Could the banking union have avoided Monte’s mess?
By Neil Unmack
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Derivative blow-ups of the type that happened at Banca Monte dei Paschi di Siena are here to stay – even in the brave new world of the euro zoneās planned banking union.
It would be wrong to lay all the blame for Monte Paschiās 720 million euro derivative loss on its regulator, the Bank of Italy. In the immediate aftermath of the scandal, many of the involved parties are trying to deflect blame onto each other, or plead ignorance. The central bank says it wasnāt shown key documents, and so couldnāt have known about the dealsā true purpose, which appears to have been to hide losses. The net effect was to push up the bankās bailout costs by some 500 million euros.
When the single regulator comes on board, the European Central Bank will have substantial new powers. Then it must choose to use them. It will be able to limit a bankās exposures, beef up governance, demand more public disclosure, and launch its own investigations. It can force banks to trim sketchy or risky businesses, and cut payouts to build capital.
But it would be naĆÆve to think it will spot all the gremlins. For one, it will still rely on national regulators, who havenāt always been great at protecting their own backyard; think of the savings banks that brought Spain to its knees. Second, it will only have direct supervision over the 200-odd largest banks with 30 billion euros or more of assets. MPS will be in that bracket, but roughly 6,000 banks wonāt. The risk is that the smaller banks become the next arena of regulatory arbitrage.
Finally, the ECBās own track record of co-ordinating authorities across Europe isnāt spotless. Its own collateral framework has been the source of some embarrassing recent boo-boos when the venerable Banque de France got confused about the rules. The system wonāt be perfect. The best hope is that it will improve.