Bank of Italy Goes on the Defensive

MILAN�Italy's banking regulator on Tuesday said it had for years tightly supervised Italian lender Banca Monte dei Paschi di Siena SpA, which says it is sitting on potentially hundreds of million euros in losses due to risky financial transactions.

The recent disclosure of the potential losses is causing upheaval in Italian financial and political circles.

The Bank of Italy's supervision of MPS has been "continuous and of growing intensity," the central bank said in a document outlining the chronology of its oversight of MPS since 2008.

Much of the financial trouble at MPS, which is Italy's No. 3 lender by assets, dates to its purchase of smaller rival Antonveneta from Spain's Banco Santander SA for �9 billion ($12.1 billion) in 2008. Santander had bought Antonveneta months earlier for �6.6 billion.

Reuters

The Italian government has recently approved �3.9 billion in aid for lender Monte dei Paschi.

The acquisition by MPS came just before the 2008 financial crisis and plunge in financial markets.

MPS subsequently engaged in a number of so-called structured-finance deals�a broad category that can include a range of complex financial bets�in 2008 and 2009 that the bank and regulators say burdened it with risk. The details and potential losses of those structured-finance deals are only starting to emerge now.

The government recently approved a �3.9 billion aid loan to MPS. The money is expected to be disbursed to the 540-year-old bank by the end of February.

According to the Bank of Italy document, the central bank began to question MPS's capital solidity when it first had to evaluate whether to give its green light to the Antonveneta acquisition in 2008.

From the second half of 2009 into 2010, the central bank intensified its scrutiny of MPS's liquidity, including by sending inspectors to its headquarters and offices, according to the document.

"The situation of the bank was considered to be unclear and potentially critical," the document says, referring to the way the complex transactions were affecting the bank in 2010.

An MPS spokesman declined to comment on the chronology of events released by the central bank.

MPS Chief Executive Fabrizio Viola, who became CEO early last year, said on Monday said that the bank was reviewing its past transactions and that the amount of losses, which were likely to be more than �200 million, would be fully disclosed in February. He also said that one derivative transaction, which was called Alexandria, had been incorrectly represented in the bank's accounts.

MPS's new managers are poring through documents in an effort to understand and explain the extent of the bank's financial woes. The central bank's summary highlights, more clearly than has been laid out thus far, how critical MPS's situation became in the years up to the summer of 2011.

At that time, even as the bank was digesting the Antonveneta purchase, the liquidity situation of MPS worsened due to tensions in sovereign-debt markets, the central-bank document says. The value of the large government-bond portfolio held by the bank decreased, hurting its capital position, the document says.

The European Banking Authority conducted stress tests on a high number of European banks and found that MPS had a shortfall of regulatory capital of �3.3 billion as of the end of September 2011.

From that point until June last year, Monte dei Paschi put together a restructuring plan aiming at bringing the bank back into the black by 2015.

Write to Giovanni Legorano at giovanni.legorano@dowjones.com