The latest banking crisis in Italy risks focusing scrutiny on the leadership of both the Bank of Italy and Italy’s financial markets regulator Consob. The decision to give the central bank’s current Chairman Ignazio Visco a fresh six-year mandate despite his having presided over one of the worst banking crises in living memory (and as Italy usually has a banking crisis every two days, that's an achievement, has started a tug-of-war between political parties and the president, who makes the ultimate decision on who to appoint as central bank chief.
The first to point the finger was Italy’s former premier Matteo Renzi, who, in an effort to distract from his own party’s part in the collapse of Monte dei Paschi di Siena (MPS) perhaps, called into question the supervisory role of both the Bank of Italy and Consob during Italy’s banking crisis.
Silvio Berlusconi, a key player in the center-right coalition whose party came out on top in recent elections in Sicily, was next to join the fray. “The Bank of Italy did not exercise the control that was expected of it,” he told reporters in Brussels in response to a pointed question about Visco.
As the controversy grows, it risks drawing the role of Visco’s predecessor, current ECB President Mario Draghi, into the spotlight. Many of the key events that helped pave the way to Italy’s current crisis took place during his mandate as governor of Italy’s central bank. And now the skeletons are beginning to crawl out of the closet.
It was recently revealed in a Milan court case that in 2010 Italy’s central bank, run by Draghi, knew that MPS’ management had papered over a loss of almost $500 million in 2010 and failed to report it. It’s not the magnitude of the loss that matters, but how it was done and who knew what and when. Bloomberg:
A 2010 report from the Bank of Italy … shows inspectors were aware that a 2008 trade struck with Deutsche Bank AG was the mirror image of an earlier deal Monte dei Paschi had with the German lender. The Italian bank was losing about €370 million ($431 million) on the earlier transaction, dubbed Santorini, as of December 2008. The new trade posted a gain of roughly the same amount and allowed losses to be spread out over a longer period, the document shows.
One of the main reasons was to hide the losses racked up from MPS’s purchase in late 2007 of Banca Antonveneta, a mid-sized Padova-based bank. This still-opaque deal is arguably the most important banking scandal in Italy of the last ten years, and it directly paved the way to the collapse of MPS.
In its quest for growth at any price, MPS paid €10 billion for Antonveneta, over 50% more than the €6.6 billion Spanish lender Banco Santander had paid just months prior as part of its joint acquisition (with Royal Bank Scotland and Belgian bank Fortis) of Dutch giant ABN Amro. Santander was happy to hold on to the Brazilian side of ABN Amro’s business while hastily disposing of the Italian “assets.”
For Monte dei Paschi it was an ill-timed disaster, just as the purchase of ABM Amro’s disparate other parts had been for Royal Bank of Scotland and Fortis, both of which would end up receiving taxpayer-funded bailouts to stay alive once the post-Lehman hangover hit Europe.