The MPS scandal underscores the problem of the dual control of the ECB and national supervisors
When eurozone governments agreed last year to give the European Central Bank (ECB) 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 countrys third largest bank properly when he ran the Bank of Italyalthough 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 doesnt yet have the full set of tools to do the job properly. Moreover, a huge amount is at stake since the ECB is the eurozones 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 upsomething 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.
That said, the countrys central bank seems to have been slow to get to grips with MPS. For example, the bank took nearly a year to raise capital after it was told to. The Bank of Italy also waited over a year before launching a second in-depth inspection, even though it found a host of problems in its 2010 inspection and discovered other problems afterwards.
There are mitigating factors: the management was hiding information and dragging its feet; the Bank of Italy