Regulation, Corporate Governance and Risk Management in Banks and Insurance Companies

Regulation may impact on financial risk taking by financial intermediaries by way of the decision-making process envisaged in the various possible legal structures set forth by the law. In Europe there are three different possible board structures: the one-tier board system, typical of the UK, Spain and many other countries, the vertical two-tier system, typical of Germany and of the Netherlands in the case of large companies and countries in which companies may choose between different models, such as France and Italy. The vertical two-tier system, was introduced in Italy with the company law reform in 2003. In the last eighteen months it was chosen in three of the most recent bank mergers in Italy (Intesa-Sanpaolo IMI, Banca Popolare di Verona e Novara-Banca Popolare Italiana, Banche Popolari Unite-Banca Lombarda) and also by Italy’s largest investment bank Mediobanca. It was also suggested for Assicurazioni Generali by international institutional investors. This re-fuelled the debate concerning corporate governance in Italy. The adoption of the vertical dual system was appreciated by observers who pointed out the potential of the two-tier system in relation to the innovative role of the Supervisory Board and, especially, to its function as filter between ownership and management and in the definition of the risk appetite of financial intermediaries. Others alleged that there are no substantially innovative elements in its application compared to the traditional Italian horizontal two-tier system and underlined the risks of duplication of powers and responsibilities and the plethoric multiplication of seats on the boards. This paper pursues a twofold objective of investigating i) the peculiarities of the corporate governance of financial intermediaries as concerns the size of the board and performance and ii), the role of committees in the risk acceptance process of European financial intermediaries considering also the type of governance system in place. Two international samples are used to conduct the analysis: the companies which make up the Eurotop 100 index and the top 40 European intermediaries by capitalization.