Scandal at the world’s oldest bank shows how endemic banks’ risk-taking culture is

January 29, 2013
January 29, 2013

You’d think that a bank that has survived for more than 600 years would be a little more cautious than most. Indeed, Banca Monte dei Paschi di Siena (MPS), Italy’s third-largest bank and the world’s oldest, has a conservative reputation. But for the past few days financial headlines in Italy have been dominated by a derivatives-trading scandal more reminiscent of Wall Street than the Via Banchi di Sopra.

Over the last ten years MPS, founded in 1472, took what can only be called excessive risks. In 2007, it purchased the troubled Banca Antonveneta (paywall) for a whopping €9.3 billion ($12.52 billion) from Spain’s Banco Santander, which had bought it a few months earlier for €3 billion less. From 2006 to 2009, MPS was also playing around—and using shady accounting procedures—in the derivatives market. It ultimately lost as much as €720 million, which CEO Fabrizio Viola says has still not properly shown up in financial statements. Even after the company had lost out on these trades, it increased its proprietary trading portfolio (Italian), from €25 billion in 2009 to €38 billion in 2011.

The scandals have brought particular scrutiny given that the Italian government agreed to bail out Banca MPS back in June 2012. On Jan. 26 it agreed to extend €3.9 billion to the poorly funded bank, including rolling over a €1.9 billion loan the bank took out in the middle of the financial crisis. It will have to pay back that money over the next five years.

Clearly, Banca MPS screwed up. How was Banca Antonveneta suddenly worth €3 billion more in a matter of months? How did it end up in derivatives transactions that were so damaging, and how did it conceal those losses from auditors, shareholders, and regulators? Believe it or not, the most recent chief executive appointed last year only found out about the nature of the transactions from a document hidden away in a safe at the bank’s headquarters. Clearly, Banca MPS was not properly handling its risk and not properly disclosing financial information.

The MPS affair joins the more than $6 billion loss on derivatives trading at JP Morgan last year, and a variety of other insider-trading and derivatives scandals that have surfaced in the past few years, in painting a not-very-pretty picture for the financial world. New global regulations aimed at curbing excessive risk-taking, like Basel III, still rely on a bank to assess and respond to its risks itself. Although the process will become more automated, new regulations won’t stop the bank from inaccurately pricing acquisitions and trades or overruling warnings. (For example, JP Morgan reportedly ignored warnings that it was amassing a massive risky position on trades conducted as recently as early 2012.)

It would be nice to rely on banks to accurately report their financial information, but they continue to be afforded a kind of secrecy and leniency that doesn’t bode well for preventing another financial crisis. Banks may have cleaned up their balance sheets since 2008, but it’s still too easy for them to get dirty again.

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