How is it possible that Antonio Fazio is still the governor of the Bank of Italy?
After announcing his support for domestic ownership of Italian banks, critics this summer accused Mr Fazio this summer he of openly favouring Banca Popolare Italiana over ABN Amro in a takeover contest. In doing To do so, he overruled the opinion of his own employees about BPI’s the financial solidity stability, of BPI, and for this decision he will be questioned by Italian prosecutors. Since then, Silvio Berlusconi, the Italian prime minister has declared the permanence of Mr Fazio’s permanence at position as the head of the central bank “incompatible with the international credibility of our country”; one economy minister of the economy has resigned, refusing to travel with him to Washington; and while the next new one has denied him the right to represent Italy in a World Bank meeting. How can he still be in office?
One reason is the archaic statute of the Italian central bank. Designed in 1936 by the Fascist regime, the Bank of Italy’s statute cossets its governors like a duxuniversity don, with lifetime appointments, considerable power close to dictatorial power, and relatively few obligations of transparency. Hence, none of the governor’s his decisions can be challenged on the merit. In the past, the problem was somewhat mitigated by the fact that the prime minister had the power to remove the governor. was removable by the Prime Minister. But this possibility was eliminated under as the Bank of Italy conformed to the rules of the European Central Bank. FormallyOnly the 13-member governing council Consiglio Superiore of the Bank of Italy has the formal right to initiate a dismissal procedure, of removal, but guess who sits on that board? Appointees of Mr Fazio. Not surprisingly, these people gentlemen are among the very few in Italy who do not think Mr Fazio has to leave.
The second reason is the inability of Italian institutions to deal swiftly and promptly with this kind of this problem, an inability that has seriously compromised Italy’s international reputation. abroadThe government has been timid, afraid of upsetting the hardline Lega Nord, or Northern League, Lega Nord which was defending which defended Mr Fazio in exchange for his support of a northern bank. Prime Minister Mr Berlusconi has oscillated between applauding Mr Fazio and asking him to leave, depending, it would seem, on the demands of what his coalition partners. asked him to do. Part of the political opposition, also, has also been reluctant to timid in demandingdemand asking Mr Fazio’s resignation, possibly because Unipol, a company linked to the main opposition party, Unipolbenefited from the governor’s Faziostaunch defence ’s protection of of the Italian banking system against from foreign acquisitions. The Italian president (himself a former central bank governor of the Bank of Italy, who, as prime minister, appointed Mr Fazio) when he was Prime Minister) has been remarkably silent on this issue, in spite of an appeal by of 270 Italian economists asking him to intervene.
But the real reason is for that Mr Fazio’s resilience remains in place ’s behavior is no accident. It is a textbook example case of “regulatory capture”, in which the regulator internalises the benefits of the regulated, rather than those of the nation. In Italy’s perverse system, under which the Bank of Italy is “owned” by the banks it regulates and acts in their interest.By shielding them from international competition, Fazio preserves their rents and receive in exchange their support. The current statute of the Bank of Italy, that, incidentally is owned by private banks, the central bank’s statute lacks safeguards does not include enough guarantees against the possibility that a governor like such as Mr Fazio may act to protect the rents of Italian banks, shielding them from foreign competition in exchange for their support.
Clearly, the central bank’s statute of the Bank of Italy needs a serious reform to minimise the risk of regulatory capture and Mr Fazio has to must go in order to restore the bank’s credibility. HoweverIf, however, Mr Fazio sticks to by his refusal to resign, has said, of the Bank of Italy. Faziosaid, however, that he will not resign, So what to do? First, the ECB should clearly state make it clear that they do it does not approve of Mr Fazio’s actions, although but we think it it would be a bad precedent (both for the ECB and for Italy) if they were the one forcing it was the body tried to force his the resignation. Second, the central bank’s governing council Consiglio Superiore of the Bank of Italy should vote on Mr Fazio’s tenure and revoke his appointment. Unfortunately that it is unlikely to happen, given the nature of this body, composed of dominance of Mr Fazio’s appointees in this body. But let them vote: the council meets tomorrow and such a move would this will clarify the situation.
If the Consigliocouncil’s members do not find nothing anything reprehensible in Mr Fazio’s behaviour, they must have to declare this it openly, putting their their reputation on the line. If, as we expect, Mr Fazio will survives this vote, the only hope is a decisive intervention by of Carlo Azeglio Ciampi, the Italian president. He can exert his moral authority on the bank’s council members. and send a message to parliament. But in this of the Consiglio, in which case he should must act very soon. before they vote, or send a message to Parliament. Thus far, his silence has been interpreted as recognition of respect for his the limited constitutional power he has, and his respect for the central bank’s independence, of the Bank of Italy, but this situation is so serious and extraordinary that he cannot abstain any longer. The Italy’s reputation of Italy is on the line. is at stake. President Ciampi should speak openly and clearly to Mr Fazio and to the nation. We expect nothing less from him.
Alberto Alesina is professor of political economics at Harvard University; Luigi Zingales is professor of entrepreneurship and finance at the University of Chicago