The country ranks a lowly 40th on Transparency International’s 2005 corruption perception index, worse than any other European nation apart from Greece and lower even than Botswana and Malaysia.
But, until recently, one Italian institution stood out as a beacon of probity in this morass of sleaze: the Bank of Italy. The central bank was regarded both at home and abroad as a centre of intellectual excellence, objectivity and transparency, even when the rest of the country was engulfed in an all-embracing corruption scandal, called tangentopoli (bribesville), in the early 1990s. Reflecting this faith in the central bank, Italy’s then president, Oscar Luigi Scalfaro, asked the governor Carlo Azeglio Ciampi to form a technocratic government in 1993 to guide the country to fresh parliamentary elections, such was the esteem in which the central bank was then held.
Regrettably, much of that high standing has been eroded over the past year as, under Mr Ciampi’s successor, Antonio Fazio, the Bank of Italy became embroiled in the latest, and highly damaging, financial scandal. This involved attempts to stop foreign banks ABN AMRO and BBVA acquiring control of private Italian banks and keeping them in Italian hands, despite EU rules on the free movement of capital. Finally in December when Mr Fazio resigned after sustained and heavy pressure, the government faced a tangentopoli in reverse: it needed someone of high standing to go in and restore the central bank’s reputation and lift morale.
The task has fallen to Mario Draghi, a former director-general at the treasury and deputy chairman of Goldman Sachs, who was heavily involved in Italian privatisation and is noted for setting high standards. When Mr Draghi arrived at the treasury in 1991 he found staff downhearted and dispirited and he discovered why after engaging a consultancy to poll employees. Ironically, the consultants’ survey showed that the treasury’s employees would much rather have been working for the highly respected central bank.
Mr Draghi set about changing things. Public debt management and the responsibility for EU policy were taken from the Bank of Italy and brought into their more rightful place in the treasury. That added some gloss to the musty ministry and soon staff began benchmarking their jobs against those in the treasuries of the UK and France.
Last year’s saga that brought the Bank of Italy to its knees cannot be blamed on the bank’s loss of power, however. Other European central banks have seen their powers wane with the arrival of the euro and transfer of monetary policy to Frankfurt, but have not been engulfed by scandal as a result. At least the Bank of Italy retained its banking supervisory role unlike, for example, the Bank of England which (while still in charge of monetary policy as the UK stayed outside the euro) has seen these powers transferred to the Financial Services Authority.
The machinations have undermined the Bank of Italy’s credibility as a supervisor. At one point last year, two of the bank’s senior inspectors wrote an adverse report on Banca Popolare Italiana (BPI), known as Banca Popolare di Lodi until last June, the bank that Mr Fazio was supporting to prevent Banca Antoniana Popolare Veneta (Antonveneta) from falling into the hands of ABN AMRO. But their opinions were overruled by Mr Fazio and this has damaged the standing the vigilanza supervisory service needs to do its job. “When inspectors visit banks nowadays they are met with smiles rather than respect”, said one inspector in an off-the-record conversation with The Banker. He added: “Mr Draghi will need to look very closely at the vigilanza and will probably have to make big changes.”
Mr Draghi may have read the warrant for the arrest of Gianpiero Fiorani, BPI’s chief executive, and highlighted a passage where the judge points a finger at the work of the central bank. “The reference is to those who remained passive for years, despite various and detailed complaints from consumers’ associations and private individuals, betraying numerous small savers, continuing stubbornly to defend the bank in question (BPI) even during the final clamourous affair, the bid for Antonveneta,” the judge observed. Clearly Mr Draghi will have to distinguish between central bank employees that tried to do their best in difficult circumstances and those that were complicit in lowering the bank’s reputation.
Mr Draghi’s appointment will bring a major change in the central bank’s style, just as Mr Fazio’s arrival brought a big shift. During Mr Ciampi’s governorship, openness was the rule and journalists, for example, enjoyed access to staff for off-the-record briefings; even senior officers in the vigilanza were available to explain how the supervisory service worked. Under Mr Fazio, a centraliser, contacts with the outside were tightly controlled, and what was once open was closed shut.
Mr Fazio’s promotion to governor from deputy-general manager dashed the hopes of Lamberto Dini, who as general manager was the central bank’s number two and favourite for the governorship. With hindsight he would have been a better choice. Mr Dini went on to become treasury minister in 1994 and covered that job while also being prime minister between 1995 and 1996. He followed the experience with five years as foreign minister.
