Is the ECB’s Draghi Implicated in this Banking Scandal?

Mario Draghi – the current president of the European Central Bank – was chief of Italy’s central bank when the loss-making derivatives contracts and alleged fraud at Monte dei Paschi di Siena (MPS) began in 2007, but a senior Bank of Italy source told Reuters that he had little control over what has been termed “ineffective oversight.”

Since the bank’s derivative losses became known at the end of January, after the world’s oldest bank was forced to ask for a 3.9 billion euro ($5.28 billion) taxpayer bailout, questions have been raised about the oversight of Italy’s banking system and the close ties between MPS and the government, fermenting further political debate ahead of Italy’s most important election in years. The resulting commotion has drawn in the central bank, the government, the center-left Democratic party, and even Draghi.

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Most of the criticism has come from Monte Paschi shareholders, account holders, and politicians.

The Bank of Italy has said it did “everything in its powers” to regulate Monte Paschi, Reuters reported; it force the bank to raise new capital and pressured executives to resign. These executives are now under criminal investigation…
Draghi has been criticized for not sanctioning banking managers involved in the derivative losses more quickly, as the Bank of Italy was aware of the loss-making derivatives contracts as early as 2010. But the bank has maintained that it acted appropriately. The source informed Reuters that the decision to begin a sanctions procedure depends on the inspectors and a series of lower committees, not the central bank’s governor or its executive board.

“The inspectors are the only people responsible for initiating a sanctions procedure so if they don’t find anything in the course of their inspection then it’s not possible for the top management to start the process,” said the source. Yet, in the summer of 2010, Bank of Italy inspectors found two opaque derivatives contracts that could have cost MPS 720 million euros ($973.87 million), and no sanctions were proposed.

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That decision “had nothing to do with the board,” the central bank official said, although he clarified that Draghi was shown the report. Sanctions were not launched until 2012, after the responsible executives had left the bank and after Draghi had moved on to head the ECB. Criminal proceedings began in November 2011.

In addition, the central bank is also under investigation for its alleged oversight failure. However, it has been suggested in the press that the Bank of Italy lacks the necessary powers to effectively regulate the nation’s banks. While it can replace the board of directors, it cannot fire individual managers, a power that the central bank would welcome.

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