Bank of Italy Head to Face Lawmakers Over Costly Lapses

Updated on
  • Visco to say central bank diligent in lender supervision
  • Finance chief: central bank role effective, except some cases

Ignazio Visco will defend the Bank of Italy’s oversight of the country’s lenders this week after a crisis that led to taxpayer-funded bailouts, losses for small investors and a damaged reputation for the financial system abroad.

As a two-and-half month probe by the country’s parliament into the industry comes to an end, Visco will make his long-awaited appearance at a committee hearing on Tuesday.

Some of those who will interrogate the 68-year-old governor had sought unsuccessfully to block his appointment to a second term in October, signaling the waning domestic confidence in the institution. The bank rescues that took place on his watch followed protracted negotiations with the European Union in Brussels.

Ignazio Visco

Photographer: Alessia Pierdomenico/Bloomberg

“In the political world there is a widespread negative view of the central bank’s action,” said Luca Erzegovesi, professor of banking and corporate finance at the University of Trento, northern Italy. “I think it’s unfair to blame everything on the regulators for crises that took place during an economic slump and amid key regulatory changes.”

Bailout Questions

Amid accusations of lax oversight, the hearings are an attempt to understand how the state ended up having to pump billions of aid into lenders, including 5.4 billion euros ($6.3 billion) to recapitalize Banca Monte dei Paschi di Siena SpA after a failed market attempt. With a national election due within months, they are also an opportunity for some politicians to tap into public anger and shore up support before the vote.

In June, the government committed as much as 17 billion euros to wind down Popolare di Vicenza SpA and Veneto Banca SpA, two smaller banks in the Veneto region. And in late 2015, Visco’s central bank and the government approved a resolution plan for four regional lenders -- with shareholders and subordinated-debt holders incurring losses.

Speaking before the parliamentary committee on Monday, Finance Minister Pier Carlo Padoan defended the performance of the country’s regulators. “Despite difficulties, there has basically been a substantial capacity to handle” the situation, he said, when asked if he thought the Bank of Italy and market watchdog Consob effectively supervised the banking system.

He added that the government decided to confirm Visco at the lead of the central bank to guarantee institutional stability, which remains key for Italy’s reputation on financial markets. He said the government acknowledged “that the supervision in specific cases could have done better.”

Last week, Padoan praised the government action in a Twitter post and laid some of the responsibility for the crisis on banks’ executives.

The parliamentary committee decided not to hear from European Central Bank President Mario Draghi, who led the Bank of Italy in the years when troubles started to build up at the lenders. But it will hear from ECB Supervisory Board member Ignazio Angeloni a day after Visco.

Defensive Position

Carmelo Barbagallo, the Bank of Italy’s chief inspector, gave a preview of what Visco is likely to say in earlier testimony to the panel.

Barbagallo told lawmakers that bad management at the Veneto lenders was to blame for their near-failure. He also said that the crisis at Paschi was amplified by the actions of former management and that the Bank of Italy did not have powers regarding the accounting of some derivative deals the lender signed.

The Monte dei Paschi near-failure came to the fore again this month when an appeals court cleared three former executives of charges of misleading authorities. During the trial, the defendants’ lawyers said that the central bank was aware of the accounting methods used by Paschi for a swap it allegedly used to mask losses.

Erzegovesi, who expects the Monte dei Paschi difficulties to be raised during Visco’s hearing, said the court ruling “seemed to contradict the account of the Bank of Italy.”

Visco himself has already defended his actions and, like Barbagallo, said that bank executives must also bear some of the burden.

“Supervision significantly reduces the risk of banking crises but can’t reduce it to zero,” he said shortly after his reappointment. “Supervisors can’t take the place of managers.”

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