Commission’s study and intervention, not only because we believe that the interconnection of the banking and financial world should be regulated and oriented towards the common good rather than the production of wealth for the few, but also because, as has now been proven, the freedom of action left to the shadow banking system is becoming the breeding ground for organised crime. attracted by the high yields of a market without rules or controls.