January 29, 2013 7:08 pm

Finance minister defends Italy bank supervision

Italy’s finance minister has delivered a robust defence of the Bank of Italy’s supervision of the Tuscan bank at the centre of a bailout scandal, urging politicians in the heat of an election campaign to exercise “prudence and responsibility” in debating the state of the country’s banking system.

Vittorio Grilli was called to testify before a special session of parliament in Rome on Tuesday to explain the government’s controversial decision to go ahead with €3.9bn in loans to Monte Paschi di Siena, following revelations that its former management – under investigation for alleged fraud and other financial crimes – had hidden lossmaking derivatives contracts from supervisors.

The stage was set in Rome for a tough encounter. Giulio Tremonti, former finance minister who had a stormy relationship with Mario Draghi – Bank of Italy boss before becoming European Central Bank chief in 2011 – attacked what he said was the then governor’s failure to exercise adequate vigilance despite effective inspections carried out by the central bank’s functionaries.

“For two or three years almost nothing was done” by the Bank of Italy, Mr Tremonti said, apparently referring to the period from the purchase by Monte dei Paschi of Antonveneta in 2007 – for what he said was an inflated price of over €9bn – until inspections requested by Mr Draghi in 2010.

Referring to the Bank of Italy’s statement last week that it discovered the “true nature” of the lossmaking derivatives only when documents were found in a safe at the Siena bank last October, Mr Tremonti said relevant documents were actually in a safe at the Bank of Italy’s headquarters in Rome.

That claim was repeated by Elio Lannutti, an opposition senator, who said failings at Monte dei Paschi had led to a “hole” of over €15bn.

Lawmakers in former prime minister Silvio Berlusconi’s centre-right party used the hearing to score political points against technocrat prime minister Mario Monti, who is running for office, and the centre-left Democratic party, which has close political ties to the Siena bank.

Mr Grilli – who was briefed by Mr Draghi in Milan on Monday – insisted that the Bank of Italy’s supervision of Monte dei Paschi had been “continuous, thorough and appropriate” and had intensified through inspections that began under Mr Draghi in 2010 and continued under Ignazio Visco, his successor.

Mr Grilli said Monte dei Paschi, Italy’s third-largest bank by assets, was solid despite its capital shortfall and losses linked to derivatives, which the bank’s new management, in place since last April, say could amount to €720m.

The Bank of Italy opened a sanctions procedure against the Siena bank after inspections revealed its former management had failed to set up adequate control mechanisms.

Mr Grilli said the central bank’s 2011 inspection showed that problems had not been overcome and that it demanded a “swift and clear discontinuity” in the bank’s management, which was replaced last year.

The €3.9bn bailout through so-called “Monti bonds”, which carry an interest rate of 9 per cent, will allow Monte dei Paschi to meet capital requirements set by the European Banking Authority. The bonds had been designed by the European Commission, Mr Grilli said.

If the bank cannot repay the loans then they will be converted into shares, giving the state a direct shareholding.

“I think that prudence and responsibility are needed in the public debate on the situation of our financial institutions and of Monte dei Paschi di Siena in particular,” Mr Grilli said, arguing that failings at the bank did not represent a systemic crisis.

Following Mr Grilli’s appearance in parliament, the Bank of Italy released a document detailing its supervision of Monte dei Paschi since its takeover of Antonveneta. The statement insisted that the Bank of Italy approved the take-over only on the basis that the Tuscan bank raised sufficient funds to rebuild its capital base, and it listed the efforts it had made to ensure this took place.

Commenting on the hearing, Gianluca Spina, president of the Politecnico di Milano Business School, said Mr Grilli had delivered an important message to markets and the public that Italy’s banking system was sound.

Mr Spina noted, however, that the current judicial investigations had prevented Mr Grilli from giving a detailed explanation of events, particularly the role played by foreign banks in Monte dei Paschi’s troubles, including Bank Santander from which it bought Padua-based Antonveneta a few months after the Spanish bank had acquired it for €6.6bn.

While the Bank of Italy has supervisory authority over Italian banks, it was not the only supervisory with authority over Monte Paschi. The Italian Treasury has regulatory responsibility for the foundation which is the major shareholder in the bank, and which over the past five years took on €1bn in debt – far in excess of what is allowed in its statues – in order to retail control of the bank while it went through a series of capital raising actions as losses undermined its capital base.

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