Crisis of the financial system
Monitoring and penalties activity
INTERVIEW with LAMBERTO CARDIA
President of the National Commission for the Companies and the Stock Exchange (Consob)
by Pio Marconi
Let us deal with the specific ground on which the CONSOB operates. What are the effects of the crisis on the Italian Stock Exchange? What is the dimension of the downturn? Are there signs of recovery?
The impact of the crisis on the Italian Stock Market has been very heavy. After the insolvency of the Lehman Brothers in the middle of September, 2008, the indices of the Milan Stock Exchange registered greater losses compared to those suffered by other financial Exchanges, such as London and New York although they were the epicentre of the quake.
The crisis, as we know, started in the United States banking system of the mortgage industry at low credit. It immediately spread to the British market, and proceeded to sweep throughout the world, first infecting the finance and then, in succession, also the real economy. For Italy, it was an importation crisis.
Compared internationally, our credit system has remained relatively protected and has given proof of a good holding capacity. The damage has been decidedly more contained than elsewhere.
However, notwithstanding this, the Italian Stock Market has suffered more than other financial centres. During 2008, it lost almost 50%. This was due, among other things, to the fact that in the basket of indices, the securities of the banking sector, in Italy, have a percentage weight greater than that in the indices of other stock exchanges, where the basket is less exposed to the fluctuation of the credit sector.
The crisis has been felt also in terms of the dimensions of the list price. Approximately thirty societies have taken advantage of the quotations at giveaway prices to buy back their shares and exit from the Stock Market – the so-called delisting. Others have seen their securities penalized beyond any financial-economic reasoning.
The capitalization of the Stock Exchange has been so reduced that, in relation to GDP, it has returned to the level of the mid nineties.
In recent months, there have been signs of recovery, even though it is difficult to evaluate the extent and the times. The prevalent judgement of the experts in the field is that the worst is behind us. We shall see. However, perhaps something is starting to move in the world of businesses.
For the past year and a half only companies exiting from the Stock Market have been recorded and none entering.
Now, some aspiring newcomers could come to knock at the doors of Piazza Affari (Milan Stock Market), but it is premature to speak of inversion of tendency. One swallow does not make a summer.
The monitoring and control of the shares market and the stock exchanges are carried out by national Institutions. The crisis showed us that the crisis factors act outside of the borders. What is the general opinion towards the introduction of above-national bodies and how could the coordination with the national Authorities be realized?
This is a crucial point. There is no doubt that one of the lessons we must learn from this last crisis is that the international system of monitoring of the financial markets must be revised. The overall architecture of the system must be considered in the light of the experiences of the last two years. More coordination at an international level is necessary. In my opinion, the European ambit must make and extra effort. It is not sufficient to reinforce the coordination among the national monitoring authorities. A first nucleus of above-national authority is needed. The model could be that of the European System of central banks, articulated on a linchpin, analogous to that of the Bce, around which the national institutes continue to move as operative instruments of protection of the single markets.
Reflections on this are being made at top institutional level in Europe and in Italy. In the Community ambit, a project of the Commission is at an advance stage of discussion: to create a European System of the authorities of financial vigilance, which provides for, among other things, the constitution of three new above-national authorities: one for the banking sector, one for the financial markets and one for the insurances and pension funds.
A hearing is in course in Parliament, which could contribute to advance a national position on the subject. The path taken by Europe seems, to me, easy to adhere to, even if several details need to be better defined, and to avoid, at all costs, the risk of creating bureaucratized and muddled structures.
President Obama introduced significant changes in the functions of the FED and made alterations in the executive of the SEC, the United States Authority of vigilance over the stock exchanges. In Italy, the attention and criticism was not turned on the monitoring Institutes of the stocks and shares market, but rather on the credit system. However, do you hold that certain modifications to the activities of the CONSOB are necessary?
It is true. Notwithstanding the storm, our vigilance system has remained protected. Moreover, as I said before, the epicentre of the quake was not here, but elsewhere, in the markets of Anglo-Saxon tradition. In the fire line of criticism was the ‘light touch’ model of vigilance, founded on trust in the capacity of self-regulation of the market.
