The first people to tell the public that the world's oldest bank was cooking its books weren't the bank's executives, its outside auditors at KPMG, its regulators at the Bank of Italy, or anyone else who had a duty to keep the place honest. They were journalists with a good source: a stack of documents from another bank that helped craft the scheme.
About two weeks ago, Bloomberg News reporters Elisa Martinuzzi and Nicholas Dunbar broke the story that Deutsche Bank AG designed a derivative in December 2008 for Banca Monte dei Paschi di Siena SpA that hid the Italian lender's losses before it sought a 1.9 billion euro ($2.6 billion) taxpayer bailout in 2009.
The ensuing scandal threatens to be a major issue in Italy's elections in a few weeks. It's also a reminder that bank regulators, no matter what country they're from, have proven time and again to be unreliable protectors of the public interest. Remember this for next year, when oversight of Monte Paschi and Europe's other large banks is scheduled to move to the European Central Bank.
Within hours of Bloomberg's initial Jan. 17 story, Monte Paschi promised a review of the deal, dubbed Project Santorini, and other transactions. This week, the Bank of Italy acknowledged it checked Santorini as early as 2009 and spotted accounting problems with it the following year. Back then, the Bank of Italy was led by Mario Draghi, now the ECB's president. Unfortunately for him, the Bank of Italy didn't make Monte Paschi disclose the information while he was its governor.
True Believers
Italian prosecutors have opened a criminal investigation that includes the Bank of Italy. And now Monte Paschi, founded in 1472, is seeking a new 3.9 billion euro taxpayer bailout. Monte Paschi officials say it won't need more assistance after that. But who believes them?
In their bid to create an integrated financial framework for the region, the European Union's leaders have cited three major needs: a single supervisory mechanism to oversee the area's largest banks, a single resolution plan for restructuring or closing failing banks, and a common system for deposit insurance.
The ECB is set to become the supervisor by March 2014 for the 17 countries using the euro, overseeing banks with at least 30 billion euros of assets. (Monte Paschi has 224 billion euros of assets.) The resolution and insurance prongs remain in the aspirational stage.
One of the goals is to break the bank-sovereign nexus. When the value of Italian bonds plunged during Europe's debt crisis, for instance, Monte Paschi was hurt because it held lots of the government securities, which is a reason the bank sought its first bailout. It's a vicious cycle.
Rescuing failing banks in a crisis adds to governments' financial troubles, which can drive down sovereign bond prices, further depressing banks' capital levels, and so on. The quagmire deepens from there. The countries still need to roll over their debt and sell new bonds. And they need large banks as customers, which helps explain why governments keep propping them up.
Prices for European government bonds have surged since last summer, when Draghi pledged to do "whatever it takes" within the ECB's mandate to preserve the euro. Still, it's anyone's guess what might cause Europe's sovereign-debt crisis to flare up and yields to soar again. Europe's economic troubles aren't over.
Staying Together
The single supervisory mechanism "would provide a timely and unbiased assessment of the need for resolution, while the single resolution authority would ensure actual timely and efficient resolution," EU President Herman Van Rompuy wrote in a December paper titled "Towards a Genuine Economic and Monetary Union."
This looks like a pipe dream when viewed through the prism of the Monte Paschi debacle. It's hard to imagine that Monte Paschi would have been supervised better by the ECB, under Draghi's leadership or someone else's, than it was by the Bank of Italy when Draghi was its governor. (At least with the Bank of Italy, you can't accuse it of being hopelessly uninformed.)
Yet skip ahead and envision a world in which the ECB was already responsible for supervision and had been legally anointed the euro area's single resolution authority. Let's also assume for argument's sake that the ECB wanted to close Monte Paschi, and that Italy's political leaders disagreed, as they very well might. It's simply inconceivable that ECB officials would walk into Monte Paschi's Siena headquarters, seize the bank with all its branches and shut it over Italy's objections. And Monte Paschi isn't even all that big a bank by European standards.
There isn't a country in Europe that has shown itself willing to lose one of its national champion banks. Can you picture French politicians allowing the ECB to have the final say on closing a huge French bank such as Credit Agricole SA, which has 1.9 trillion euros of assets? Would Germany's government really defer to the ECB on euthanizing Deutsche Bank, with 2 trillion euros of assets? No way.
The EU's leaders say a single resolution authority is a necessary element to save the euro and preserve the union. While they may be right about that, need alone won't make it happen. Believe it when you see it in action.
Jonathan Weil is a Bloomberg View columnist. Contact him at jweil6@bloomberg.net.
