Crossing the Rubicom – IV

Modern banking started in Italy in the early 15th Century. Pinpointing the moment is a bit arbitrary, especially since we know a banker had is head cut in Barcelona during the 13th century for not being able to return depositors’ money, the Templar Knights performed the services we associate with banking after the turn of the first millennium and Christ himself expelled from the Temple of Jerusalem the dedicated members of the profession. It can be argued that people have always lent and kept valuables for others thus banks satisfy perennial needs since the dawn of times.

And yet, modern banking began in Italy. In Genoa to be exact, where, by 1407, the Bank of St George became the first (known) chartered bank in the world. Thus, if Italians did not invent banking they have at least invented a cornerstone of modern banking activity – banking regulation. It should come as no surprise that they continue to excel at that and showing the world the path modern banking regulation should trend upon.

A mere 65 years after the Ufficio di San Giorgio was given state permission to operate, in Siena, another such institution was founded under the name Monte di Pietà, later rebranded Monte dei Paschi. So it is only adequate that the oldest surviving bank in the world is the first to receive state aid that is not a really a bail-out since, like the Italian Finance Minister so wisely put, bail-outs are not allowed by the Italian law.

“What’s in a name?” Shakespeare asked. “That which we call a bail-out by any other name would smell as sweet”, Juliet might have said and Hamlet probably added that “something is rotten in the Republic of Italy”. Wasn’t signore Draghi the head of the Italian banking regulator, just before he was appointed head of the institution everybody expects to play that role for the battleship Euro banking sector as a whole? How does this inability (or plain refusal) to see what was going on inside the third largest Italian bank plays into what is expected from the head of the ECB? Is he expected to do the same sort of kicking the can down the road exercise?

Some people might argue that, at the time, it was impossible for Draghi to have anticipated what would happen and they are right to some extent. After all auditors were not informed and no one can foretell the future no matter how many econometric models he has at his disposal. But the question remains: if auditors are only supposed to audit things they are informed of, then what’s the point of auditing something in the first place? It’s not like if somebody is doing something wrong he is going to tell it to the police. A regulator that says, as far as we are informed we cannot see anything wrong, is pretty much useless. On the contrary, it might be argued that it actually adds risk to the financial sector as counterparties and public at large grow complacent.

There seems to be an increase in the number and size of rogue trader activity. Maybe the number of people that do this sort of thing is not increasing, only the size of their blunders, but yet, one cannot but suspect that, as regulation and controls increase, so do the costs and, if something is going to work outside the law, it better pay off big time, same as Chicago mobsters under prohibition. And if it becomes riskier it doesn’t really matter as risk is not being properly assessed by those who ultimately pay the bill – the taxpayers. I was going to write shareholders but bail-outs under any other name are more the rule than the exception these days. The whole financial system grew into a massive credit pyramid based on collateral with almost any institution becoming if not too big, too structural to fall. And how many ticking time-bombs are out there ready to explode nobody can tell. But we can tell they exist because the regulating system fosters its creation. Unfortunately it seems that, by the time they explode, those who held office as regulators, if they are lucky, have already moved on to greener pastures. Coincidently the word “paschi” in Italian means exactly that – “pastures”.

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