ROME Just as he prepares to take responsibility for regulating the banking system of the entire euro zone, Mario Draghi faces questions dating back to his leadership of the Bank of Italy over its oversight of the world's oldest bank.
Turmoil at Italy's third largest lender, 540-year-old Banca Monte dei Paschi di Siena, has rocked the Italian financial establishment and raised questions in the middle of an election campaign for the government and the Bank of Italy.
Monte dei Paschi is accused of having overpaid for a 9 billion euro purchase of a rival in 2007, and also of having made risky derivatives trades in 2006-2009 aimed at massaging accounts, which will book it a loss of 720 million euros.
A source close to a judicial investigation has told Reuters that authorities are investigating whether bribes were paid at the time the bank bought rival lender Antonveneta. Authorities are also examining whether laws were broken in the risky trades.
Whether mistakes, wrongdoing or some mixture of the two were the undoing of the bank, questions are being asked of its regulator, the Bank of Italy, which Draghi left in 2011 to become head of the European Central Bank.
Draghi has long faced questions of why he offered few objections to Monte Paschi's purchase of Antoneveta for an apparently unjustified price of 9 billion euros, a few months after Spain's Santander had bought it for just 6.6 billion.
He did insist Monte Paschi raise more capital, but apparently saw nothing suspicious about the deal that is now under the spotlight of criminal prosecutors.
Questions about the Bank of Italy's role in Monte Paschi have become much sharper since last week, when a newspaper published excerpts from a November 9, 2010 report showing that BOI inspectors had raised flags about derivatives trades more than two years ago.
It has not been made clear whether Draghi was alerted at the time to the conclusions of the seven-page report, signed by chief inspector Vincenzo Cantarella and five colleagues after inspections carried out between May and August 2010.
According to the report, seen by Reuters, the inspectors homed in on the complex derivatives trades now at the heart of the scandal, involving Japanese bank Nomura (8604.T) and Deutsche Bank (DBKGn.DE).
Those trades "present a risk profile which is not adequately controlled, and which has not been communicated" to Monte Paschi's board, the inspectors wrote.
The risk of the operation with Deutsche Bank was "not suitable for the role of the bank department which carried it out", they added, referring to the group's balance sheet management department.
The report concluded by saying that within 30 days Monte Paschi's management must answer the BOI, spelling out what actions it planned to take to address the problems raised. However, the BOI has yet to make clear whether Monte Paschi ever replied as demanded, what steps it promised to take if any, and whether anything was done to follow up.
"NOT A POLICEMAN"
Monte Paschi's chief executive revealed the extent of the possible losses from the derivatives on Thursday last week, and excerpts from the internal BOI report showing the regulator's concerns appeared in Italy's Corriere della Sera the following morning.
That day, Draghi and his successor as BOI Governor, Ignazio Visco, both appeared at the World Economic Conference in Davos.
Draghi delivered a speech and took no questions from reporters. Visco, who normally shies away from the media, gave a spate of television interviews to try to deflect criticism of the bank's oversight.
"It is wrong to insinuate that there was a lack of supervision by the Bank of Italy," Visco said.
He suggested that the BOI had acted behind the scenes to apply pressure to Monte Paschi to change its management, adding that his institution had nothing to hide and would cooperate with prosecutors probing Monte Paschi.
Visco stressed that the BOI was "not a policeman," but did not go into specifics and dodged questions about whether Draghi had known about the derivatives contracts.
With Draghi's new employer, the European Central Bank, about to emerge as the super-regulator for the euro zone banking system, he may find such questions do not easily go away.
(Reporting by Gavin Jones; Editing by Peter Graff)