How Italy failed the stress test (and Emilio Botín didn’t)

Continuing last week’s theme, it was the Italian banks — with nine fails, four still requiring capital injections — that bagged the booby prize in the great EU stress-testing exercise, followed predictably by Greece and Cyprus, while Germany and Austria (with one fail each) fared better than some of us had feared. The most delinquent European bank turned out to be the most ancient, Banca Monte dei Paschi di Siena, which was judged to have a capital shortfall of €2.1 billion as a result of a very modern set of problems.

Founded in 1472 as a kind of charitable pawnbroker, the bank which eventually became Italy’s third largest had a more or less blameless 527-year record until it listed on the Italian stock exchange in 1999. From then on — not unlike our own historic building societies as soon as they demutual-ised, and not unlike our own Co-op Bank in having a board full of good citizens who knew little about banking — it went looking for trouble through aggressive expansion. Subsequent bad results were concealed by off-market derivatives deals (notably with Deutsche Bank and Nomura) that became the subject of fraud investigations.

But what’s most interesting about Monte dei Paschi’s sin-bin status is the sidelight it throws on another pillar of southern European banking: the late Emilio Botín of Banco Santander of Spain, about whom some readers thought I was too kind when he died in September. This complicated parable starts with another regional lender, Banca Antonveneta of Padua — Italy’s ninth largest and its first to fall under foreign ownership when it was acquired in 2005 for €7.5 billion by ABN Amro of the Netherlands, after a scandal in which Bank of Italy governor Antonio Fazio was accused of acting improperly to impede the sale. Two years later, ABN itself famously fell to a consortium of Santander, the Belgian-Dutch combine Fortis, and Fred Goodwin’s RBS — and both Fortis and RBS were ruined as a result.