Last updated: February 17, 2013 6:42 pm

Siena ‘bomb’ rocks banking foundations

Berlusconi©EPA

Comeback trail: Silvio Berlusconi addresses a rally in Turin yesterday at the start of the last week of campaigning for the February 24-25 election

With its stunning views over Siena’s Piazza del Campo, Palazzo Sansedoni has been for four centuries home to the city’s most powerful families and institutions. For more than a decade after its creation in 1995, Fondazione Monte dei Paschi conformed to the wealth of the palace’s previous owners.

But the foundation is now in deep financial trouble. The near-collapse at Monte dei Paschi di Siena, which the Fondazione has controlled throughout its existence, has more than halved its net wealth, which was as high as €2.7bn in 1995 and fell to €1.3bn in 2011. Analysts think that, were the foundation forced to mark-to-market the losses on its assets, its net wealth would be even lower.

Critics wonder how it is possible that the foundation’s board rubber-stamped the poor managerial decisions at MPS, which have ultimately forced Italy’s third-largest bank to request a €3.9bn loan from the state.

Fondazione Monte dei Paschi is only one of the 88 banking foundations scattered across Italy. Its tumble has re-opened a long-standing debate over whether these political bodies with strong ties to the local administrations can be trusted to control the country’s lenders.

When a new government is elected in Italy early next week, it will face demands to weaken their power, sever their links with elected politicians and subject them to tighter regulation.

“Monte dei Paschi is a bomb. The relation between the banks and the foundations is destined to change,” said a senior policy maker in Rome, who asked not to be named.

The fondazioni were created in the 1990s following the privatisation of Italy’s banking system. In 1999, a law forced them to reduce their stakes in the banks they controlled to below 50 per cent.

Yet critics argue that the foundations’ grip on Italy’s banking system remains tight.

MPS – where the Fondazione still controls 34.9 per cent of the bank, having owned as much as 50 per cent – is the most egregious case. But groups of banking foundations also own 14 per cent of UniCredit and 27 per cent of Intesa Sanpaolo, Italy’s two largest banks.

The close links between the fondazioni and local politicians are deemed to have worsened the governance of Italian lenders. “The foundations are a Trojan horse through which politicians have entered the banks,” said Tito Boeri, an economics professor at Bocconi University in Milan.

A study by Prof Boeri found that four out of Italy’s five largest lenders have at least one career politician on their boards. “These politicians typically come from the board of the fondazioni, where they clean up their CV and then go to run a bank, despite not having adequate managerial competences,” he said.

Once on the board of a bank, a politician’s objectives are not purely financial. Work by Paola Sapienza, an economist at Northwestern University in the US, has shown that banks that are subject to a strong political influence are more concerned about the electoral cycle than about improving profitability.

ACRI, the association of Italy’s banking foundations, has taken steps to limit the scope for conflicts of interests between banking and politics. Last June, its members approved a charter obliging them not to appoint career politicians on their board before they have spent at least one year away from active politics.

Giuseppe Guzzetti, ACRI’s chairman, insists that Monte dei Paschi was an exception. He says the foundations do not control Italy’s banks, and that their aim is to preserve their capital and use their investment returns to finance charitable activities.

“We are philanthropic organisations and our grants help Italians with their social needs at a time when the government is having to cut back its support,” said Mr Guzzetti.

Critics of the foundations would like the next government to force them to diversify their portfolio and sell any shares they own in an individual bank until they get below a low threshold – maybe 2 per cent.

The government may have its hands tied, however. A ruling by Italy’s Constitutional Court in 2003 found that the foundations were private entities. As such, the state cannot dictate their investment strategies.

The government could instead impose stricter rules on the proportion of members on a foundation’s board that are appointed by local politicians. At Fondazione Monte dei Paschi, 14 of its 16 board members were chosen by local authorities.

Finally, Italy’s next government will have to decide on the future supervision of the foundations. Currently, it is in the hands of the finance ministry, which exerts a relatively “light-touch” oversight.

Stefano Fassina, economics spokesman for the Democrats, who are on course to win next week’s election, is against stripping the ministry of its supervisory role.

“The question we should address instead is which instruments the finance minister needs in order to be an effective supervisor,” said Mr Fassina.

Prof Boeri doubts this would go far enough. “The government has been too soft on the fondazioni,” he said. “Italy needs to set limits on what they can invest in and move their supervision to one of the other existing regulators.”

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