Mr Dini and Mr Fazio are different in many ways: the former is lithe, dapper and worldly; the latter is bulky, dishevelled and provincial. Mr Dini was born in the cultured city of Florence. Mr Fazio comes from the village of Alvito, deep in the Latium countryside south of Rome and returns there often. An assiduous attender of Holy Mass, Mr Fazio has spoken regularly on moral and spiritual matters. “Seeking of personal gain and profit is incompatible with carrying out public functions,” he once said in a talk about the modern relevance of the Catholic saint Thomas Aquinas.
No-one doubts Mr Fazio’s personal morality but during his period of office he seems to have become too close to some bankers and banks that the central bank supervises. He was persuaded of the merits of supporting Mr Fiorani in BPI’s dash for growth, and, finally undone by his association, resigned on December 19, 2005, ending several months of clinging to power (see Antonveneta/BPI drama).
Italy’s central bank already complied with the rules that established Europe’s single currency and required the governors of countries’ central banks to be independent and free from political interference, but the Bank of Italy’s governor uniquely enjoyed appointment for life. That changed on December 23 when parliament approved legislation under which future governors would be appointed for six years, renewable once only. The law also introduces principles of transparency and collectivity into the central bank’s top management. On December 29, government and opposition agreed that Mr Draghi should be appointed.
ABI, the Italian banking association, was fulsome in its praise. “The appointment of Mario Draghi as the Bank of Italy’s governor matches hopes that the position would be filled by someone enjoying wide recognition and international standing. The new governor enjoys such standing and possesses competence and experience in the exceptional measures that are needed for leading the Bank of Italy. Mr Draghi matches the institution’s tradition of excellence.”
Mr Draghi’s curriculum vitae displays his credentials for the post. Sharp, intellectual, international and liberal, Mr Draghi is also an accomplished political operator. During his 10 years as director-general of the treasury, Mr Draghi served nine different governments of various political colours.
Two major issues put the treasury in the front-line during the 1990s: privatisation and the euro. Large banks such as Credito Italiano in 1993 and Banca Commerciale Italiana the following year were in the vanguard of Italy’s privatisation push. Mr Draghi led the team and during his time at the treasury about L200,000bn (€103bn) of public assets were sold. Privatisation brought Mr Draghi into close and regular contact with international investment bankers, and made him well-known and respected in the world’s financial centres.
An example of the care Mr Draghi takes during the holding of public office occurred early in the privatisation process when British Invisibles, a body for promoting British services, organised a seminar on the UK’s Royal Yacht Britannia in July 1992. British investment bankers, Italian politicians and leaders of Italian public-sector industry spent a pleasant day afloat in Her Majesty’s yacht, ate an agreeable lunch and listened to speakers explain the UK’s expertise in privatisation. Both right and left-wing critics complained the cruise off the Tuscan coast was part of an Anglo-Saxon plot to carve up Italian public assets. Mr Draghi gave the opening address, but was quickly over the gangway to disembark before the cruise got under way.
Then, in the second half of the 1990s, the treasury turned its attention to the single European currency. Mr Draghi had been in the front line of 1992’s crisis that forced the lira out of the European exchange rate mechanism. In the later struggle to get the lira into the euro, Mr Draghi worked closely with Mr Ciampi, treasury minister between 1996 and 1999. Such challenges helped Mr Draghi to recruit bright and ambitious people, some from the central bank itself. In 1998, for example, the treasury hired Lorenzo Bini Smaghi, a Bank of Italy employee who had been on secondment to the European Monetary Institute. They will meet up again at the European Central Bank (ECB), where Mr Bini Smaghi is now Italy’s representative on the board.
Mr Draghi has also moved quickly to deal with any potential conflict of interest over Italy’s other foreign bank affair, that of Banca Nazionale del Lavoro (BNL), which has been sought after by Spain’s BBVA. Until his appointment as governor, Mr Draghi had been for four years deputy chairman of Goldman Sachs, which advised BBVA on its BNL bid that lapsed in July.
At the treasury, Mr Draghi oversaw BNL’s privatisation in 1998 and worked hard to involve a major foreign bank. BBVA took almost 15% in BNL at that time to become a key shareholder. But when it sought to win control, with a public tender offer last year, it was obstructed by Mr Fazio and an Italian national champion, Unipol, an insurer controlled by the left-wing cooperative movement. However, even before Mr Draghi took up his post as the Bank of Italy’s governor, the general manager had rejected Unipol’s request for authorisation of its offer. And, on taking up his post, Mr Draghi said that he would stand aside on this matter in the future. He has also sold his Goldman shares and options, entrusting a British blind trust with management of his financial assets.
