When euro zone governments agreed last year to give the European Central Bank the power to supervise its banks, that looked like another victory for its president Mario Draghi. It is more like a poisoned chalice.
The ECB will certainly get a chunk of extra power. But it will also be blamed when banks run into trouble, as they inevitably will. Draghi himself is experiencing this first hand following the scandal at Monte dei Paschi di Siena (MPS), which has had to be rescued by the Italian state. He has been lambasted for failing to supervise the country’s third largest bank properly when he ran the Bank of Italy – although the criticism seems overdone and has often been fuelled by his political opponents back in Rome.
The potential reputational risks for the ECB from banking snarl-ups on its watch are probably even bigger than they are for national central banks. This is because it doesn’t yet have the full set of tools to do the job properly. Moreover, a huge amount is at stake since the ECB is the euro zone’s most credible institution. If its reputation gets tarnished because of perceived supervisory failures, that could rub off on its ability to conduct monetary policy or manage crises effectively.
The Bank of Italy rejects the notion that it was guilty of supervisory lapses with MPS. It pointed out in a seven-page document last week the host of regulatory actions it had taken since it first became worried about the bank in the second half of 2009.
The bottom line is that MPS did not blow up – something which could have triggered a new euro panic. The Bank of Italy deserves some credit for avoiding such a calamity. It did eventually force the Sienese bank to strengthen its weak liquidity and capital buffers as well as push for the management to quit.