Markets start the year strong while Italy totters towards the next crisis

The headline business story of the holiday season was the latest bailout of Banca Monte dei Paschi di Siena. This is Italy’s third largest bank and, according to recent ECB ‘stress tests’, Europe’s weakest — regarded by pessimists both as a potential catalyst for systemic collapse and a symptom of deeper Italian problems that could kick off another euro crisis this year.

Monte dei Paschi is also of special interest to me as the world’s oldest bank, having been founded by the magistrates of Siena in 1472 to provide loans at non–usurious rates to ‘poor or miserable or needy persons’, underpinned by wealth from local agriculture. Though it evolved more conventionally over the centuries, it remained sufficiently rooted in its territory and purpose to win praise, in the 1930s, from the exiled American anti-capitalist Ezra Pound — who called it a ‘damn good bank’, in contrast to the Bank of England, which he regarded as ‘a gang of usurers’ under the allegedly evil governorship of Montagu Norman.

Pound was a mad poet, but Monte dei Paschi was undoubtedly a better corporate citizen in his day than it is now. It offers a parable of just about everything banks get wrong by chasing modernity and market share. The Siena institution was divided in 1995 into a bank and a charity which became the bank’s major shareholder: dividends from the bank funded the annual Palio horse race, for example. Then the bank listed on the Italian stock exchange — and, under pressure to demonstrate competitive edge, embraced new products, opened more branches and absorbed other regional banks. When these ventures made losses and bad loans piled up, damage was disguised by off-balance-sheet accounting while successive senior executives first tried to mislead regulators, then left their jobs.

Already bailed out twice, the bank is critically under-capitalised; but having lost most of its stock-market value it can no longer raise new equity in the market.