For years, this model, rooted in the United States and the United Kingdom, was indicated, for example, also in Italy by many local observers. The subprime mortgages crisis has highlighted the weaknesses of this approach. The vigilance authorities of those Countries, the SEC in the USA and the FSA in Great Britain, had to recite publicly “mea culpa”. Their top executive elements were changed. In Italy, the attention of the public debate concentrated more on the solidity of the banks, on their requisite assets, on the so-called Tremonti bonds. But there was no action brought against the Authorities: in Italy, in fact, there were no assaults by savers on the bank-teller windows, nor were there resounding bankruptcies like that of Lehman Brothers.
Notwithstanding this, for the Italian Authorities, as well as for others, the crisis is an occasion of growth, of the search for a common, strong regulatory system and the streamlining of the techniques of vigilance. The Authorities have always much to learn from crises. The ideal scheme is to prevent as much as possible; to repress when it is necessary.
The effort consists in constantly refining the ability to analyze and listen to the market, to diagnose rapidly the symptoms of the sicknesses when they are still curable and before they become pathological situations. In CONSOB, we have been working for some time in this direction. It is not an easy task. The reality with which the Authorities are faced is that of a market in continual transformation, which always finds new channels to get around and evade the regulations introduced, from time to time, by the Governments, the Parliaments and by the same authorities which fight misuses and irregularities. It entails following and seizing an extremely fast moving target, which is able to assume a multitude of different forms.
Among the subjects put forward by the Italian Government in the discussion of the economic ministers of the G8, a renewed action of repression of the illicit, of corruption, of dirty money and of the misuses of the banking secrecy was proposed. How did the sanctioning activity of the Commission work out? How does CONSOB coordinate with the Judicial Authorities?
Since 2005, as a result of the implementation of European directives, and also thanks to the coming into force of the savings reform, the vigilance powers of CONSOB have been significantly reinforced. The Authority has been supplied with more instruments and resources.
The sanctioning system of our regulations has been modified to render it more dissuasive. The results were not long in arriving. A sudden brisk repressive and sanctioning activity was recorded. The financial media in recent years has made ample reference to it. Added to this, and also thanks to the good collaboration between CONSOB and the Judicial Authorities, which has been placed on new bases. In particular, thanks to the directives on the fight against market misuses, which has now provided for a two-way information exchange. Previously, instead, such transfer of information was done on a one-way basis only; that is, from CONSOB to the Judiciary. This new collaboration has rendered the counteraction of misuses and irregularities on the financial markets more efficient.
Also the collaboration between CONSOB and the Guardia di Finanza has played a very important role in rendering our powers of inspection more incisive.
Obviously, the activity of CONSOB has taken place within the context of the competence that the Legislator has conferred. The actions you mentioned, such as repression of illicit actions tied to corruption, recycling, misuses of the banking secrecy go beyond the jurisdiction of CONSOB. This competence falls into a larger perspective which involved more subjects: the Judiciary, the Bank of Italy, the Unit of financial information (formerly the UIC), the Guardia di Finanza, in part also CONSOB, and possibly the anti-mafia and the same security apparatuses. An always closer collaboration is hoped for between these subjects. In this sense a very positive step has been taken with the institution of the Committee for Financial Security, which meets, periodically, at the Ministry of Economy. The duties of the Committee are coordination functions.
Today, the minority shareholder is marginal in the shaping of company policy. This keeps the investors away from the stock market. This reduces the controls. How can the minority be safeguarded?
The protection of the minority is an essential point for reinforcing the trust in the Market and in the Authorities. In the last few years, much has been done. The Savings Reform has introduced the figure of Director representing the minorities. CONSOB has intervened on the market to ensure the substantial respect, and not only formal, of the regulations. The effort is to unmask possible self-styled minorities, which can, in reality, be connected to the shareholders of reference. The limit to the number of positions for the members of the internal control bodies, that is, audit committees and supervisory boards, is another provision adopted by CONSOB in the implementation of the savings reform, which should mean a greater protection of the minorities.
