This chapter discusses how decarbonisation will affect capital markets and how capital markets can support decarbonisation. One notable focus is on the risk of ‘stranded assets’, that is assets that lose value because of decarbonisation, and the potential implications for financial stability. The chapter also analyses how capital markets can become a key enabler of decarbonisation, also thanks to new sustainable finance instruments such as green bonds.

In this chapter, we provide an overview of the Italian legislation on interlocking directorates and its enforcement in the last decade. In 2011, Italy introduced a specific anti-interlocking provision aimed at promoting competition in the banking, insurance, and financial sectors. After explaining why these personal ties may facilitate a collusive or quiet life equilibrium among competitors, we attempt to evaluate the effectiveness and limits of the Italian interlocking ban. Using the banking sector as a case study, we present data on the number of interlocking directorates that persist among the 25 largest banking groups operating in Italy at the end of 2018. The result of our study is that interlocking directorates among major Italian banks and banking groups seem to have disappeared. This is in line with empirical studies showing that, in the period following the entry into force of the Italian interlocking ban, bank lending rates fell, indicating more vigorous competition. We conclude our chapter by questioning whether the 2011 Italian interlocking ban has had any effect on the ownership structure of the relevant market players, for instance contributing to the disposal of minority and cross-shareholdings held by competing companies, and on the composition of their governing bodies.

In the past decades, governments significantly expanded their ‘insurance’ role in the economy. The ‘all-insurance’ state today is expected to cover almost all risks and contingencies from social security, via protecting certain industries or the financial sector to supporting demand and mitigating international crises.Social expenditure reflects the most important ‘insurance role’ of government. Social expenditure has been on a continuous upward trend for decades and absorbed 24% of GDP on average in 2016. Projections for the coming decades point to further moderate increases in an optimistic scenario and very adverse dynamics with spending growing to well above 30% of GDP in pessimistic ones.Large additional social expenditure increases would be hard to finance and would crowd out other, productive spending. Such a world of ‘social dominance’ would not be stable and sustainable. Fortunately, we have all the policy levers to prevent it.

Financial sector developments pose the second important fiscal risk for the coming years and decades and this is the first of two chapters mapping and analysing such fiscal–financial risks. Rising financing costs affect debt service expenditure, especially for countries with high debt and short-term financing. Asset price movements can constitute further major fiscal risks in a downturn. Adverse financial sector developments and negative confidence effects also burden public expenditure and finances via the real economy, and guarantees that fall due in ‘bad’ times can exacerbate this effect. Debt has ratcheted up over consecutive economic and financial cycles over the past forty years, an effect particularly strong during the global financial crisis due to fiscal–financial linkages. Simulations show that the situation of several advanced countries is critical, given their lack of fiscal buffers for another crisis.