Unipol’s hostile bid, opposed by the BNL board, evolved late last year. It also emerged that Unipol had helped Mr Fiorani in his bid for Antonveneta and the same group of property speculators and financiers took part in both operations.
On December 28, Unipol chairman Giovanni Consorte and Ivano Sacchetti, the insurer’s general manager, tendered their resignations. The warrant that had led to Mr Fiorani’s arrest also included details of some dealings by Mr Consorte and Mr Sacchetti. The warrant stated that BPL had granted them unsecured loans of €4m each in December 2004. The judge said the loans were used to fund equity trades and allowed the two men to make profits of €1.7m each. When 2005 closed, Mr Consorte was under investigation by magistrates in Milan and Rome. He is on trial for insider trading in Unipol bonds, a charge that he denies.
There promises to be more to come out of the investigations into both the BPI/Antonveneta and Unipol/BNL affairs and magistrates were busy chasing numerous leads as 2006 opened. Among other things, they are interested in the involvement of investment banks, such as Deutsche Bank, working out of London. Certainly, Italy’s magistracy is owed much. If Mr Fazio’s damning telephone call to Mr Fiorani had not become public knowledge, which thanks to the magistrates it did, BPI would likely have achieved its aim and acquired Antonveneta, and the backroom dealings would probably have remained hidden.
However, as The Banker went to press, no charges had yet been laid against any of the people being investigated. Moreover, under Italian law, defendants are considered innocent until the judgement of the final level of appeal has been delivered. This can take many years and often the statute of limitations comes into effect before the appeals process can be completed.
But the magistracy was not alone in closing 2005 shining more brightly than before. The Bank of Italy’s staff, who decided to strike in mid-December, partly in protest against the governor, showed welcome concern for the central bank’s standing. Others stood up for the law and the rules of liberal financial markets. ABN AMRO deserves credit for sticking it out when its cause seemed lost and much credit goes to the team of investment bankers at Rothschild in Milan who, angered at how their client, ABN AMRO, was being treated, worked strenuously to ensure that the facts were known to all.
As Mr Draghi takes over, one question to which he may want to hear the answer is why Mr Fazio’s colleagues – the general manager and his two deputies – in the Bank of Italy’s four-member executive directorate were unable to prevent last year’s disaster. It was clear in July that Mr Fazio had to go and yet he stayed until the end of the year. Why did the other three members of the directorate not resign? Did they believe that Mr Fazio’s behaviour was appropriate to the governor of a central bank? Why was the Superior Council, effectively the board, with the power to remove the governor, inactive? The central bank seemed to have become an autocracy, with Mr Fazio its all-powerful boss. Governance will have to be a priority for the new governor.
Looking from the treasury, which had coped well with the challenges that it faced, Mr Draghi may well have wondered at the end of the last decade if Italy’s central bank possessed the management culture needed to tackle the challenges that it faced. Building that culture is now his job. Mr Draghi showed what he was capable of then. He is now called upon to repeat that act at an institution traumatised by the six-month drama that led to his predecessor’s departure.
Certainly much is expected of him. “Mr Fazio’s departure lifted a great weight. The atmosphere is now much lighter,” a senior officer at the Bank of Italy told The Banker.
“We expect from the Bank of Italy what we have always expected: that it will ensure respect for the law and proper behaviour from all the banks it supervises. It seemed, and last year’s events confirmed this, that the treatment of banks wanting to work in Italy was unequal,” says Guido Rosa, chairman of the foreign banks’ association. “We are confident that Mr Draghi will do what is expected and necessary. A new page has been turned.”
So Mr Draghi begins his service at the Bank of Italy with much in his favour. Few doubt that he will revive morale at Italy’s central bank and that he will keep the required detachment from the job. “As the treasury’s director-general, he always used the formal mode of address, never first names,” says a senior Milanese investment banker. Anyone hoping to plant a kiss on Mr Draghi’s forehead, as Mr Fiorani wanted to plant on Mr Fazio’s, will be given pretty short shrift.
MARIO DRAGHI CV:
1947: Born, Rome
1976: PhD in economics at MIT
1981-1991: Professor of international economics, University of Florence
1983: Counsellor to treasury minister
1984-1990: Executive director World Bank
1990: Consultant Bank of Italy
1991-2001: Director-general treasury ministry
2002-2006: Deputy chairman Goldman Sachs
2006: Governor Bank of Italy