Placing a barrier to the proliferation of the positions of control, helps to ensure that the internal controls are more serious and efficient – not just a formality or a mere facade.
Much work remains to be done. Very shortly, CONSOB intends to approve the new regulations on the operations between correlated parts, that is, those operations between subjects who are connected among themselves, who usually answer to the shareholder of control or of majority and who, in determinate circumstances, override the interests of small shareholders.
The new discipline, strengthening the role of the independent administrator and improving the regime of transparency on this type of operation should lead to a greater protection of minority shareholders.
Other forms of protection are on the way thanks to the Community directive on the rights of shareholders, which will facilitate, to a great extent, the right to vote also thanks to recourse to the computerized vote via internet. These are provisions that take the direction of giving more voice and, therefore, also more protection to the minority.
Vigilance is founded on administrative control. But there also exist other participant controls. The associationism of the consumers. The association of the small shareholders, who with their complaints have frequently made the pathologies emerge. How can the role of the organized savers be reinforced?
The CONSOB doors are always open to those who wish to report irregularities and misuses. Every year, we receive thousands of complaint statements. Everyone of them are examined. Some contain useful points for vigilance activities. Sometimes, the complaints are presented by organized groups, such as the associations of small shareholders and consumers.
As arbiter, CONSOB listens to all the protagonists of the market irrespective of their positions, be they high or low. In this exercise, it can happen that the arbiter is pushed from one side to another. Often the contenders are very noisy, but this is part of the game. CONSOB does not take sides. It exercises its functions with neutrality and without self-interest, pursuing the objective of the respect of the rules and of the integrity of the market. In doing this, it sometimes results that one or more of the contenders or even all of them are unhappy with the decisions, but this is also part of the game. There is no doubt, however, that the report and complaints that arrive from shareholder associations or consumers often constitute a precious element for the CONSOB investigations.
The associationism can be reinforced through the institution of the class action, the collective legal actions. This instrument – in use for a long time in the United States and other Countries – is on the home stretch also in Italy. It could be a powerful weapon with a strong preventive effect of deterrence and dissuasion. But as all things new, also this must be put to the test, to verify what effects it can concretely produce on our system. We know that the time factors in the Italian Judicial System do not correspond with the expectations of the citizens and that the courtrooms are overflowing. The class action, in my opinion, is an instrument that must be managed with caution. The risk is an explosion of the conflicts with possible negative repercussions on the Italian Judicial System, already struggling for breath. It is to be hoped that in a final balance, the benefits will outweigh the costs.
One comes again to reflect on subjects which are too quickly abandoned: the social market economy, the joint-management. It concerns prospects which allows the humanization of the economy and the formation of wealth. Can they become instruments for transparency? Can they favour a re-birth of trust?
After the last war the social market economy has given proof of itself for over 60 years. The Countries which adopted this model of development – among the first being Germany – have found a lasting condition not only of economic and business growth, but also of social adhesion and political co-existence. It is a model that tends to include and create, rather than exclude and oppose.
It reduces conflict between the various socio-economic actors, extends the responsibilities: it involves. It provides for the widest participation possible, also outside of the companies, where the mechanism of co-determination opens the doors of the Supervisory Boards to the representatives of the workers. Post-war Germany, destroyed by the wreckage of Nazism, took the path of social market economy under the guide of Chancellor Konrad Adenauer. Still today, Germany harvests the fruits of those choices. It was not a privilege exclusive to the Adenauer Christian democrats. It was common property of all the German political classes, including the social democrats who, once in government, proceeded along the same path. After all, it should not surprise, given that this model puts together and allows different elements to converge: the animal spirits of capitalism and the market, tempered by a sense of social responsibility and by solidarity towards the weakest. This model has functioned and continues to function. I believe that still today, it can be a valid reference point for the present and for our future.