Monte Paschi Oversight Thorough, Continuous, Grilli Says

Regulatory oversight of Banca Monte Paschi di Siena SpA was “continuous and thorough” and the bank remains solid even with a capital shortfall and possible losses linked to undisclosed structured finance deals, Finance Minister Vittorio Grilli said.

Grilli testified in parliament today to defend the government’s plan to grant a 3.9 billion-euro ($5.3 billion) rescue as lawmakers ask whether the lender still deserves the aid. Revelations that former management hid details of the loss-making transactions from regulators has raised questions about the Bank of Italy’s oversight under Governor Ignazio Visco and his predecessor Mario Draghi.

Supervision of Monte Paschi “has been continuous, thorough and appropriate and it intensified more and more through inspections that began in 2010 when Draghi was the governor and continued in 2011, 2012 and 2013 under Governor Visco,” Grilli told lawmakers.

The central bank opened a “sanctions procedure” against the Siena, Italy-based bank after the inspections because Monte Paschi’s management failed to set up adequate control mechanisms and showed high interest-rate exposure and poor liquidity.

Monte Paschi said on Jan. 17 it will review its accounts after Bloomberg News reported the lender engaged in a transaction with Deutsche Bank AG in 2008, dubbed “Project Santorini,” that obscured losses before it sought an initial government bailout the following year. The bank said Jan. 23 it’s reviewing three money-losing structured deals, including Santorini, uncovered by newly appointed executives.

Grilli, Draghi

The bailout will allow Italy’s oldest bank to meet capital levels demanded by the European Banking Authority. Today’s testimony by Grilli follows a meeting yesterday in Milan between Grilli and European Central Bank President Draghi, who headed Italy’s central bank when some of the secret, structured-finance deals were undertaken.

Revelations this month that Monte Paschi’s former management hid details of the deals that may saddle the bank with hundreds of millions of euros in losses has undermined support for the aid. Former premier Silvio Berlusconi, who’s heading the center-right coalition in the Feb. 24-25 national vote, has criticized Prime Minister Mario Monti over the bailout by linking the aid to an unpopular property tax.

Grilli tried to calm the waters today, saying “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.”

He explained how the aid to Monte Paschi isn’t a bailout but comes in the form of high-interest loans that will initially pay the state a 9 percent return, rising to 15 percent over the life of the rescue. If Monte Paschi can’t pay back the funds, the loans will convert into shares, giving the government a direct stake in the lender.

Before it's here, it's on the Bloomberg Terminal.