Old Money: The Full Monte
The world’s oldest bank has trodden a 500-year line between the sacred and the profane.
by Professor Richard Roberts, Kings College London
Monte dei Paschi di Siena is the world’s oldest bank, but is struggling to maintain its existence.
It was founded in 1472 by the Republic of Siena as a public pawnbroker called Monte della Pieta (Public Fund of Piety). Its original business model was a mixture of commerce — the provision of asset-backed loans to “poor or miserable or needy persons” — with philanthropy, in the shape of an interest rate ceiling of 7.5%.
In an early foray into venture capital it backed Christopher Columbus’s first voyage. Columbus discovered America and Monte discovered emerging market risk (Columbus defaulted).
After emerging unscathed by the conquest of Siena by neighbouring Florence in 1555, during one of the frequent wars between Italy’s various city-states that marked the period, reform in 1625 was marked by a change of name to Monte dei Paschi. Still a public institution, overseen by an eight-man board of local nobles, it focused on the provision of credit to Tuscan commercial clients, especially farmers.
This required capital, which was provided by the state in the form of the revenues from publicly owned cattle breeding pastures ( paschi ) that were securitized and sold as 100 Scudi bonds with a 5% coupon — paschi bonds so to speak — which, for the era of Romeo and Juliet, must have been a distinctly cutting edge piece of financial engineering.
Over the years, Monte dei Paschi survived and expanded, despite political and financial upheavals. The disorder that followed the French Revolution from 1789 wiped out Italy’s patchwork of city-states and their ancient banking institutions — with the exception of Monte dei Paschi.
From 1833, it expanded from its commercial banking roots to develop the additional function of a savings bank taking deposits by individuals. By 1910 it was Italy’s second largest savings bank.
A new charter in 1872 charged the city of Siena with responsibility for the management of the bank. It also stipulated that half the annual profit would be retained by the bank, while the other half would be paid to the city for public ends. The new charter encouraged lending to farmers; in 1896 it was characterised by an American authority as “a land and mortgage bank”. Funds were raised through the issuance of small denomination agricultural bonds that circulated as currency.
Monte dei Paschi sailed through the Italian banking crises of 1866, 1893, 1907, 1921 and 1931, as well as Mussolini’s meddling with the banks. Its 500th anniversary celebrations in 1972 were attended by 2,000 bankers from around the world. By then it was Italy’s fifth largest bank providing retail and commercial banking through a network of 540 branches.
Good works included sponsorship of the palio horse race in Siena’s main square. Headquartered, as ever, in the Palazzo Salimbeni, it was still run by an eight-member board now appointed by local and central government.
Scandal struck in 1993 when several directors were accused of receiving kickbacks for granting loans. By then, it was one of Italy’s largest financial groups with six overlapping subsidiary banks, through acquisition, plus a range of other activities including insurance and tax collection.
The scandal strengthened calls for reform and modernisation, and in 1995 it converted into a limited company, Banca Monte dei Paschi di Siena (MPS), that was listed in 1999.
Flush with the proceeds of the flotation, management went on an expansion spree, a phenomenon not uncommon among demutualised financials, becoming Italy’s third largest bank by assets.
The culmination of the dash for growth was its purchase of Banca Antonveneta in November 2007, in the final days of banking mania. The sale was part of a break-up of ABN Amro, and MPS paid a huge premium just as the financial crisis was about to break.
MPS’s share price slumped, valuing the entire group at less than the value of the acquisition. The transaction prompted MPS into a frenzy of activity to fund the deal and rebuild its capital, including a state bailout.
There was also a series of derivatives deals to keep huge losses off its balance sheet. Revelations about the hidden derivatives became a public scandal in 2013.
As the eurozone crisis intensified there were also large losses on its holdings of Italian government bonds. MPS passed the first European bank stress test in 2010, but stumbled in October 2014 and again in July 2016.
Now there’s a new recapitalisation plan with a record dose of securitization. Hopefully, it will be as successful as its pioneering paschi bonds — that would certainly be something to celebrate come 2022, Monte dei Paschi’s 550th birthday.