ECB’s Visco Says Some Italian Lenders Still Need More Capital

European Central Bank council member Ignazio Visco said some medium to large Italian banks need more capital as the country’s recession drags on.

“Some large- and medium-sized groups still must make progress on the road to broadening their resources,” Visco, also head of Italy’s central bank, said in a speech today in Bergamo, Italy. Increasing capital “allows a reduction of financial leverage without cutting credit support to the real economy. The strengthening is in the interests of shareholders.”

Italy is mired in its fourth recession since 2001 as Prime Minster Mario Monti’s policies to contain the budget deficit curb domestic demand. Unemployment was at the highest in more than 13 years in December and consumer confidence fell in January to the lowest level since at least 1996.

“The economic decline may end in the second half of 2013, with a return to growth at a modest pace and with high uncertainty,” Visco said.

The image of Italy’s banks has been affected by the fallout of accounting irregularities and criminal probes of Banca Monte Dei Paschi di Siena SpA. On Feb. 7, Monte Paschi said it will take a 730 million-euro ($975 million) hit to its assets after accounting for structured deals that hid earlier losses.

Derivative Deals

Siena prosecutors are probing the bank’s former managers for alleged market manipulation, false accounting, obstructing regulators and fraud, people familiar with the matter have said.

Monte Paschi Chief Executive Officer Fabrizio Viola told reporters in Bergamo today that the bank hasn’t decided whether to restructure two derivative transactions, dubbed Santorini and Alexandria, which were used to disguise losses.

The bank is slated to receive a 3.9 billion-euro taxpayer bailout this month to boost capital after failing to meet regulators’ minimum requirements.

Monte Paschi has declined 17 percent in Milan trading since Bloomberg News first published details of the Santorini transaction on Jan. 17.

Italian lender deposits rose an annual 6.9 percent in December, the 11th consecutive monthly increase, the Rome-based central bank said yesterday. Still, in the same month loans to companies shrank by about 9.1 billion euros from November, the ECB said in a Jan. 28 report.

Changing Management

Visco said today that regulators need more power to fire managers at the companies it oversees.

“When a lender isn’t in a situation of crisis, the Bank of Italy can ask shareholders to change management, but it can’t overrule their decision,” Visco said. Regulators “must be able to effectively intervene in cases where, on the basis of established evidence, they see fit to oppose the appointment of managers or remove them.”

The Italian central bank said on Jan. 24 that Monte Paschi’s former managers hid from it “the nature of some transactions.” The Bank of Italy has rejected criticism from lawmakers and consumer associations of its oversight of the Siena-based lender’s accounts and trades.

Former Finance Minister Giulio Tremonti said on Jan. 25 that normally it’s up to the Bank of Italy to inform prosecutors and not the other way around. “I think everything was very well known in certain circles,” he said.

The Bank of Italy’s role isn’t to “police” lenders and it wasn’t informed of Monte Paschi’s newly emerged transactions producing losses, Visco said in a Jan. 25 interview in Davos, Switzerland.

The Bank of Italy “has done everything it should, looking ahead it will be important for Monte Paschi to follow through on its restructuring plans,” Mario Draghi, ECB President and Visco’s predecessor at the Italian central bank, told reporters in Frankfurt on Feb. 7. “It was me who signed both inspections and don’t forget it was Banca d’Italia who gave most of the papers to the judiciary.”

-- With assistance from Sonia Sirletti in Bergamo and Elisa Martinuzzi in Milan. Editors: Frank Connelly, Alistair Reed