This bank is on the road to failure, but since banks can no longer fail the Italian government will eventually nationalize it:
Today’s scandal update informs us that the Bank of Italy was swapping ECB eligible collateral for ineligible collateral. Neither party disclosed these transactions. While they were material to the health of the lender, there was no legal reason to do so.
What these secret loans tell us is two things. Monte dei Paschi’s health is tied to the fate of the Italian sovereign bond. The collateral swap was initiated in October of 2011, which was the recent low point for Italian bonds. Now that Italian bonds are again under pressure ahead of the election, the bank’s health will continue to be a question mark. Moreover, bank executives have no problem lying about the true health of the institution.
The other key fact we can glean from this story is that the Bank of Italy extends secret loans to failing institutions to avoid stoking a market panic. Investors in any Italian bank should reconsider the health of their investments.